POSITION PAPERS ON TELECOMMUNICATIONS

State of New Jersey Division of the Ratepayer Advocate POSITION PAPERS ON TELECOMMUNICATIONS PREPARED BY RATEPAYER ADVOCATE BLOSSOM A. PERETZ AND THE STAFF OF THE DIVISION OF THE RATEPAYER ADVOCATE January 2000 “...[W]e must establish our place in a new economy by making high technology the undisputed engine of our growth. What does the new economy look like? It’s a world whose raw materials are the microchip and information technology. It’s an economy that places a premium on skills and education...New Jersey - the home of Thomas Edison and Albert Einstein - is well-suited to enter this new economy.” Governor Christine Todd Whitman State of the State Address January 11, 2000 31 CLINTON STREET, 11TH FLOOR P. O. BOX 46005 Newark, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer @rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa “To ensure broad access to communications services and technology, the FCC will ensure that all Americans -- no matter where they live, what they look like, what their age, or what their special needs may be -- have access to new technologies to take advantage of the enormous opportunity created by the communications revolution...” –William E. Kennard, Chairman Federal Communications Commission ACKNOWLEDGMENTS The Ratepayer Advocate wishes to acknowledge the outstanding contributions of the following staff members in the development, preparation and production of this document: Leora Mosston, Esq., Chief of Staff Heikki Leesment, Esq., Managing Attorney Telecommunications and Cable TV Carl Billek, Esq., Assistant Deputy Ratepayer Advocate Donna Carney, Attorney Assistant Lawanda Gilbert, Esq., Assistant Deputy Ratepayer Advocate Jose Rivera-Benitez, Esq., Assistant Deputy Ratepayer Advocate Joshua Seidemann, Esq., Assistant Deputy Ratepayer Advocate Felicia Smith, Law Student Intern Vannessa Thompson, Administrative Assistant Christopher White, Esq., Assistant Deputy Ratepayer Advocate STATE OF NEW JERSEY DIVISION OF RATEPAYER ADVOCATE 31 CLINTON STREET - 11TH FLOOR P.O. BOX 46005 NEWARK, NEW JERSEY 07101 CHRISTINE TODD WHITMAN Governor BLOSSOM A. PERETZ, ESQ. Ratepayer Advocate and Director PROLOGUE These Position Papers on the evolving state of telecommunications in New Jersey and nationally have been prepared to provide as much information as is current as of December 1999 about emerging advanced technologies and the fast changing telecommunications marketplace born of the Federal Telecommunications Act of 1996 (Federal Act) which has generated revolutionary change in the availability and marketing of telecommunications and cable TV services. New Jersey now has the opportunity to become a true participant in the global, national, and state transmission of information, thereby improving opportunities for economic growth. Many new options for both residential and business telecommunications and cable TV consumers have become available inspired by these legislative changes and every resident of the state should be able to select among various companies and technologies to access information and to communicate with each other. Indeed, so rapid are these changes that we anticipate that we will need to update these papers in 2000 to reflect the volatile telecommunications marketplace and the many revisions that will occur reflecting decisions by federal and state regulatory agencies and the courts. We are mindful that this is a “living” document that will change and evolve continuously. We hope these Position Papers will assist you in clarifying these complex options so that your vital concerns and decisions about telecommunications in the new century will be as informed as possible. As always, my staff and I stand ready to answer any questions you may have about any of the materials. I look forward to our working together in the future to ensure that the best interests of all New Jersey telecommunications consumers are protected and served. January 2000 Blossom A. Peretz, Esq. Ratepayer Advocate Tel: (973) 648-2690 ! Fax: (973) 648-2193 ! Fax: (973) 624-1047 i http://www.njin.net/rpa E-Mail: njratepayer@rpa.state.nj.us STAFF OF THE DIVISION OF THE RATEPAYER ADVOCATE BLOSSOM A. PERETZ, Esq., Ratepayer Advocate Leora Mosston, Esq., Chief of Staff Angela LaSalle, Public Information Officer LEGISLATIVE OFFICE 28 W. State St. 5th Fl., Rm. 512 P. O. Box 560 Trenton, NJ 08625 MANAGING ATTORNEYS ELECTRIC Greg Eisenstark, Esq. NATURAL GAS Sarah Steindel, Esq. TELECOMMUNICATIONS/CABLE TV Heikki Leesment, Esq. WATER/WASTEWATER Andrew Dembia, Esq. STAFF ATTORNEYS Judith Appel, Esq. Carl Billek, Esq. Robert Brabston, Esq. Anthony Francioso, Esq. Lawanda Gilbert, Esq. Kurt Lewandowski, Esq. Susan McClure, Esq. Ami Morita, Esq. Jose Rivera-Benitez, Esq. Joshua Seidemann, Esq. Diane Schulze, Esq. Badrhn Ubushin, Esq. Christopher White, Esq. Nusha Wyner, Esq. LEGAL CONSULTANT Debra Robinson, Esq. LEGAL ASSOCIATE Bernard Smalls, J.D. LEGAL INTERN Felicia Smith, Rutgers Law School, Newark Donna Carney ATTORNEY ASSISTANTS Mary Greene Lisa Gurkas SUPPORT STAFF Ivette A. Altamirano Peggy Clemons A. Cristina Haffner Vannessa Thompson Esther Anta Lillian DeLoach Kayann Ivey Pamela Wright FISCAL AND ACCOUNTING SERVICES Donald Copeland, Chief Accountant Richard Hochstead, Accountant COMPUTER SERVICES Jose Selaya, CNE, LAN Administrator Sandeep Sikka, MCSE, Data Processing Programmer POSITION PAPERS ON TELECOMMUNICATIONS TABLE OF CONTENTS “All New Jersey consumers, residential, business and municipal, should have equal and affordable access to telecommunications and information services that meet their social, business, educational, career and quality of life needs.” – Blossom A. Peretz, Ratepayer Advocate Section Page PROLOGUE BY BLOSSOM A. PERETZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi A. A PRIMER ON TELECOMMUNICATIONS TECHNOLOGY FOR THE NEW MILLENNIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Choosing Your Phone System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. The Technology Of Competition a. Tangled In The Local Loop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. The Digital Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Bandwidth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Fiber Optic Cable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. Digital Subscriber Line (DSL) Services - Broadband Over Quicker Copper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Bypassing The Local Loop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g. Coaxial Cable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h. Wireless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. What Are The Differences Between Local Calls, IntraLATA Calls And Long Distance Calls? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. What Is A Local Call? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. What Is An IntraLATA Call? . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. What Is A Long Distance Call? . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3 A-4 A-5 A-6 A-6 A-7 A-8 A-9 A-9 A-10 A-10 A-11 A-12 ii B. THE EMERGING COMPETITIVE LANDSCAPE NATIONWIDE: FEDERAL AND STATE INITIATIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 I. The Breakup Of The Long Distance Monopoly . . . . . . . . . . . . . . . . . . . . . B-1 II. The Telecommunications Act Of 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . a. What Are Sections 251 And 252 Of The Federal Act, And What Were They Designed To Accomplish? . . . . . . . . . . . . . . i. As Of December, 1999 What Have Sections 251 And 252 Accomplished? . . . . . . . . . . . . . . . . . . . . . . . . . . . ii. What Still Must Happen To Fully Implement Sections 251 And 252 Of The Federal Act? . . . . . . . . . . . . . . . . iii. What Is The Status Of The Goals Of Sections 251 And 252 Of The Federal Act In New Jersey? . . . . . . . . . . . . b. What Is Section 271 Of The Federal Act And What Was It Intended To Do? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. What Has Section 271 Accomplished So Far? . . . . . . . . . . ii. What Still Must Happen To Fully Implement Section 271 Of The Federal Act? . . . . . . . . . . . . . . . . . . . . . . . iii. What Is The Status Of The Goals Of Section 271 Of The Federal Act In New Jersey? . . . . . . . . . . . . . . . . . c. What Is Section 706 Of The Federal Act Supposed To Do? . . . . . i. What Has Been The Effect Of Section 706 So Far? . . . . . . ii. What Must Happen To Realize The Goals Of Section 706? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii. What Is The Ratepayer Advocate Doing To Realize The Goals Of Section 706 Of The Federal Act In New Jersey? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3 B-4 B-7 B-8 B-9 B-12 B-13 B-14 B-15 B-17 B-17 B-18 B-20 The Position Of The Ratepayer Advocate On Implementation Of The Federal Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-22 III. Significant Developments At The Federal Communications Commission (“FCC”) Affecting the New Jersey Telecommunications Market (1998-1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. The Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Deployment Of Advanced Telecommunication Services . . . . . . . . c. Regulatory Relief If Equipment Accounts (Investments) Are Overstated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. FCC Expands Access Requirements In Multiple Tenant Buildings To Promote Competition For Residential And Business Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. FCC Issues Regulations To Ensure Access To Telecommunications Service, Equipment And Customer Premised Equipment For Persons With Disabilities . . . . . . . . . f. FCC Adopts Rules To Promote Competition In Directory Publishing And Directory Assistance . . . . . . . . . . . . . . . . . . . . B-23 B-24 B-25 B-27 B-28 B-29 B-32 iii g. FCC Issues Notice Of Inquiry On Flat Rate Charges For Low Volume Long Distance Users . . . . . . . . . . . . . . . . . . . . . . . . . B-33 FCC Chairman William E. Kennard’s Current Agenda . . . . . . . . . . . . . . . . . . B-34 The Position Of The Ratepayer Advocate On The Development Of A Competitive Marketplace In New Jersey . . . . . . . . . . . . . . . . . . . . . . . B-37 IV. Significant 1999 Developments In Neighboring States . . . . . . . . . . . . . . . a. State Of New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. Entry of Bell Atlantic-New York Into The Long Distance Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Commonwealth Of Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . i. UNE Platform And EELs . . . . . . . . . . . . . . . . . . . . . . . . . . ii. OSS Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii. Structural Separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-38 B-39 B-39 B-40 B-42 B-42 B-43 The Position Of The Ratepayer Advocate On Promoting Competition . . . . . . B-43 C. THE EMERGING COMPETITIVE LANDSCAPE: NEW JERSEY INITIATIVES TO PROMOTE A COMPETITIVE TELECOMMUNICATIONS MARKETPLACE . . . . . . . . . . . . . . . . . . . . . . C-1 I. The New Jersey Telecommunications Act Of 1992 (N.J.S.A. 48:2-21.16, et. seq.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1 II. Promised Changes In Rates, Services And Competition: InterLATA And IntraLATA And Local Exchange Competition, Or How Federal And State Legislation Are Supposed To Benefit New Jersey Consumers . . a. Telecommunications Markets And The Regulatory Schemes Which Apply To Them . . . . . . . . . . . . . . . . . . . . . . . i. What Is The Status Of InterLATA, Or Long Distance Competition In New Jersey As Of December 1999? . . . ii. What Is The Status Of IntraLATA Toll Competition In New Jersey As Of December 1999? . . . . . . . . . . . . . . . iii. What Is The Status Of Local Competition In New Jersey? . b. Why Have Telecommunications Carriers Spent Nearly Four Years Litigating Access To Entry Into The Local Exchange Market? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. What Issues Are Present In The Federal Litigation? . . . . . . ii. What Issues Are Present In New Jersey’s Local Telecommunications Market? . . . . . . . . . . . . . . . . . . . iii. Are There Access Issues Which Affect Competition In New Jersey’s Local Market? . . . . . . . . . . . . . . . . . . . . C-5 C-6 C-9 C-10 C-13 C-14 C-14 C-16 C-19 iv c. The Technical Solutions Facilitation Team (“TSFT”) At The BPU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. What Issues Were Raised Before The TSFT In Regard To Unbundled Network Elements? . . . . . . . . . . . . . . . ii. What Issues Were Raised Before The TSFT In Regard To Operations Support Systems? . . . . . . . . . . . . . . . . iii. What Issues Were Raised Before The TSFT In Regard To Performance Measurements And Standards? . . . . . iv. What Action Did The Board Take As A Result Of The TSFT Meetings? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Are There Any Other Outstanding Issues Which Could Affect The Introduction Of Local Competition? . . . . . . . . . . . . . . . . . C-21 C-22 C-23 C-24 C-24 C-25 The Position Of The Ratepayer Advocate On Local Exchange Competition . . C-26 D. CONSUMER ISSUES ARISING FROM DEREGULATION . . . . . . . . . . . . D-1 I. Area Codes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. Why The Current Method By Which Telephone Numbers Are Distributed Is No Longer Effective . . . . . . . . . . . . . . . . . . . . . b. What Is Number Portability And How Will It Effect Area Code Relief? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Is Number Conservation An Alternative Solution To Area Code Relief? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Why Does The Ratepayer Advocate Recommend Long-term Area Code Reform? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. If Area Code Relief Is Necessary, Should The Board Implement A Geographic Split Or An Overlay? . . . . . . . . . . . . . . . . . . . . D-1 D-4 D-9 D-10 D-11 D-13 The Position Of The Ratepayer Advocate On Area Code Relief . . . . . . . . . . . D-15 II. Payphones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-16 a. Federal Regulation Of Payphones . . . . . . . . . . . . . . . . . . . . . . . . . D-16 b. State Regulation Of Public Payphones . . . . . . . . . . . . . . . . . . . . . D-18 The Position Of The Ratepayer Advocate On Payphones . . . . . . . . . . . . . . . . D-20 III. Consumer Protection Issues In A Competitive Telecommunications Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. Privacy Of Customer Information . . . . . . . . . . . . . . . . . . . . . . . . . b. Reliability And Quality Of Service . . . . . . . . . . . . . . . . . . . . . . . . . c. Applications For Service; Deposits; Obligation To Serve; Redlining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-21 D-22 D-24 D-26 v d. Credit And Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. Right To A Payment Arrangement . . . . . . . . . . . . . . . . . . . ii. Disconnection Of Basic Local Service . . . . . . . . . . . . . . . . e. Slamming And Cramming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. Monthly Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii. Proposed Board Rules On Termination Of Residential Service . . . . . . . . . . . . . . . . . . . . . . . . . . . D-28 D-28 D-29 D-29 D-32 D-32 D-33 The Position Of The Ratepayer Advocate On Consumer Protection . . . . . . . . D-34 E. SOCIETAL CONCERNS OF THE TELECOMMUNICATIONS ACT OF 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1 I. Universal Service, Low Income Consumers, And High Cost Areas . . . . . . E-1 a. The Federal Act And Universal Service Goals For New Jersey . . . . E-2 i.. Low Income Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . E-3 The Position Of The Ratepayer Advocate On Universal Service For Low Income Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-6 ii. Support For High Cost Areas . . . . . . . . . . . . . . . . . . . . . . E-8 The Position Of The Ratepayer Advocate On Support For Telecommunications Services To High Cost Areas . . . . . . . . . . . . E-9 iii. Support For Schools And Libraries . . . . . . . . . . . . . . . . . . E-11 (a) Provisions Of The Telecommunications Act Of 1996 Mandate That Telecommunications Carriers Provide Discounts To Schools And Libraries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-12 (b) E-Rate Issues That Affect New Jersey Schools And Libraries . . . . . . . . . . . . . . . . . . . . . . . . . . E-14 1. Limited Federal E-Rate Funds Will Leave Some New Jersey Schools Without Advanced Technology Resources . . . . . E-14 2. Computer Technology Remains Unaffordable For Most New Jersey Public Schools . . E-16 3. New Jersey Schools That Obtain A Federal E-Rate Discount May Still Find The Cost Of Implementing Technology Plans Prohibitive . . . . . . . . . . . . . . . . . . E-16 The Position of the Ratepayer Advocate On The Need For A New Jersey Universal Service Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-18 F. CABLE TELEVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 vi I. Cable Television Regulation And Deregulation . . . . . . . . . . . . . . . . . . . . . a. What Effect Has Cable Rate Deregulation Had On Cable Rates And Services? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. What Can The Ratepayer Advocate Do To Curtail The Continuing Rise Of Cable Rates? . . . . . . . . . . . . . . . . . . . . . . c. What Are The Fundamental Changes The Ratepayer Advocate Considers Necessary For Meaningful Cable Rate Regulation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. Will Meaningful Competition And Effective Regulation Protect Consumers’ Interests? . . . . . . . . . . . . . . . . . . . . . . . . . e. Were CPST Cable Rates Deregulated On March 31, 1999? . . . . . . f. What Is The Ratepayer Advocate’s Position On Cable Late Fees? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g. Why Are Consumers Served By Small Systems Treated Differently Than Consumers Served By Larger Operators? . . . h. How Will The Recent Mergers And Acquisitions Of Cable Operators Affect Cable Consumers? . . . . . . . . . . . . . . . . . . . II. The Road To Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. How Do The Ratepayer Advocate’s Positions Promote Competition? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i. Municipal Overbuilds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii. Satellite Operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii. Local Exchange Carriers (“LECs”) . . . . . . . . . . . . . . . . . . . iv. Utility Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 F-4 F-5 F-6 F-7 F-8 F-9 F-10 F-10 F-12 F-12 F-13 F-14 F-16 F-17 III. Future Cable Services: Regulation Or Open Access? . . . . . . . . . . . . . . . F-19 a. What Is The Ratepayer Advocate’s Position On “Open Access” To Cable Modems? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19 The Position Of The Ratepayer Advocate On The Cable Television Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24 The FCC’s Cable Television Consumer Bill Of Rights . . . . . . . . . . . . . . . . . . F-26 G. MUNICIPAL TELECOMMUNICATIONS ISSUES AND STRATEGIES . . G-1 I. Wireless Telecommunications Services And Cell Tower Placement . . . . . . a. The Law Affecting Cell Tower Construction And The Use Of Public Rights Of Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. The Adoption By A Municipality Of “Best Practices” . . . . . . . . . . i. Drafting A Tower Zoning Ordinance . . . . . . . . . . . . . . . . . G-1 G-3 G-10 G-11 vii ii. Guidelines For A Community That Receives A Request To Build A Wireless Telecommunications Facility . . . . iii. Some Additional Concerns . . . . . . . . . . . . . . . . . . . . . . . . (a) The Effects Of Radio Frequency Emissions . . . . . . (b) Camouflaged Towers . . . . . . . . . . . . . . . . . . . . . . (c) Additional Aesthetic And Safety Concerns . . . . . . G-14 G-15 G-15 G-16 G-16 The Position Of The Ratepayer Advocate On Cell Tower Placement And Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-17 II. Municipal Telecommunications Networks And Other Initiatives . . . . . . . G-18 a. The Importance Of Advanced Local Telecommunications Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-19 b. Private/Public Partnerships Bring Advanced Telecommunications Services To Under Served Individuals And Communities . . . . G-22 The Position Of The Ratepayer Advocate On Municipal Telecommunications Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-24 H. THE IMPACT OF MERGERS AND CONVERGENCE ON COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H-1 I. Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. What Is A Merger? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Why Have There Been So Many Telecommunications Mergers In The Last Few Years? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. Does the Ratepayer Advocate Support Mergers? . . . . . . . . . . . . . d. What Role Does The Ratepayer Advocate Play In Reviewing Proposed Mergers? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. How Can Consumers Benefit From Mergers? . . . . . . . . . . . . . . . . II. Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. What Is Convergence? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. How Did The Convergence Phenomenon Start? . . . . . . . . . . . . . . c. How Have Traditional Utility Providers Transformed Themselves Into Converged, Multi-Service Providers? . . . . . . d. Have New Jersey Consumers Benefitted From Convergence? . . . . e. Does The Ratepayer Advocate Support Convergence? . . . . . . . . . H-2 H-2 H-2 H-4 H-5 H-6 H-7 H-7 H-7 H-8 H-9 H-9 The Position Of The Ratepayer Advocate On Mergers And Convergence . . . . H-10 viii I. A CALL FOR ACTION FROM THE RATEPAYER ADVOCATE TO PROMOTE COMPETITION, ENCOURAGE TECHNOLOGY INNOVATIONS AND ENSURE THESE BENEFITS TO ALL NEW JERSEY CONSUMERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 Creating A Competitive Marketplace In New Jersey: Let’s Not Lose The Race To Our Neighboring States . . . . . . . . . . . . . . . . . . . . . . . . I-2 Federal Policymakers Are Affecting New Jersey Consumers: Let Us All Speak On Behalf Of Our Ratepayers . . . . . . . . . . . . . . . . . . . . . I-4 New Jersey Must Develop And Follow A Plan To Avoid Further Area Code Splits: Let’s Seek FCC Authority To Do So . . . . . . . . . I-6 Consumers Need Available And Affordable Payphones . . . . . . . . . . . . . . . I-7 Consumers Must Understand Their Choices And Be Protected From Unscrupulous Marketers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-8 The Benefits Of Competition And Advanced Technologies Must Be Affordable For Low Income Consumers And Those Who Live In High Cost Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-9 A State Universal Service Fund Must Ensure That Our Schools And Libraries Are Connected To The Information Superhighway . . . . . I-11 Cable TV Customers Must Be Afforded Fair Rates And Proper Services In A Market Open For Competition . . . . . . . . . . . . . . . . . . I-13 Policies In New Jersey Should Promote Open Access To Cable Broadband Information Services Of All Kinds, Including Internet Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-15 Uniform State Legislation Is Necessary To Insure Fair Regulations For Construction Of Cell Towers In Support Of Wireless Telecommunications Transmission . . . . . . . . . . . . . . . . I-17 A Study Of Municipal Telecommunications Networks Should Be Encouraged To Analyze Access To Advanced Technologies For All Residents And Businesses Throughout The State . . . . . . . . I-18 Industry Mergers And Convergence Will Benefit Consumers Only If A Framework Is In Place For Insuring Consumer Choice And Open Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-18 ix A Last Word: New Jersey Must Prepare For The Time When No One Will Ever Truly Be Offline, And Consumer Choice Will Be Infinite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-19 J. GLOSSARY OF TELECOMMUNICATIONS TERMS . . . . . . . . . . . . . . . . . J-1 x INTRODUCTION The stated goal of the Federal Act is “[t]o promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and to encourage the rapid deployment of new telecommunications technologies.” – Preamble, Pub. L. No. 104-1041 In February 1996, the historic Telecommunications Act of 1996 (“Federal Act”) was signed into law, opening the doors to competition throughout the residential and business telecommunications and cable television marketplace. The primary goals of the Federal Act are to remove the legal barriers which have prevented long distance carriers, local telephone companies, and cable operators from entering each other’s markets and to ensure a level playing field for all in these newly competitive markets. Perhaps most significantly, the Federal Act contains guidelines which unbundle monopoly telecommunications service in the local exchange market and permit local telephone companies to compete in the long distance market. When drafting the Federal Act, Congress was concerned that state or local laws or the business practices of Incumbent Local Exchange Carriers (“ILECs”) could present barriers to competition. Historically, ILECs, the providers of local (i.e., not long-distance) telephone service, have existed as regulated monopolies.2 In order to tear down any such barriers, Congress granted the Federal Communications Commission (“FCC”) broad authority to implement the provisions of the Federal Act. The FCC is the Federal agency that oversees 1 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56. (1996) (“1996 Act”). The 1996 Act amended the Communications Act of 1934. Hereinafter, the Communications Act of 1934, as amended by the 1996 Act, will be referred to as “the Federal Act,” and all citations to the sections of the Federal Act will be to the Federal Act as it is codified in the United States Code. 2 Additional definitions of specialized terms used throughout these position papers can be found in the Glossary provided at the end of this publication. xi regulation of radio, television, telephone, and other communications services, and has the authority to to preempt state and local laws which could restrict competition. For example, the Federal Act, at Section 253(a), provides that “No state or local statutes or regulation, or other state or local requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service.” State legislatures and public utility commissions thereby play a significant role in ensuring that the pro-competitive provisions of the Federal Act and strong consumer protection laws are in place. In spite of Congress’ intentions to deregulate the telecommunications industry and to open the marketplace to competition, implementing such broad changes throughout the highly regulated telecommunications industry has not been easy. Many technical, regulatory and policy issues have been raised which must be settled before consumers can receive the benefits of unrestrained competition. In fact, many different aspects of the Federal Act have been challenged before state public utility commissions and in the courts by the long distance carriers, local telephone companies and cable operators whose customers were intended to benefit from the Federal Act’s pro-competitive, deregulatory policies. These legal challenges have delayed the implementation of many of the Federal Act’s pro-competitive, deregulatory policies and hindered the introduction of meaningful competition.3 For example, some of the Federal Act’s provisions which open the local telephone market to competition have been challenged, stayed and delayed since the day the Federal Act was passed. This delay has been particularly harmful to consumers, because more than any other provision in the Federal Act, opening local telephone markets to competition 3 Some of these more significant challenges, as well as their outcomes are discussed in greater detail in the individual sections of this publication. xii represents the triumph of consumer choice over monopoly control. The Ratepayer Advocate has determined that meaningful competition throughout the telecommunications and cable industries can result in new and more advanced services, lower prices as well as additional consumer benefits. In the deregulated long distance market, for example, consumers now have a choice of multiple carriers, many of whom now offer rates lower than at any other time in the history of telecommunications. Lower rates and other consumer benefits have been realized in the long distance market because of competition. Providers in the long distance marketplace were forced to compete on the quality of their services and the competitiveness of their rates. This is the same goal Congress foresees for the local telecommunications marketplace. Although this goal has not yet been achieved, the Ratepayer Advocate believes the introduction of local competition may soon be realized. At the time of the printing of this document, December 1999, the New York State marketplace became open to competition when the FCC approved the entry of Bell Atlantic-New York into the long distance marketplace. The Ratepayer Advocate has been intimately involved in the proceedings before the New Jersey Board of Public Utilities as well as federal and state courts and agencies affecting the introduction of competition for all telecommunications and cable services throughout New Jersey. In some of these proceedings, our interpretation of the Federal Act’s pro-competitive policies and our vision of a competitive marketplace has been upheld; in some proceedings it has not. In all of these proceedings, the Ratepayer Advocate has participated vigorously on behalf of the State’s ratepayers. xiii The Ratepayer Advocate asserts that the implementation of the Federal Act’s procompetitive, deregulatory provisions is essential to the realization of a competitive telecommunications and cable marketplace. Therefore, we will continue to be an active participant in all proceedings which affect telecommunications and cable television rates and services, ensuring that the voices of New Jersey consumers are heard when these important matters are decided. xiv THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE A PRIMER ON TELECOMMUNICATIONS TECHNOLOGY FOR THE NEW MILLENNIUM JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa A A. A PRIMER ON TELECOMMUNICATIONS TECHNOLOGY FOR THE NEW MILLENNIUM “I dreamed of wires extending all over the country and of people in one part of America talking to people in another part of America. It was the dream of a dreamer, but Mr. Vail [President of AT&T, 1907-1919] has made it come true...Mr. Vail has brought this instrument into every home...He has covered this continent with a network of wires...He has accomplished the dream of my youth.” --Alexander Graham Bell In February 1996, President Clinton signed into law the Telecommunications Act of 1996 (“Federal Act”),1 which seeks to open the doors to competition throughout the business and residential local exchange telecommunications markets. “Local exchange” refers to telephone service that is not toll or interstate long-distance. The primary goals of the Federal Act are to remove the legal barriers which have prevented long distance carriers, local telephone companies, and cable television operators from entering each other’s markets and to ensure a level playing field for all in these newly competitive markets. Perhaps most significantly, the Federal Act ends the monopoly control of the local exchange market and conditionally permits local telephone companies to compete in the long distance market. In drafting the Federal Act, Congress sought to introduce and expand competitive choices in local telecommunications service markets, in addition to stimulating additional competition in the long-distance markets. Consequently, the Federal Act requires local monopoly phone companies -- the Regional Bell Operating Companies (“RBOCs”) known as the Baby Bells (these are the large local telephone companies, such as Bell Atlantic or Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 151, et seq. (1996). A-1 1 Southwestern Bell, that were formed after the break-up of AT&T) and other local exchange carriers (“LECs”)2-- to “unbundle” their networks and to sell to competitors “pieces” of their networks that competitors need in order to provide local phone service to individual customers. In return, once a LEC opens its local exchange network to competitors, it will be permitted to offer long distance service to its own local phone subscribers. But this long-awaited transition to a competitive local telecommunications market has been mired in regulatory and court proceedings triggered by both implementation of the Federal Act and proposed mergers among major players in the industry. These delays have complicated the task of bringing local exchange competition to New Jersey consumers. But nearly four years after passage of the Federal Act, the New Jersey Board of Public Utilities (“Board”) is now resolving some of the thornier technical issues that have been a roadblock to competition, while decisions of the U.S. Supreme Court have brought closure to some of the legal challenges to the Federal Act raised, primarily by GTE and the “Baby Bells” throughout the country. The Ratepayer Advocate is also encouraged by the recent decision of the Federal Communications Commission (“FCC”) in December 1999, permitting Bell Atlantic - New York to enter the long distance marketplace in New York State which will hopefully stimulate local exchange carriers to open their network more quickly to competitors, and in turn hasten their entry into the long distance marketplace. At the same time, technology is helping some companies bypass the telecommunications network of the Baby Bells entirely to bring new services directly to customers, with companies The definition of specialized technical terms used throughout these position papers can be found in the glossary provided at the end of this publication. A-2 2 ready to offer local phone service across cable lines, the Internet, and through wireless technology, such as cellular-type services. The Ratepayer Advocate is optimistic that, within the next two years, New Jersey’s residential and business customers will be able to choose from numerous carriers utilizing many different technologies for their local telephone service. In fact, with the introduction of these new choices, local competition is as likely to come from new and developing technologies as from traditional wireline service. By understanding the technical, policy, and legal issues affecting the telecommunications industry, legislators and public officials can help their constituents benefit in this newly competitive marketplace. Choosing Your Phone System New Jersey consumers today can choose their long distance providers, their cellular phone providers, and even a company to provide regional toll call service (as opposed to interstate long- distance) for calls that extend beyond the local calling area. But, despite the pro-competitive policies of the Federal Act, most New Jersey residential phone customers still have no option but the “traditional phone company” -- Bell Atlantic, Sprint United, or Warwick -- when it comes to local phone, or local exchange service. Why is that last mile of copper wire linking each home to the public switched telephone network (“PSTN”) to which all telephone companies are connected, creating such a stranglehold on competition? The answer, in part, lies with the hardware and software of the public switched network. A-3 I. The Technology Of Competition a. Tangled In The Local Loop Despite exponential changes in technology, the telephone network still resembles the system put in place almost 100 years ago. Telephone subscribers receive access to the basic telephone network through a physical connection -- twisted copper wire -- from the customer’s premises to a local phone company. Within these central offices, telephone companies use electric switches, located in what is called a central office, to connect customers’ phone lines to the destination dialed. A phone call between two people has traditionally consisted of an analog electrical signal that travels over a closed circuit, and which can only be used by the two parties. This is referred to as a connection-based, or circuit-switched, system. Circuit switches were designed for voice (as opposed to video or data) communications. Although significant advances in switching technology permit circuit switches to also be used for data and video, they are still best designed for voice communications. Despite the fact that the traditional phone system creates challenges for high-speed communications, it creates even more substantial hurdles to competition. According to one estimate, it would cost $3,000 to $5,000 per home -- or hundreds of billions of dollars nationwide -- for competitors to build a duplicate phone network to every consumer’s home and business.3 This bottleneck does not just limit consumer choice in local telephone service; it has become the technological hurdle that prevents consumers from getting speedy Internet access 3 Ziegler, Bart, “Out of the Loop,” Wall Street Journal, September 21, 1998, at R6. A-4 service and other long-promised innovations. Most local links consist of antiquated copper lines that cannot readily transmit this promised flow of new services. b. The Digital Network Providers are overcoming the technological limitations of the traditional PSTN by using digital data. Digital communications refer to the transmission of data, or bits, through copper wire or glass fibers, known as “fiber optics.” Digital bits can represent video, data, or sound. When digital bits of data are routed through the network, they are assembled into units of information called packets. A particular voice, data, or video message is divided into multiple packets. These packets travel across various nodes of a computer network, called routers. Routers are high-speed computers that can direct the flow of packets to their destinations via various separate routes. Each packet may travel along a different route to its final destination, but will be reassembled to complete the original message upon the arrival of all of the packets. This method of data transport is called “packet switched technology.” Traditional analog/voice communications connect two people on a single line, which becomes unavailable to any other voices. In contrast, packet-switched systems allow each “packet” of data to travel multiple paths. Any number of end-users can send packets of information along the same path at the same time. A packet-switched system, in other words, virtually eliminates the busy signal, since video, sound, and data packets can travel simultaneously along the same lines. To overcome problems in transmitting data over the traditional telephone network, voice or analog switches are being replaced by digital, packet-switching technologies. A-5 c. Bandwidth Bandwidth is the term of measure for the amount of digital data that can be transmitted over a particular communications route. Digital data is transmitted in bits. A bit is a piece of data represented by either a “1” (one) or a “0” (zero). Particular combinations of 1's and 0's are combined into eight-bit parcels called bytes. A byte, therefore represents the unit of transmission of a piece of information, such as voice, video or text datum. The speed of digital transmission is measured in bits per second (“bps”). Consumers are most familiar with the term bps as it relates to their computer modems, which transmit data at speeds close to 56.6 kilobits per second (or 56,600 bits per second). The growth of the Internet has fueled the demand for high-speed telecommunications services, which in turn has created an increasing demand for bandwidth. Broadband communications has come to mean very high speed telecommunications, typically in excess of 1.5 megabits or million bits per second (“Mbps”). Broadband capability can be provided over copper wire or fiber optic cable. d. Fiber Optic Cable Fiber optic cable uses beams of laser light sent through thin glass cables, instead of electro-magnetic signals that travel over copper, to provide vast bandwidth to consumers and businesses. Signals travel at the speed of light and, unlike electro-magnetic signals, are not weakened or corrupted by distance or electrical interference. As part of its obligations under a program known as “Opportunity New Jersey,” Bell Atlantic-New Jersey (“BA-NJ”) is committed to installing fiber-optic cable throughout the state by the year 2010 and to every school and library in the state by the year 2001. BA-NJ has completed installation of an all-fiber, interoffice network in a part of New Jersey known as the A-6 Atlantic Coastal LATA (see discussion of LATAs below), which allows all telecommunications services between BA-NJ’s central offices within this 1,500-square-mile area to be carried over fiber-optic facilities. e. Digital Subscriber Line (DSL) Services - Broadband Over Quicker Copper Several technologies now allow consumers to use a traditional phone line to speak on the phone and receive video from the Internet at the same time, that is, to provide voice and high speed data simultaneously over twisted pair copper lines. The leading technology for these purposes is Digital Subscriber Line (“DSL”) provisioned over networks of telecommunications carriers. DSL is quickly emerging as an economic solution to provide high speed Internet access to end users - both residential and small to mid-size businesses. With DSL the customer can receive data at 1.5 Mbps or higher. DSL technology upgrades the performance of the standard twisted pair (the copper line connecting most homes and businesses) to carry high capacity data transmission. By expanding the amount of frequency used over the copper line, DSL is able to function simultaneously with standard voice and fax services and avoids the installation of a new separate line. Because the technology works over the existing telephone plant, DSL is significantly less expensive to deploy on a broad scale than other approaches, such as a new fiber or cable construction. Since phone lines are nearly ubiquitous in the United States, DSL providers are able to provide service in all areas of the country to all classes of customers. Though DSL holds out the promise to deliver broadband access to businesses and consumers, there are several technical issues with regard to the widespread implementation of DSL. One of the primary inhibitors is signal A-7 attenuation, also known as the distance limitation. Since DSL utilizes a higher frequency that is more susceptible to attenuation than ordinary voice transmission, there are currently distance limitations on how far the customer can be located from the telephone company’s central office. Using current technology, DSL is limited to locations within a three-mile maximum loop from the central office. There are several versions of DSL service, with differing usage characteristics and distance constraints. One such version is called asymmetric digital subscriber line (ADSL). As ADSL does not interfere with the basic voice service, the user can simultaneously browse the Internet or watch a movie while talking on the telephone. According to some reports, ADSL provides a competitive advantage over broadband Internet access provided over cable systems in the following areas: ! ! Simultaneous fast Internet and voice/fax capabilities over a single telephone line; Data security over a dedicated point-to-point line, from customer to local exchange carrier (LEC), which is not available over a shared medium such as HFC or cable modems; and Dedicated bandwidth that guarantees performance regardless of the number of users on the network. In the case of cable modems, where the bandwidth is shared, the actual performance may slow down as the number of users on the network increases. f. Bypassing The Local Loop In response to the demands for higher-speed access to the Internet, there has been an explosion of new telecommunications technologies. “Telecommunications has become a mix of transmission mediums,” writes Robert Gibson.4 “Today the consumer can readily use ! Gibson, Robert, The New Global Telecommunications Industry and Consumers, Pennsylvania State University, Institute for Information Policy, Chapter 1 at www.naruc.org/chapter1.html. A-8 4 traditional voice telephony, wireless cellular, wireless spread-spectrum, traditional voice phone call or data connection.”5 These changes in technology, even more than changes in state and federal regulation, can bring competition to New Jersey because they will allow competitive carriers to bypass the bottleneck that the “last mile” of wire to customers’ homes represents. g. Coaxial Cable Another wire already in most American homes is the coaxial cable provided by cable television companies. Traditionally, coaxial cable only provided communications that went in one direction: the signal transmitted by cable television studios into your home. Cable companies in New Jersey and throughout the United States have spent billions of dollars to upgrade their networks to allow for two-way communications. Comcast already offers Internet services in its New Jersey franchise territory over coaxial cable wires. With AT&T’s merger with MediaOne and Tele-Communications, Inc. (“TCI”), the industry anticipates that telephony, as well as Internet services, will be offered over cable wires in only a few years. h. Wireless Wireless technology is still under development, but it, too, may compete in the future with “Ma Bell.” The so-called wireless local loop would operate just like regular phone service from the consumer’s point of view. The home phone would connect to a regular jack in the wall. However, the wireless company would use a device attached to that house to transmit calls via cellular-radio frequencies to antennas located throughout the service territory. 5 Id. A-9 Recent decisions of the U.S. Supreme Court and Orders from the Board of Public Utilities may speed the arrival of local phone competition in New Jersey. But, advances in technology that allow competitors to bypass traditional phone service could play an equally important role in bringing New Jersey consumers and businesses new options in the market. II. What Are The Differences Between Local Calls, IntraLATA Calls And Long Distance Calls? Telecommunications companies are jockeying for position to compete in the new local exchange marketplace. At the same time, for many consumers in New Jersey and nationwide the differences between local, regional, and long distance phone calls are not clear. The Ratepayer Advocate supports the development of informed consumers who will be more likely to benefit from the competitive marketplace. a. What Is A Local Call? A local call is one that is placed and received within a customer’s local service, or local calling area. In New Jersey, local calling areas are usually quite small, and local phone calls are generally those that are made and received within a single exchange area or between two contiguous exchange areas. In some parts of New Jersey, the local exchange area may be no larger than one town. BA-NJ, which provides local exchange service to the vast majority of New Jersey phone customers, has been subject to a rate cap since 1987. Most BA-NJ phone customers receive unlimited local phone service for a flat rate of $8.19 per month. This longstanding rate cap will be subject to review by the Board in the year 2000. A-10 b. What Is An IntraLATA Call? The simple answer is that an IntraLATA or regional toll call is a phone call that does not cover enough distance to be a long distance call, but that travels too far to be local. “LATA” is an acronym for Local Access and Transport Area. LATAs were established after the breakup of AT&T in 1984 in order to define the jurisdictional limits of local exchange carriers which continued to be regulated as monopolies. Traffic completed within the LATA was the province of monopoly local exchange carriers. Traffic that crossed LATA boundaries (i.e., InterLATA toll calls) was deemed a competitive service and could only be carried by interexchange carriers. Because New Jersey’s local calling areas are generally quite small, customers may find much of their phone bills consist of IntraLATA toll phone calls. Most calls that extend beyond the boundaries of a caller’s community and immediately neighboring towns are billed as IntraLATA toll calls. New Jersey is divided into three local toll call regions. One consists of northern New Jersey. It covers the 201/973 and 908/732 area codes. The second toll call area consists of the eastern portion of the 609 area code. The third local toll call area consists of the 856 area code and the western half of the 609 area code. Regional toll calls, then, are phone calls that originate and terminate within a single LATA, but that are made to people or businesses located beyond the borders of the caller’s community. In other words, a phone call from Morristown to Newark is a regional toll call, since it originates and terminates in the northern New Jersey local toll call area. c. What Is A Long Distance Call? A-11 A phone call that crosses LATA boundaries becomes a long distance call. Therefore, a phone call from Newark to Cape May is an in-state long distance call, since it crosses LATA boundaries. In-state long distance rates can differ from interstate long distance rates. At present, long distance calls within New Jersey may be handled only by companies that have traditionally carried long distance calls, such as AT&T, Sprint, or MCI. BA-NJ will only be permitted to provide long distance service within New Jersey when state and federal regulators have determined that the local exchange market in New Jersey is competitive. A-12 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON THE EMERGING COMPETITIVE LANDSCAPE NATIONWIDE: FEDERAL AND STATE INITIATIVES JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa B B. THE EMERGING COMPETITIVE LANDSCAPE NATIONWIDE: FEDERAL AND NEIGHBORING STATE INITIATIVES “I yield to no one in the intensity of my conviction that competition is a better safeguard and promoter of the interest of both consumers and the public at large than regulated monopoly, wherever it is feasible.” –Professor Alfred E. Kahn, 1998 I. The Breakup Of The Long Distance Monopoly In 1963, Microwave Communications Inc. was formed with the intention of competing with AT&T for a share of the long-distance market. It took Microwave Communications nearly a decade to offer private line service between St. Louis and Chicago (“private line service” is telephone service offered between two points over a dedicated line). By that time, the company had changed its name to MCI and had nearly gone bankrupt seeking entry into the long distance market, fighting not only AT&T, but the Federal Communications Commission (“FCC”), as well. MCI persisted, and by the mid-seventies, federal regulators began to support and promote competition in the long-distance market.1 AT&T reigned over virtually all telephone service until 1982, when a consent decree settled its longstanding antitrust dispute with the United State Department of Justice (“DOJ”). The settlement required the so-called “break-up” of AT&T: a massive redistribution of assets and an unprecedented rearrangement of markets and services. These changes in AT&T’s control over the telecommunications marketplace established the framework for competition in the long-distance market, which has now been extended to the local exchange marketplace. 1 S. Coll, The Deal of the Century: The Breakup of AT&T, Athaneum, New York, (1986). B-1 Under the consent decree, modified by U.S. District Court Judge Harold Greene in 1983, AT&T retained ownership of its Long Lines Division, Western Electric, and Bell Telephone Laboratories. In other words, AT&T was given the parts of the company that were expected to become competitive. AT&T was also permitted to provide long distance service and manufacture and sell telecommunications equipment (i.e., telephones, switches, cabling, etc.). AT&T was required to spin off 22 Bell operating companies (“BOCs”) that provided local telephone service. The 22 Bell operating companies were further organized into seven Regional Bell Operating Companies (“RBOCs”), which are commonly referred to as the Baby Bells: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West. The RBOCs retained control over the basic local telephone exchange service monopoly in their respective territories. They were, however, prohibited from entering the long distance interstate market. Most importantly, the RBOCs owned, among other network elements, almost all of the “local loops” (the aerial wires or buried cables over which telephone service is provided to subscribers) in their service areas. Ownership of this “local exchange network” is indispensable in providing all telephone services, whether local or long-distance. For instance, a long-distance call begins in one local exchange and ends in another. To place such “interexchange” calls, long-distance carriers must rely on the same facilities that the local exchange carrier (“LEC”) uses to provide service within local calling areas. Thus, a long-distance call from Trenton, New Jersey, to Hartford, Connecticut, is transported from the caller’s telephone through BA-NJ’s local network to a point of interconnection with a longdistance carrier. That long distance carrier then transports the call along its interexchange B-2 network to Connecticut, where the local carrier then completes the call over its network to the appropriate destination. In originating or completing a long distance, or interexchange call, a LEC provides “exchange access” to the interexchange carrier. Interexchange carriers pay LECs billions of dollars each year in “access changes.”2 As noted in a 1998 Brooking Institute Policy Brief, “[f]or a few years, the Baby Bells lived the quiet life of regulated monopolists while AT&T steadily lost market share to companies like MCI and Sprint in long distance, and Mitel and Northern Telecom in communications equipment. But, despite control of their state-regulated monopolies, the RBOCs were unhappy with the line-of-business restrictions, and persistently pushed courts, regulators, and elected officials for authority to enter competitive markets.”3 II. The Telecommunications Act Of 1996 “The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves – in their separate, and individual capacities.” –Abraham Lincoln The Telecommunications Act of 1996 (“Federal Act”)4 was intended to open all telecommunications markets to competition so that consumers could enjoy the benefits of increased choices, reduced prices, expanded services, and enhanced technology and innovation. See Access Charge Reform, 11 FCC Rcd 21354, 21371 (1996), petitions for review denied, 153 F.3rd 523 (8th Cir. 1998). Litan, Robert E. and Noll, Roger E. “Unleashing Telecommunications: The Case for True Competition,” Brooking Institute Policy Brief #39 (Nov. 1998) at 1. Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 153, et seq. (1996). B-3 4 3 2 The blueprint to build this new and improved telecommunications market is contained in several sections of the Federal Act, particularly Sections 251, 252, 253, 271, and 706. Consumers might think they need not be interested in the details of the Telecommunications Act of 1996, thinking, “all I want is greater choice and cheaper rates for my local and long distance service, and maybe faster Internet connection, too.” However, to understand how to achieve these benefits, consumers should understand (1) what the Federal Act was designed to do and how it was designed to do it; (2) what has happened thus far; (3) what still must happen in order to realize the goals of increased choices, advanced services, and lower prices; and (4) what the Ratepayer Advocate is doing to achieve these goals in New Jersey. This paper addresses each of these four issues as they pertain to Sections 251, 252, 271, and 706 of the Federal Act. a. What Are Sections 251 And 252 Of The Federal Act, And What Were They Designed To Accomplish? The Federal Act altered significantly the legal and regulatory framework governing the marketplace for local exchange telecommunications services. Throughout the country, prior to the implementation of the Federal Act, the local exchange market was served by a monopoly. In most areas of New Jersey, the monopoly provider was and remains Bell Atlantic - New Jersey (“BA-NJ”). A cornerstone of the Federal Act was the opening of the local exchange market to competition. As expressed throughout the Federal Act, Congress envisioned competition in the local telephone market (commonly referred to as “local competition”) developing in three ways: through (1) facilities-based competition -- construction of new networks by competing B-4 carriers; (2) interconnection -- the ability of competitors to purchase elements of the incumbent’s network and combine them with their own facilities; and (3) resale of existing LEC services. The Federal Act, and the implementing regulations established by the Federal Communications Commission (“FCC”), were intended to eliminate prior statutory, regulatory, and economic barriers to competition which resulted in a virtual monopoly for LECs in their respective markets. Sections 251 and 252 of the Federal Act were intended to serve as a catalyst for competition as well as an essential stepping stone for promoting long-distance service by the RBOCs in the geographic regions in which they currently provide local telephone service (also known as “in-region” long-distance service; see discussion of Section 271, below). Briefly stated, Section 251 of the Federal Act requires incumbent local exchange carriers (“ILECs”), such as Bell Atlantic-New Jersey (“ BA-NJ”), to provide competing telecommunications carriers with interconnection and access to unbundled network elements (“UNEs”) at rates, terms, and conditions that are just, reasonable, and nondiscriminatory, and to offer telecommunications services for resale. While some of the above terms may seem confusing, they all serve to achieve a specific goal: the seamless introduction of competition to the local exchange market. Interconnection is the ability of a competitor’s telephone network to interface or transfer telephone calls and other information from itself to another company’s network. Unbundled network elements are, essentially, all the parts of the telephone network that are used for the transmission of a phone call. By permitting competitors access to all or parts of the incumbent carrier’s network for a fee so that competitors can “rent” the existing network (as will be discussed in greater detail below), Congress determined that competitors should not be required to build their own B-5 networks from scratch as this would be prohibitively expensive and time-consuming. Some competitors have chosen to build all or certain parts of the network themselves and want access to only portions of the incumbent’s network. However, other competitors have chosen to buy all of the incumbents’ network at a discount, and then resell the service. Section 252 established the pricing standards which states are to consider when setting the rates at which the incumbent must offer interconnection to its network. The most significant standard is that when setting the rate for interconnection to an incumbent’s network, the state must base the rate on a forward-looking cost, or, the cost which would be required to build an efficient network today. The Act permits carriers to reach agreements through several different methods. For example, the Act permits carriers to negotiate an agreement between themselves. Additionally, a carrier may choose, in part or in whole, a previously approved agreement of another carrier. After an agreement is reached through negotiation, it is submitted to the state regulatory commission, in New Jersey, the Board of Public Utilities (“Board”), which may reject the agreement only if it discriminates against a carrier that is not party to the agreement or if it is found to be inconsistent with the Federal Act. When two carriers cannot reach consensus on the terms of an agreement, the carriers may choose an arbitrator to determine an appropriate agreement. In such a case, the agreement reached through arbitration is then submitted for approval to the state regulatory commission. An arbitrated agreement must then either be approved or rejected. The Federal Act provides that an arbitrated agreement may not be modified by the state regulatory commission. It may be rejected, only if the state regulatory commission determines that the arbitrator’s decision is inconsistent with the Act. B-6 i. As Of December, 1999 What Have Sections 251 And 252 Accomplished? To date, Sections 251 and 252 have inspired a great deal of litigation, which has significantly slowed the introduction of local exchange competition throughout the country. Among the challenges made to Sections 251 and 252, RBOCs have questioned the FCC’s authority to set default ceiling prices for network elements (the cost of the incumbent’s network for a competitor) as well as the FCC’s authority to permit competitors to adopt, or “pick and choose,” individual parts of other competitors’ interconnection agreements. The ability of a carrier to “opt into” and adopt, pursuant to the Federal Act, another agreement in its entirety was never in dispute. Additionally, RBOCs challenged the FCC’s determination that network elements, such as certain databases and access to operator and directory assistance services must be made available to competitors. While these legal challenges were winding their way through the courts, ultimately to the U.S. Supreme Court, incumbents and competitors continued to sign interconnection and resale agreements. However, since uncertainty hovered over the entire industry, many competitors have elected to await the final outcome of these issues before they invested their time, effort, and money into their entry in the local exchange market. Although the years of litigation may not be over, key issues have, nevertheless, been decided. Early in 1999, the U.S. Supreme Court ruled on several issues in a manner that is likely to stimulate local exchange competition. The Court reaffirmed the FCC’s right to set default interconnection rates, as well as a competitor’s right to “pick and choose” individual parts of interconnection agreements between competitors and an incumbent. However, the Supreme Court ordered the FCC to revisit its rules and to demonstrate for each individual B-7 unbundled network element why access is necessary for competitors, and how denial of access to each element would impair a competitor’s ability to provide service.5 ii. What Still Must Happen To Fully Implement Sections 251 And 252 Of The Federal Act? Now that many of the issues raised in the litigation regarding Sections 251 and 252 have been settled, the Ratepayer Advocate is hopeful that incumbents and competitors will concentrate more on interconnecting to each other’s networks and offering unbundled network elements, either individually or in assembled arrays, rather than forestalling competition through more litigation. It appears that competition is most likely to come through access to unbundled network elements and interconnection, rather than through resale. Resale of the incumbent’s services, as provided for in Section 251, has not proven to be a successful market strategy. Many resellers claim that the discount they receive from incumbents to resell local exchange service is too insignificant to permit service to be resold at a profit. Although the Ratepayer Advocate supports resale as a meaningful platform from which to enter the telecommunications marketplace, it seems unlikely to be the preferred means of market entry by most competitors. The Ratepayer Advocate submits that, once incumbents and competitors become fully committed to work with each other in the marketplace, rather than against each other in the court house, they can make a commitment to serve all consumers, not merely business and industrial subscribers. As noted in our discussion of Section 706 of the Federal Act below, competitors have chosen to mostly serve larger, more profitable business customers, rather than AT&T Corp. vs. Iowa Utilities Board, 525 U.S. 366, 67 U.S.L.W. 4104, 1999WL24568 (January 25, 1999), reversing in part and affirming in part, Iowa Utilities Bd. vs. FCC, 120 F.3d 753 (8th Cir. 1997). B-8 5 less profitable small business and residential customers. Until competitors enter the small business and residential local exchange market, those consumers are likely to be denied the lower rates and enhanced choices offered to large business customers who have access to multiple providers. iii. What Is The Status Of The Goals Of Sections 251 And 252 Of The Federal Act In New Jersey? As has been the case throughout the country, meaningful implementation of Sections 251 and 252 of the Federal Act in New Jersey has been frustrated by ongoing litigation which can be briefly described. In 1996, the Board initiated a proceeding to determine a LEC’s cost to provide basic telephone service and to establish “generic” rates, terms, and conditions of interconnection and wholesale resale rates for all services. The Board of Public Utilities stated that these generic rates and terms were to be available to carriers who chose not to go through the negotiation or arbitration procedures outlined in Section 252 of the Federal Act, and that these rates and terms would not supersede rates, terms, and conditions established by carriers who chose to use the negotiation or arbitration procedures permitted by the Federal Act. At the conclusion of the Board’s proceeding, the Board determined that a competitor would be required to pay BA-NJ $16.21 per month on average for use of BA-NJ’s local distribution network (i.e., the local loop) to provide service to a customer. Additionally, the Board reversed its former position and decided, without explanation, that this $16.21 rate would supersede rates determined through negotiation or arbitration. The Ratepayer Advocate believes that the rate established by the Board is excessive and conflicts with the rates set by the FCC. Therefore, the Board’s decision to supersede negotiated or arbitrated rates is inconsistent with the Federal Act. Most importantly, B-9 there is concern that the Board’s actions would impede the development of local exchange competition in New Jersey. Although AT&T had gone through arbitration proceedings with BA-NJ in New Jersey, the decision of the arbitrator was superseded by the Board’s determination to apply the results of the generic proceeding. Prior to the Board’s determination, AT&T invoked its rights under Section 252 and petitioned the Board to assign a neutral arbitrator to resolve outstanding issues in its negotiations for an interconnection agreement with BA-NJ. After BA-NJ and AT&T presented their positions to the arbitrator on the outstanding issues, the arbitrator ruled that AT&T should only have to pay $11.76 per month for use of BA-NJ’s local network to connect a customer. Notwithstanding the arbitrator’s decision, the Board decided that its “generic” decision would supersede the arbitrator’s decision, and required AT&T to pay, on average, an additional $4.45 per month per customer. AT&T claimed that this increased cost is unjustified, impermissible under the Federal Act, and effectively prevents it from providing competitive service at a profit. The Ratepayer Advocate has concluded that the Board’s $16.21 rate is too high and will inhibit local exchange competition from developing. For example, BA-NJ provides local exchange service to residential subscribers for $8.19 per month, although many consumers also take additional services or make regional toll calls, resulting in their total higher telephone bills being higher. The FCC set a $12.47 default ceiling rate for a competitor’s use of BA-NJ’s network to connect a customer, or $3.74 lower than the Board’s rate of $16.21. The BANJ/AT&T arbitrator’s decision was $11.76, or $4.45 lower than the Board’s rate of $16.21. By setting this charge at more than twice BA-NJ’s price of local service, the Board has created B-10 an environment that is inhospitable to competitors, and has denied a great many consumers the benefits of competition that a more reasonable rate would provide. Subsequent to its decision, the Board required AT&T to modify its interconnection agreement with BA-NJ in accordance with its “generic” rates. Both companies did so under protest and claimed that the Board’s action prevented them from competing for residential local exchange customers. Seeking to reverse the Board’s decision, AT&T and MCI each filed suit in the Federal District Court for the District of New Jersey. The Ratepayer Advocate intervened in both cases on the grounds that the Board may not rewrite an interconnection agreement with arbitrated rates that otherwise comply with Section 252 of the Federal Act. The resolution of these cases is critical to the future of residential and business local exchange competition throughout the state. We are currently awaiting the decision of the court. As long as the case remains in litigation, it is unlikely that the Board will either modify its calculation of the generic rate or reverse its decision to supersede the arbitrator’s decision. The Ratepayer Advocate is hopeful that this issue will be resolved by the court soon. If the court finds in favor of the pro-competitive position taken by the Ratepayer Advocate, the Board’s decision to supersede the arbitrator’s rate will be reversed, and competitors will be able to interconnect to BA-NJ’s network at a more reasonable, pro-competitive rate. Should the court reach such a conclusion, the Ratepayer Advocate is confident that the Board will move swiftly to implement the court’s orders, ensuring that the promise of local exchange competition, with lower prices, more options, and enhanced choices for consumers, can be realized for all ratepayers. B-11 b. What Is Section 271 Of The Federal Act And What Was It Intended To Do? Prior to the Federal Act, the RBOCs, which were created as a result of the breakup of AT&T, were not permitted to provide long distance service.6 These companies, including Bell Atlantic, were permitted to provide only local and intraLATA (or regional, in-state) toll service, while other carriers, such as AT&T, were permitted to provide only long distance service and thereafter intraLATA toll service.7 However, in drafting Section 271 of the Federal Act, Congress decided to permit the RBOCs meeting certain conditions to offer all telecommunications services, including long distance service. These “certain conditions” are contained in Section 271 of the Act. Section 271 includes a 14 point “checklist” of requirements that an RBOC must satisfy for the FCC to be able to conclude that the RBOC’s local market (on a state-by-state basis) is open to local exchange competition. Central to this checklist is the FCC’s insistence that the interconnection and resale provisions required of the incumbent (as discussed earlier) are being met. Additional requirements made of the incumbent toward its competitors include access to emergency services and customer telephone numbers. The reasoning behind Section 271 is rather straightforward. The RBOCS have monopoly control over the telephone wires that connect customers’ telephones to the network, commonly known as “the last mile.” Congress thought, quite logically, that if the RBOCs continued to control this essential bottleneck facility and were also allowed to provide long For an in-depth history of the breakup of AT&T, see B.I., “The Breakup of the Long Distance Monopoly.” For an in-depth review of local, intraLATA and interLATA toll services, please see Section A of this publication, “A Primer on Telecommunications Technology for the New Millennium.” B-12 7 6 distance service, then the RBOCs will have no incentive to permit other carriers to make use of their local distribution networks so that there will be competition in the local market. Absent an incentive, Congress was concerned that the RBOCs would hold onto their local exchange monopoly while they entered the long distance market. Ultimately, Congress determined that Section 271 would serve as a quid pro quo: if the RBOC would open its local market to competition, it would receive the right to compete in long distance business. i. What Has Section 271 Accomplished So Far? If the RBOC opens the local loop and competitors have the opportunity to resell and interconnect with its infrastructure in the manner Congress intended, the RBOC can go to its state regulatory commission, the Department of Justice (“DOJ”), and the FCC,8 to request and receive permission to provide long distance service. But, more than three-and-a-half years after the Federal Act has been passed, only one RBOC has satisfied the Section 271 checklist, that being Bell Atlantic-New York which received authority from the FCC on December 22, 1999 to enter the market for long distance service. Until the FCC approved the Bell Atlantic petition for New York State, RBOCs have largely either challenged in court the FCC’s interpretation of Section 271 and other relevant sections of the Federal Act, or they have Section 271 requires the RBOC to present its application to all three bodies, although each serves a separate function. The state regulatory commission -- in New Jersey, the Board of Public Utilities -- reviews the application and reaches a conclusion as to whether the Section 271 checklist has been met. Its determination, while significant, holds no legal value. The DOJ then reviews the application and makes a determination as to whether the Section 271 checklist has been met. The DOJ informs the FCC of its decision, which gives it “substantial weight” as it makes its own conclusion. The FCC then determines whether the RBOC has satisfied the Section 271 checklist and whether its entrance into the long distance market is in the public interest. The FCC’s determination is legally binding. The FCC has never approved a Section 271 petition and the DOJ has never recommended the FCC do so, even though in several cases, the state regulatory commissions had concluded that the applicant met the Section 271 checklist. B-13 8 simply been unable to provide the internal support mechanisms which ensure nondiscriminatory access to competitors. With the approval of Bell Atlantic-New York now having “broken the ice” by establishing a model for other applicants to follow, it is expected that applications from SBC-Texas, Bell Atlantic-Pennsylvania, Bell Atlantic-Massachusetts and Bell South-Georgia will be filed in short order. ii. What Still Must Happen To Fully Implement Section 271 Of The Federal Act? To implement Section 271 of the Act, the RBOCs must simply meet all the requirements of the Section 271 checklist. In some instances, the RBOC has gone to the FCC and claimed that it has met the Section 271 checklist, only to have its petition rejected. In recent months, many RBOCs have been working with their competitors, public utilities commissions, and consumer groups in order to ensure that all the necessary computer systems and interfaces are in place to provide greater assurance that a Section 271 petition before the FCC will be met with approval. That approach was followed in New York and met with success at the FCC. While this collaborative effort has produced disagreements between incumbents and competitors, it has also led to a surprising degree of agreement. Many industry observers expect the process successfully employed in New York State to be emulated by other states as they all seek to encourage greater competitive entry in their telecommunications markets. Yet even with this focused approach, there remains some disagreement as to whether the New York process has addressed all outstanding issues. Some of BA-NY’s competitors allege that a few significant performance issues remain outstanding. The Department of Justice recommended to the FCC that BA-NY’s application not be approved until those last performance issues are resolved. Though the FCC decided to grant BA-NY’s petition, the B-14 Commission voiced its concerns that there must be no back-sliding on service standards. Overall, the collaborative process initiated in New York and employed in New Jersey has made significant strides toward opening the local market up to competition and resolving roadblocks as RBOCs seek regulatory authority to provide intraLATA toll service. iii. What Is The Status Of The Goals Of Section 271 Of The Federal Act In New Jersey? BA-NJ has filed a “prefiling statement” for Board approval of a Section 271 petition, although it has not yet filed an actual Section 271 petition with the Board. Essentially, BANJ’s position is that many of the impediments to competition are being addressed in the Board’s Investigation Regarding Local Competition for Telecommunications Services proceeding9 and that, upon the conclusion of that proceeding, Board approval of a Section 271 petition would be in order. If the Board were to approve such a Section 271 petition, BA-NJ would then submit the petition to the DOJ and the FCC for consideration. Although the FCC is not under a statutory obligation to give any consideration to a state PUC’s review of a Section 271 petition, the FCC is required to give “substantial weight” to the DOJ’s opinion. The Ratepayer Advocate has determined that it is in the public interest that BA-NJ satisfy all 14 points of the Section 271 petition as quickly as reasonably possible so that BA-NJ is authorized to provide long distance telecommunications service. BA-NJ’s ability to combine local and long distance service would make the company a unique and powerful competitor in the marketplace. But permitting BA-NJ to enter the long distance market before the company has met its Section 271 obligations could prove damaging to the prospects of local competition. Before BA-NJ is permitted to enter the long distance market, it should earn 9 BPU Docket No. TX95120631. B-15 that right by fully opening its local network to competitors. To ensure BA-NJ’s eventual Section 271 approval, the Ratepayer Advocate is working closely with all stakeholders and the Board in an effort to bring competition to the local exchange market. The companies have narrowed their disagreements considerably, and the Board recently released an Order which details BA-NJ’s obligations to provide unbundled network elements (“UNEs”) and access to other company elements. As discussed above, the issue of the price at which access to BA-NJ’s network may be purchased, however, remains before the US District Court. The Ratepayer Advocate supports resolution of these issues in favor of open, competitive markets. When BA-NJ does submit a Section 271 petition to the Board, the Board should undertake a rigorous review. Although Board approval of the petition alone will not permit BA-NJ to offer long distance service, the nature of the Board’s review of the petition will demonstrate the Board’s commitment to an open, competitive local exchange market, as well as a more competitive long distance market. While the Ratepayer Advocate disagrees with the Board’s position regarding interconnection rates (see discussion of Sections 251 and 252, above), the Ratepayer Advocate supports the Board’s thorough review of many of the other impediments to local exchange competition. The Ratepayer Advocate is committed to working with BA-NJ and the Board to ensure that the company fully opens its market to local competition and meets all the 14 points of the Section 271 checklist. At that time, we will support its request to provide long distance telecommunications services. B-16 c. What Is Section 706 Of The Federal Act Supposed To Do? Section 706 of the Federal Act requires the FCC and state commissions to encourage the deployment of advanced telecommunications capabilities to all Americans, including elementary and secondary schools. “Advanced telecommunications capabilities” is defined in the federal legislation as “high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.” Congress anticipated the growth and improvement of existing services, such as telemedicine, interactive learning, and electronic commerce through the deployment of advanced telecommunications capabilities. Of Section 706 So Far? The most significant effect of Section 706 has been symbolic. It has demonstrated to telecommunications companies that Congress recognizes that the economic and social development of the country are intertwined with the development of telecommunications technologies. The Internet, and the values that it promotes (dissemination of ideas, freedom of speech, and reduced costs for communication), are among the most significant developments for consumers in the United States as we enter the next millennium. Many experts believe that we have only begun to develop the full capabilities of telecommunications technologies, and that an open marketplace that encourages the creation of advanced telecommunications services is vital to the nation’s growth. i. What Has Been The Effect B-17 In New Jersey and throughout the country, telecommunications companies are deploying new, advanced telecommunications infrastructures and services and entering new markets in order to serve consumers better. With the tremendous activity taking place within the telecommunications industry, you are likely to read that a company you have never heard of, like Global Crossing or WorldCom, is buying a company that has existed for one hundred years and is worth billions of dollars. Or you may read that an established company, such as AT&T, is buying cable television operations, such as TCI and Media One. These activities reflect various companies’ efforts to find a competitive advantage in providing these advanced services. Some companies believe that the best way to provide advanced services is through high speed cable modems over cable television systems; others believe that the best way is through wireless services; still others believe the most effective way is through high-speed digital telephone lines. There is no one “right answer.” Section 706 was not meant to favor one technology or one group of consumers over another. Rather, Section 706 was meant to spur innovations necessary to realize the widespread deployment of advanced telecommunications services without relying on traditional regulatory models. ii. What Must Happen To Realize The Goals Of Section 706? To realize the goals of Section 706, advanced telecommunications capabilities must be made available to all consumers, not just wealthy or commercial users. While large commercial users are beginning to reap the benefits of advanced telecommunications services, many residential users do not have the same level of access to these advanced services. The deployment of advanced B-18 telecommunications services has to date been directed primarily toward large commercial customers because such high-volume users provide the greatest opportunities for telecommunications providers to recoup their initial investments and reap profits. Residential consumers and other lower-volume users may be less profitable for carriers to serve than large industrial users. Therefore, telecommunications providers have been slow to offer advanced services at affordable rates in residential areas. However, to meet the goals of Section 706, the Ratepayer Advocate supports access by all consumers to advanced telecommunications services at reasonable prices. In October 1999 the FCC put out for comment proposed rules to collect basic information about two important aspects of telecommunications: the status of local telephone service competition and the availability of “advanced telecommunications capability,” i.e. the deployment of broadband services, such as high speed Internet access, to consumers. The monitoring of marketplace developments in the introduction of broadband services will be a recurring activity for the FCC over the next several years. The FCC has signaled its willingness to impose regulatory requirements and incentives should the competitive market prove incapable of stimulating rapid deployment of broadband technologies. The Ratepayer Advocate expects to play an active role in that effort. In a deregulated environment, how can development and deployment of costly new technologies be promoted while encouraging the deployment of these technologies to residential consumers, schools, and libraries, who may not be the most profitable customers? The answer is through vigorous competition. In an open, competitive environment where multiple providers must innovate constantly and find new markets for their products and services, all potential customers will be desirable, and none will be ignored. The long distance B-19 market provides a perfect example. When that market opened to competition, innovative companies developed new ideas to win customers with lower rates and special plans. In this way, consumers have benefitted. Even if your long distance bill is comparatively small, you still may get calls from some company that wants to be your long distance provider. Similarly, we may be able to measure the success of Section 706 when we start getting calls from companies that want to provide high-speed Internet service. iii. What Is The Ratepayer Advocate Doing To Realize The Goals Of Section 706 Of The Federal Act In New Jersey? In general, the Ratepayer Advocate supports policies that will ensure an open, competitive market for all telecommunications services in the State of New Jersey. Many of these policies are more thoroughly addressed elsewhere in this publication (“The Emerging Competitive Landscape Statewide: New Jersey Initiatives to Promote a Competitive Telecommunications Marketplace”, Section C). All rely upon the Board to implement these pro-competition policies. The Ratepayer Advocate participated in a proceeding pursuant to Section 706 before the FCC regarding Bell Atlantic’s (“BA”) application to provide advanced telecommunications services.10 Briefly stated, BA wanted to build a network for advanced telecommunications services throughout its service territory in order to offer high speed data services as well as to carry telephone traffic. Such an advanced network would provide a more developed telecommunications infrastructure capable of handling the transmission of advanced services. However, BA, through its subsidiaries, such as BA-NJ, is precluded under Section 271 of the Federal Act, discussed earlier, from providing long distance telecommunications services or In the Matter of Petition of Bell Atlantic Corporation for Relief from Barriers to Deployment of Advanced Telecommunications Services, CC Docket No. 98-11. B-20 10 other advanced services. Therefore, BA was required to request a waiver from the FCC under the provisions of Section 706 if it is to be permitted to carry advanced long distance telecommunications services. The Ratepayer Advocate opposed BA’s waiver request to the FCC because BA had failed to satisfy the open market requirements outlined in Section 271 of the Federal Act, a condition for its provision of long distance telecommunications services. If BA were granted a waiver of its open market obligations and permitted to provide long distance telecommunications services, the company would have no motive to provide equal access to its network to competitors, as required by Sections 251 and 252 of the Federal Act. The FCC agreed with the Ratepayer Advocate’s position and declined to grant BA the waiver it requested. Ultimately, advanced telecommunications services are being deployed slowly but surely. Currently, large business and other industrial customers are most likely to have access to these services. However, as new providers enter the marketplace, we will begin to see the provision of advanced telecommunications services to residential customers. Access by schools and libraries has improved as a result of Federal Universal Service grants. The Federal Universal Service program consists of mechanisms that make telephone and other communications services affordable for low-income subscribers, schools, libraries, and rural health care providers. However, the Board’s delay in addressing the Ratepayer Advocate’s request for a state Universal Service Fund for low income ratepayers, high cost areas and schools and libraries has prevented many from gaining access to advanced services11. The Ratepayer Universal Service issues affecting low income consumers and schools and libraries are discussed in detail in Section E of this publication: Societal Concerns of the Federal Telecommunications Act. B-21 11 Advocate remains hopeful that the Board will eventually address the request, but is concerned that the state’s children are not able to take maximum educational advantage of the opportunities presented by modern telecommunications each day that Board action is delayed. Nevertheless, the Ratepayer Advocate is encouraged by the growth of advanced telecommunications services throughout the state and will continue to monitor its further growth and dissemination among all classes of New Jersey ratepayers. The Position Of The Ratepayer Advocate On Implementation Of The Federal Act The Federal Act provides a roadmap for the introduction of increased telecommunications choices, reduced prices, expanded services and enhanced technology and innovation. Rather than embracing the new competitive paradigm, too many telecommunications providers have elected to challenge the process, thereby delaying the benefits of true competition to all consumers. However, the Ratepayer Advocate has determined that Congress’ goals outlined in the Federal Act will be reached in New Jersey when local exchange competition, is available to all. The Ratepayer Advocate will continue to participate actively in all proceedings concerned with the introduction of competition, including administrative proceedings at the Board on Operations Support Systems and Unbundled Network Elements, and appeals in federal court, while continuing to work on behalf of all New Jersey ratepayers to ensure just and reasonable rates, and increased choices for all telecommunications services, for all classes of ratepayers. B-22 III. Significant Developments at the Federal Communications Commission (“FCC”) Affecting the New Jersey Telecommunications Market (1998-1999) “Civilizations, I believe, come to birth and proceed to grow by successfully responding to successive challenges. They break down and go to pieces if and when a challenge confronts them which they fail to meet.” – Arnold Toynbee, 1948 The FCC is responsible for implementing the various provisions of the Telecommunications Act of 1996 (“Federal Act”) as well as other important national telecommunications policies. Therefore, actions taken by the FCC dramatically affect the telecommunications marketplace, including the introduction of competition, rates, and access to new and advanced telecommunications services. Before implementing a rule, the FCC provides information to the public on the issues it intends to address in a particular rule it wants to adopt and provides a comment period for interested parties.1 When the Ratepayer Advocate determines that proposed FCC action will affect New Jersey’s telecommunications or cable television marketplace, it submits comments to the FCC on behalf of New Jersey’s ratepayers. Listed below are some of the most significant regulatory actions taken by the FCC in 1999. These actions concerning the many issues facing telecommunications policy makers may seem complicated to those unfamiliar with telecommunications policy and regulation vocabulary. Nevertheless, the Ratepayer Advocate believes it is essential for those concerned with the development of telecommunications policy and regulation to examine the questions regulators and policy makers consider, as well as the answers the FCC provides. 1 See the FCC’s website at www.fcc.gov. B-23 a. The Internet On February 25, 1999, the FCC determined that calls to Internet Service Providers (“ISPs”), [an ISP is a company like America Online (AOL)], are largely interstate, even if the call the consumer places to connect with its ISP is a local call, because after consumers dial into their Internet provider, they generally visit websites and servers located outside the local calling area. The FCC’s decision is significant because an interstate service is not subject to reciprocal compensation, while a local call is. As defined in the Federal Act, reciprocal compensation is a method by which a telephone company, whose network is involved in the transmission of a call, receives compensation for the use of its network to complete a call. For example, if Bell Atlantic is your carrier, when you dial a local telephone number, Bell Atlantic transports the call to the called party. However, if the called party is served by a different telephone company, Bell Atlantic “hands off” your call to that carrier and compensates it for completing the call. Thus, if you use Bell Atlantic’s network to dial into your ISP and your ISP is served by a different carrier, the ISP’s carrier will receive compensation from Bell Atlantic for completing your call. Many competitive carriers have chosen to concentrate on serving companies like ISPs, which places them in position to complete calls and receive compensation, rather than originate calls and pay compensation to other carriers. Because many incumbent carriers, like Bell Atlantic, found themselves at the regulatory “short end of the stick,” they petitioned the FCC to limit this disparity in reciprocal compensation. The FCC issued a Notice of Proposed Rulemaking (“NPRM”) requesting comment on whether there should be a Federal rule for intercarrier compensation for ISP calls. Twenty-nine (29) state commissions commented that ISP traffic is local in nature and should therefore be B-24 subject to the payment of reciprocal compensation in accordance with the Federal Act, even if a particular carrier benefits greatly through the receipt of termination fees. Subsequently, the FCC released an order where it determined that ISP-bound traffic is interstate, but it also determined that it would not interfere with state commission decisions as to whether the reciprocal compensation provisions of interconnection agreements apply to ISP-bound traffic until it adopted a rule establishing an appropriate interstate compensation mechanism. That rulemaking is pending as of December 1999. Since the release of the FCC’s Report and Order, all but two states have continued to maintain that ISP-bound traffic is subject to reciprocal compensation. One of the two states which changed its position was New Jersey. In New Jersey, the Board reversed its previouslyheld position that reciprocal compensation should be paid for ISP-bound traffic, as provided in the interconnection agreement between BA-NJ and a competitive carrier. The Ratepayer Advocate opposes the Board’s decision, because there are costs involved in terminating traffic of all kinds including ISP-bound traffic, which should be compensated. The FCC’s Report and Order did not compel the Board to reverse its previously-held position. By changing course on this significant issue, the Board may discourage competitive carriers from entering New Jersey’s telecommunications marketplace. b. Deployment Of Advanced Telecommunication Services On March 18, 1999, the FCC announced new national rules to implement Congress’ goals for advanced telecommunication services in the wireline telephone market. Section 706 of the Federal Act requires that the FCC and state commissions encourage the deployment of advanced telecommunications services to all Americans including elementary and secondary schools and classrooms. Advanced telecommunications services include high B-25 speed, switched, and broadband telecommunications that permit high-quality voice, data, graphics, and video telecommunications over the same line and at the same time. To facilitate rapid deployment of advanced services, the FCC expanded and clarified the collocation obligations of local telephone companies, also known as Local Exchange Carriers (LECs), by setting minimum national standards. Collocation means the installation of communications equipment at the network site of another carrier. Therefore, in New Jersey, LECs such as Bell Atlantic - New Jersey, Inc. (“BA-NJ”) must meet the following minimum conditions and/or provide the following services:2 # Must permit shared cage and cageless collocation for competitors in the same building or in adjacent buildings if collocation space is not available. Must provide reasonable security measures to protect their central office equipment. May not require CLEC equipment to meet more stringent safety requirements than those the incumbent LECs imposes on its own equipment. Must permit collocation of “switching” or enhanced services function. Must permit access to the entire central office if it denies space to a CLEC and provide a list of central offices in which there is no more space. All obsolete and unused equipment must be removed to facilitate additional collocation space within central offices. The FCC also concluded that the collocation method used by one incumbent LEC or mandated by a state commission is presumptively technically feasible for any other LEC and that uniform spectrum management procedures are essential to the success of advanced services deployment.3 Therefore, the FCC issued a Further Notice of Proposed Rulemaking (“FNPRM”) in its March 18, 1999 Order to address spectrum management requirements # # # # 2 State commissions may adopt additional requirements 3 “Spectrum management” refers to the administration of the technology, technical standards and other means of transmission of voice and data over a telecommunications network. B-26 including spectrum compatibility standards for the long term. On November 18, 1999, the FCC released a Report and Order in which it determined that LECs must permit CLECs to share the LEC’s line (“Line Sharing”) for offering advanced services. Prior to the Report and Order, an ILEC was permitted to offer voice and high-speed data services on the same line. However, competitive carriers were permitted to offer only one service per line, meaning that if a competitor wanted to offer voice and high-speed data services, it would have to buy two lines. As a result of the FCC’s decision, competitors will have the same rights as incumbent providers, and will be able to become more efficient competitors for bundled voice and data services. c. Regulatory Relief If Equipment Accounts (Investments) Are Overstated On March 12, 1999, the FCC released audit reports following staffs audit of the Regional Bell Operating Companies (“RBOCs”) continuing property records. The RBOCs are the large local telephone companies, such as Bell Atlantic or Southwestern Bell, that were formed after the break-up of AT&T. In its initial finding, the reports stated that over five billion dollars of equipment claimed by the various RBOCs could not be located in their central offices. For Bell Atlantic South, which includes Bell Atlantic-New Jersey, the FCC’s accounting staff found that central office equipment with a value of almost $900 million could not be located. The maintenance of property records is a key element for establishing an audit trial to ensure accurate plant accounts for the calculation of access charges, regulatory review of those charges, establishment of depreciation rates, jurisdictional separations, and other cost allocations. In other words, the value and cost of a RBOC’s property significantly affects the costs it is permitted to pass on to consumers through their rates. For example, in New Jersey, B-27 under rate cap regulation, the Board has mandated equal sharing with ratepayers when the return on equity for intrastate regulated service exceeds 13.7%. If the FCC’s staff audit is correct and the plant and related equipment accounts are overstated, BA-NJ may have exceeded the 13.7% threshold. The FCC issued a Notice of Inquiry requesting comments by June 7, 1999 and replies on July 7, 1999 on several issues. These issues included: the ratepayer impact of the audit; whether the discrepancies would alter price caps, sharing, exogenous cost calculations, productivity factors, separations and access charges; and whether the FCC’s statistical sampling methodologies were valid and reasonable. The Ratepayer Advocate will continue to monitor this proceeding. d. FCC Expands Access Requirements In Multiple Tenant Buildings To Promote Competition For Residential And Business Customers On July 7, 1999, the FCC issued a notice of proposed rulemaking which proposes expanded access requirements for telecommunications providers in multiple tenant environments. Multiple tenant environments include apartment buildings (rental, condominium, or co-op), office buildings, office parks, shopping centers, and manufactured housing communities, referred to as Multiple Dwelling Units (“MDUs”). Under Section 224 of the Federal Act, the FCC regulates the rates, terms and conditions for pole attachments offered by utilities to cable or telecommunication carriers. Specifically, the FCC wants utilities, including incumbent local exchange carriers (ILECs) to provide nondiscriminatory access to rooftop and similar rights-of-way, and riser conduits in MDUs that they “own or control.” B-28 The FCC notes that in several proceedings before it, parties have argued that both building owners and ILECs have obstructed competing telecommunications carriers from obtaining access on reasonable and nondiscriminatory terms to necessary facilities located within MDUs. The FCC now wants comments on whether it should require building owners, who allow any telecommunication carrier access to facilities that they control, to provide comparable access to other carriers on a nondiscriminatory basis. The FCC believes that access by competing telecommunications carriers in MDUs is critical to the successful development of competition in local telecommunication markets. As of 1990, approximately 28 percent of all housing units nationwide were located in MDUs. That percentage is growing. Therefore, if a significant number of these housing units and businesses are not accessible to competing providers, competitive services will not be available to “all Americans,” frustrating the goals of the Federal Act. In New Jersey, MDUs make up a very substantial portion of the residential and business markets. The Ratepayer Advocate intends to participate in this proceeding to ensure that all residents of New Jersey including those in MDUs have access to competing providers of telecommunications services so that there are meaningful competition, greater choice, and lower prices for telecommunication services. e. FCC Issues Regulations To Ensure Access To Telecommunications Service, Equipment And Customer Premised Equipment For Persons With Disabilities On September 29, 1999, the FCC released a Report and Order adopting rules to implement Sections 251(a)(2) and 255 of the Federal Act. These two sections provide the greatest opportunity for people with disabilities since the passage of the Americans with Disabilities Act (“ADA”) in 1990. These provisions require manufacturers of B-29 telecommunications equipment and providers of telecommunications services to ensure that equipment and services are accessible to persons with disabilities, if readily achievable. Congress has recognized that, as we move into the information age with increasing dependence on telecommunications tools, people with disabilities will be unable to access many of the products and services vital to full participation in society. The purpose of Sections 251(a)(2) and 255 of the Federal Act is to amend this situation by bringing the benefits of the telecommunications revolution to all Americans, including those who face accessibility barriers to telecommunications products and services. These rules should have a significant impact on the ability of persons with disabilities in every state, including New Jersey, to access and utilize telecommunications technologies and services. Sections 251(a)(2) and 255 provide the following: # A requirement that manufacturers and service providers develop processes to evaluate the accessibility, usability, and compatibility of covered services and equipment; A requirement that manufacturers and service providers ensure that information and documentation provided to customers is accessible to customers with disabilities, if readily achievable. Where manufacturers and service providers furnish employee training, such training programs must consider certain factors relating to accessibility requirements; Adoption of the Access Board definition of the term "accessibility," incorporating the list of ways in which the functions of a product should be made accessible with minor changes. This definition applies to both equipment and services; Definition of the term "usability" as access to the full functionality of, and documentation for, the product or service, including instructions, billing, product or service information (including accessible feature information), documentation, and technical support functionality, consistent with the Access Board definition; # # # B-30 # Definition of the term "readily achievable" as easily accomplishable and able to be carried out without much difficulty or expense, consistent with the ADA. Determinations as to what is "readily achievable" will be made on a case-by-case basis considering factors which include: (1) the cost of the action; (2) the nature of the action; and (3) the overall resources available to the entity; A determination that Section 255, by its terms, applies to the design and production of each individual product and service offered by a manufacturer or service provider. The obligation of a manufacturer or service provider to review the accessibility of a product or service, and incorporate accessibility features, where readily achievable, must occur at every natural opportunity; A requirement that the universal deployment of accessibility features be incorporated into product design when readily achievable. For those features or actions that cannot be universally deployed, but are readily achievable to incorporate into some products and services, manufacturers and service providers have the flexibility to distribute those features across their products or services as long as they do all that is readily achievable; A determination that, pursuant to Section 251(a)(2), a telecommunications carrier may not install network features, functions, or capabilities that do not comply with the accessibility requirements of this Order; To ensure the accessibility of telecommunications services, the FCC asserts ancillary jurisdiction to extend the accessibility requirements of this Order to providers of voicemail and interactive menu service, as well as to manufacturers of equipment which performs those functions; Adoption of an informal complaint procedure in which manufacturers and service providers must attempt to resolve the customer's concerns and respond to the FCC within 30 days. Manufacturers or service providers are not required, as an initial response to each complaint, to supply a detailed analysis of what is and is not readily achievable to accomplish. The FCC may, based on a single complaint or a trend or pattern of practices, initiate inquiries or investigations to determine if a manufacturer is fulfilling its Section 255 obligations; and A recommendation but not a requirement that consumers contact the covered entity in advance of filing an informal complaint with the FCC. The FCC allows complainants to file a formal complaint for adjudication of a dispute at any time. The FCC notes that there is a vast array of communications-related services available # # # # # # today that are not covered by these rules and that there are new technologies being developed, outside the scope of these rules, that may further revolutionize the way we communicate. B-31 These developments will undoubtedly affect access to communications for people with disabilities. The FCC wants to ensure that they are not denied access to innovative new technologies like Internet and computer-based services, that may become complements to, or replacements for, today's telecommunications services and equipment. In addition to its Report and Order, the FCC issued a Notice of Inquiry seeking comments on Internet telephony and computer-based equipment that replicates telecommunications functionality. The FCC seeks comments on the extent to which Internet telephony has begun to replace the traditional telecommunications services, including usage patterns by persons with disabilities, subject to Section 255 of the Federal Act. The FCC also seeks comments on the impact of computer-based applications that provide telecommunications services farther into a customer's residence than the point of connection with the public network. In other words, new consumer telecommunications equipment is capable of providing functions previously available exclusively from the public network. The FCC requests commentators to not limit their responses to these two areas, but rather to raise any issues of innovations in telecommunications that may present accessibility challenges for the disabled community. f. FCC Adopts Rules To Promote Competition In Directory Publishing And Directory Assistance On September 9, 1999 the FCC took several actions to foster competition in directory publishing and directory assistance with the release of the Third Report and Order, Second Order on Reconsideration, and Third Further Notice of Proposed Rulemaking (FCC 99-227). The FCC also issued as part of this order a further notice of proposed rulemaking on Internet directories. The FCC sought comment on whether Section 222(e) of the Federal Act entitles Internet directory providers to obtain subscriber list information from carriers for use in those B-32 directories. In addition, the FCC sought comments on whether it should extend nondiscriminatory access provisions to directory assistance providers who are not telephone exchange providers or who are not telephone toll service providers and whether there should be national directory assistance including access to nonlocal listings by all LECs pursuant to Section 252(b)(3). g. FCC Issues Notice Of Inquiry On Flat Rate Charges For Low Volume Long Distance Users On July 20, 1999, the FCC released a Notice of Inquiry to address the impact of certain flat-rated charges on single-line residential and business customers who make few, or no, interstate long-distance calls. Specifically, the FCC wants to address whether flat-rated charges attributable to universal service and access charge reform are appropriate for consumers who make few long distance calls. Of particular concern is the increasingly common practice of interexchange carriers assessing minimum monthly charges to single-line residential and business customers. The FCC seeks comments on: # # whether a correlation exists between income and long-distance telephone usage; whether the concept of universal service should include some amount of affordable interstate interexchange service for low-volume users; whether the definition of “affordability” under Section 254 should allow a customer who ordinarily makes few long-distance calls to avoid minimum use charges or unreasonably high usage rates; whether lowering off-peak access charges or implementing capacity-based access charges would ameliorate some of the concerns regarding low-volume users; whether, if it is demonstrated that IXC’s are recovering more than their share of contributions to Federal-funding pools through charges to subscribers, the FCC can and should correct such over-recovery and, if so, how; # # # B-33 # whether the FCC can, consistent with the objectives of universal service and access reform, prohibit long distance companies, also known as interexchange carriers (IXCs) and LECs from recovering charges associated with those reforms through flat charges, or require any such recovery to be on a percentage basis that mirrors the manner in which the contributions are assessed upon the carriers; and whether the FCC should require all or some subset of IXCs to: (i) (ii) (iii) (iv) maintain rate plans that do not include a minimum monthly charge; pass through in rates charged consumers a specific portion of interstate switched access charge reductions as part of a basic rate plan; recover PICC charges from consumers as a percentage of the bill, capped at a certain dollar level; and include consumer education inserts with bills detailing alternative ways consumers can obtain long-distance service. # FCC CHAIRMAN WILLIAM E. KENNARD’S CURRENT AGENDA To ensure that all communications markets are open, the FCC will promote competition throughout the communications marketplace by: # Reform of Federal programs that affect rates, in order to promote the development of competition and preserve affordable rates. Scrutiny of merger proposals to ensure that they are pro-competitive and benefit consumers. Allowing the RBOCs into the long distance markets when they have opened their own local markets to competition, as required by law. Promoting competition and choice in the video marketplace. Promoting alternatives to wire line technology in the local telephone market. # # # # To deregulate as competition develops, the FCC will adapt the Commission, its rules, and procedures to the competitive future by: # # # # Aggressively continuing efforts to eliminate any unnecessary regulatory burdens. Reducing the burden of reporting and accounting requirements where no longer necessary to further the public interest. Allowing access pricing flexibility where competition has developed. Streamlining rules for the certification of telephones and other equipment. B-34 # Streamlining internal functioning so that the FCC can issue licenses faster, resolve complaints more quickly, and be more responsive to the competitors and consumers in the marketplace. The FCC will protect customers from unscrupulous competitors, and give customers the information they need to make wise choices in a robust and competitive marketplace by: # # # # # Ensuring consumer bills are truthful, clear and understandable. Showing zero tolerance for perpetrators of consumer fraud.. Simplifying the process for consumers to file complaints by phone or over the Internet. Cutting complaint resolution time in half. Remaining vigilant in protecting customer privacy. To ensure broad access to communications services and technology, the FCC will ensure that all Americans -- no matter where they live, what they look like, what their age, or what their special needs may be -- have access to new technologies to take advantage of the enormous opportunity created by the communications revolution by: # Completing Universal Service Reform to ensure affordable, available communications services nationwide. Ensuring that the 54 million Americans with disabilities can use and have access to the communications network. Encouraging the accessibility of emergency information via closed-captioning and video description. Assuring reliable wireless compatibility with E911.4 Continuing oversight of the Schools and Libraries and Rural Health Care universal service programs to ensure their efficient operation. Preserving free, over-the-air broadcast services and ensure satellite coverage in underserved areas. Opening low-power radio frequencies for local use. Promoting the participation of people of all backgrounds in broadcasting and other communications media. # # # # # # # To foster innovation, the FCC commits itself to ensure that America remains the world's 4 “E911” refers to enhanced 911 services that provide emergency service providers with caller location capability and automatic call-back. B-35 leader in innovation by: # Promoting the development and deployment of high-speed Internet connections to all Americans. Promoting compatibility of digital video technologies with existing equipment and services. Promoting competitive alternatives to cable and broadcast TV. Clearing regulatory hurdles so that innovations, and markets for them, can flourish. # # # To advance competitive goals worldwide, the FCC will serve as an example and advocate of telecommunications competition worldwide by: # # Encouraging the development of international standards for global interconnectivity. Promoting fair spectrum use through the World Radiocommunications Conference 2000. Aggressively working for the worldwide adoption of the World Trade Organization Agreement of Basic Telecommunications. Assisting other nations in establishing conditions for deregulation, competition, and increased private investment in their telecommunications infrastructure so that they can share in the promise of the Information Age and become our trading partners. # # B-36 The Position Of The Ratepayer Advocate On The Development Of A Competitive Marketplace In New Jersey. The Ratepayer Advocate supports the development of a pro-competitive marketplace at both the federal and the state levels and urges the adoption of many of the FCC’s goals for competition in New Jersey so that competition in the state can become a reality. The Ratepayer Advocate urges the Board to adopt an agenda that will foster competition since it has been acknowledged that meaningful competition does not currently exist in New Jersey even though the Federal Act was signed into law in February 1996. The outcome of these proceedings discussed above and all other current proceedings at the FCC will have a significant impact on New Jersey’s telecommunications marketplace. To learn more about these proceedings, visit the FCC’s website at www.fcc.gov. If you wish to comment on telecommunications policy and directives: (1) contact the FCC and submit comments in a proceeding as an individual citizen, or as part of a trade group or other interest group; (2) contact elected officials and urge them to express your concerns to the FCC; (3) contact the Board of Public Utilities and find out about any action it has taken on an issue before the FCC; and (4) contact the Ratepayer Advocate and inform us of your concerns. The outcome of proceedings before the FCC are shaped by public debate. The Ratepayer Advocate urges all consumers as well as other interested parties and stakeholders to participate as actively as possible in proceedings before the FCC. B-37 IV. Significant 1999 Developments in Neighboring States “One can never consent to creep when one feels an impulse to soar.” – Helen Keller, 1880 - 1968 The Ratepayer Advocate actively monitors developments in other states to evaluate alternative policies being considered by other jurisdictions for achieving the same goals that all states are actively pursuing: increased competition, lower prices, technological innovations, and more choice for all consumers. Of the many developments which our office has been following, the most important appear to have occurred in our adjoining states of New York and Pennsylvania. The experiences of both states provide important lessons for New Jersey to consider, particularly since the success achieved by our neighboring states may serve as a strategic asset in promoting economic development in their states, to the detriment of New Jersey and our economy. New Jersey cannot afford to fall behind other states with whom we compete for jobs, growth and economic development in promoting competition in telecommunications. A more favorable regulatory climate for telecommunications competition and the enhanced choices which competition brings, may be decisive in decisions respecting location for both businesses and residences. The New York Public Service Commission (“PSC”) and the Pennsylvania Public Utility Commission (“PUC”) have taken decisive action to achieve these telecommunications goals by stimulating local exchange competition in their respective states through the approaches discussed in this section. The Ratepayer Advocate believes that in order for New Jersey to maintain its lead in telecommunications, the state must accelerate efforts to bring the reality of local competition to all New Jersey telephone subscribers: residential, commercial, industrial, governmental, urban, rural, and not-for-profit. Examining neighboring states’ efforts provides important insights on how telecommunications policy might be formulated and implemented in New Jersey. B-38 a. State Of New York i. Entry By Bell Atlantic-New York Into The Long Distance Market In September 1999, New York PSC approved the application of Bell Atlantic-New York for in-region long distance authority in the State of New York, filed pursuant to Section 271 of the Federal Act. This approval was the culmination of a three year process in which the PSC took various actions to promote, foster and expand local competition in the State of New York. The PSC has required the following: • Unbundled Network Elements (“UNE”) rates to be consistent with the FCC Default Proxy Rates;1 Development of and the Testing of Operation Support Systems (“OSS”) that promote competition. OSS are the computer-driven operating systems whose compatibility among telephone companies is necessary to assure interconnection and the resultant competition; Combining UNE’s to promote competition and requiring collocation and nondiscriminatory access to poles, conduits and rights-of-way; Development of a Performance Assurance Plan to ensure competition after authority to compete has been obtained, with penalties for non compliance; Toll Dialing parity; Intrastate Universal Service support; Lifeline expansion; and Increased investment in advance telecommunications technologies; • • • • • • • On December 22, 1999 the FCC approved the petition filed by Bell Atlantic-New York, making New York State the first jurisdiction in which a RBOC was authorized to provide inregion long distance service. The FCC imposed one additional condition on Bell Atlantic in 1 Definitions of these terms can be found in the Glossary at the end of this publication. B-39 the approval process: the requirement that Bell Atlantic-New York offer broadband Digital Subscriber Line (“DSL”) service through a separate subsidiary. It is expected that the separate subsidiary requirement for broadband will now be the standard in approvals of all Section 271 petitions to follow. b. Commonwealth Of Pennsylvania In Pennsylvania, the Public Utility Commission made an early decision to seek a global settlement on all pending telecommunications matters. As a result, over a period of six months, Pennsylvania PUC Commissioners John Quain and David Rolka chaired a series of round table discussions among all interested parties, including carriers, state legislators, the Consumer Counsel (similar to the Ratepayer Advocate in New Jersey), and others, to narrow differences and hopefully arrive at a consensus decision that would stimulate real telecommunications competition. While productive in terms of identifying issues, the process did not achieve consensus. As a result, the PUC convened a formal proceeding to address on a contested basis, all the outstanding issues which could not be resolved by agreement. The full litigation of the formal proceeding consumed an additional six months, but ultimately arrived at a comprehensive solution to the problem. On August 26, 1999 the Pennsylvania Public Utility Commission concluded the above proceeding with its Global Order which establishes new rules and requirements designed to jump start local phone competition in Pennsylvania. This decision sets forth sweeping changes designed to rapidly bring greater competition in telecommunications to Pennsylvania, as envisioned by both the Federal Act of 1999 and Chapter 30 of Pennsylvania’s Public Utility Law. The most significant provisions of this decision are: • Bell Atlantic-Pennsylvania is required to cap local telephone rates until December 31, 2003; B-40 • Local telephone rates of the rural telephone companies are to be capped at $16 a month until December 31, 2003; Internet phone calls are deemed to be local calls and this requirement is applied to all Interconnection Agreements between carriers; Bell Atlantic was directed to reduce its access charges by $78 million with interexchange carriers required to reduce toll charges commensurately; Bell Atlantic was ordered to reduce its UNE rates for wholesale customers by 16.5 percent, expand the list of available UNEs, offer combinations of UNEs, and revise its rules for collocation and access to ILECs facilities;2 Establishment of a clear process for Bell Atlantic to qualify for in-region long distance authority under Section 271 of the Federal Telecommunications Act of 1996; Extension of eligibility for Lifeline Service to an additional 927,000 households in Pennsylvania by increasing the qualifying threshold to 150% from 100% of the U.S. Census Bureau’s poverty guidelines; Bell Atlantic was ordered to structurally separate its wholesale and retail operations from one another, thereby fostering a level playing field among all carriers, since Bell Atlantic’s retail operation will be subject to the same rules and procedures that apply to its competitors when requesting access to Bell Atlantic’s network and purchasing portions of it in order to provide service to its customers; Bell Atlantic is permitted to directly negotiate with some large business customers for the provision of various services; Creation of a state Universal Service Fund estimated at $30 million to provide revenues to offset expenses of programs to ensure affordable rates in all areas, especially in the higher cost rural areas of New Jersey; and Establishment of a consumer education program to provide needed information to consumers on how to shop for local telephone service and how competition will affect consumers. • • • • • • • • • The PUC took bold steps in numerous areas to open the state’s telecommunications market to full competition. In three of the most important areas, UNE platform and EELs, OSS testing, and structural separation, the PUC substantially changed the status quo. 2 Definitions of these terms can be found in the Glossary at the end of this publication. B-41 i. UNE Platform and EELs The PUC ordered Bell Atlantic to offer an unrestricted platform of loops, switch port, switch usage and transport that CLECs can use to provide competitive service to all residential customers and to business customers with total billed revenue at or below $80,000 annually. Bell Atlantic was also ordered to offer a wide variety of Extended Enhanced Loop (“EEL”) combinations, as well as new service arrangements at significantly reduced prices with respect to collocation and DSLAM3 placement. All of these actions will stimulate broad based competition, particularly in rural areas. ii. OSS Testing A third-party test of Bell Atlantic-Pennsylvania’s computerized Operation Support Systems (“OSS”) is already underway and may be nearing conclusion. The PUC held that, upon a determination that Bell Atlantic’s OSS has passed that test, and the subsequent initiation of a new docket to consider Bell Atlantic’s Section 271 petition for long distance service, the PUC will commence a 90-Day commercial availability period to allow CLECs to test Bell Atlantic's OSS in real commercial settings. The results achieved during this period (whether Bell Atlantic's system "is equivalent in its dependability and efficiency to the systems which process long distance customer choice today") will be considered in evaluating Bell Atlantic's satisfaction of the Section 271 checklist requirements. The commercial availability period is considered critical in assuring that customers are not victimized and competition hampered by faulty OSS systems. DSLAM stands for Digital Subscriber Line Access Multiplexer, and is the industry’s name for the electronics which a CLEC attaches to the copper loop of the incumbent local exchange carrier, in order to transport high speed data over the copper voices to the consumer. A DSLAM converts a voice-grade copper loop into a Digital Subscriber Line (DSL). B-42 3 iii. Structural Separation The Pennsylvania PUC found that, in view of Bell Atlantic's monopoly control of the local exchange market in its service territories, the structural separation of Bell's wholesale and retail operations is necessary to provide the competition envisioned under the Telecommunications Act of 1996 and state law. Bell Atlantic was ordered to submit a plan for effecting that separation, and a proceeding will be commenced to consider that plan once it is filed. In response to the new directives, Bell Atlantic-Pennsylvania has filed several legal challenges to the August 26th ruling of the Pennsylvania PUC. The Position Of The Ratepayer Advocate On Promoting Competition Both the PSC’s actions in New York and the PUC’s actions in Pennsylvania provide road maps for the State of New Jersey as we seek to increase competition, offer more choice, lower prices, and bring technological innovations to all New Jersey consumers including access for low income customers. The Ratepayer Advocate supports renewed and innovative efforts to promote a competitive telecommunications market in New Jersey. To accomplish this, we must retain parity with our neighboring states so that New Jersey continues to remain an attractive location for all businesses, including advanced technology industries and educational institutions. Parity for business and residential consumers will also make New Jersey a more attractive place in which to work and live. B-43 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON THE EMERGING COMPETITIVE LANDSCAPE: NEW JERSEY INITIATIVES TO PROMOTE A COMPETITIVE TELECOMMUNICATIONS MARKETPLACE JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa C C. THE EMERGING COMPETITIVE LANDSCAPE: NEW JERSEY INITIATIVES TO PROMOTE A COMPETITIVE TELECOMMUNICATIONS MARKETPLACE “How do we make sure the Information Highway has onramps and off -ramps into every neighborhood? How do we avoid creating a country of information haves and havenots?” ... “This is what I call the digital divide. If we can’t bridge that digital divide, it will separate Americans when they most need to be brought together.” –William E. Kennard, Chairman, 1998 Federal Communications Commission I. The New Jersey Telecommunications Act of 1992 (N.J.S.A. 48:2-21.16, et seq.) Years before the Federal Telecommunications Act was passed in 1996, the New Jersey Legislature recognized the benefits of competition in the telecommunications marketplace. In the Telecommunications Act of 1992 (“New Jersey Act”), the State Legislature provided guidance to the Board of Public Utilities (“BPU” or “Board”) on how to implement deregulation and promote competition in telecommunications markets within New Jersey. The New Jersey Act has two main thrusts. The first discontinued traditional utility regulation of all interexchange, or long distance, carriers, such as AT&T, MCI and Sprint. The other major focus of the new law was the grant of express authority to the Board to implement plans for alternative regulation of local exchange carriers (e.g., Bell Atlantic-New Jersey), which meet certain enumerated goals of the New Jersey Act. Any plan for alternative regulation would have to advance several stated goals of the law in order to be approved by the BPU, including affordability of protected services; just and reasonable prices for telecommunications services; enhancement of economic development in New Jersey; a comprehensive program of service quality; and specifically identify the benefits to be derived from the alternative plan of regulation. N.J.S.A.48:2-21.18 C-1 The most significant aspects of the New Jersey Act include: (1) The deregulation of the interexchange telecommunications market in New Jersey because the Legislature determined that in a competitive marketplace, pervasive utility regulation is not necessary to protect the public, (“interexchange calls” are calls to destinations beyond the local calling area, and can be either intrastate or interstate); (2) The Board was required to maintain universal telecommunications service at affordable rates, and to ensure that customers pay only reasonable charges for local exchange services which are available on a non-discriminatory basis, (“universal service” refers to the policy, enunciated in the Federal Act, of assuring telephone service to all Americans at reasonable rates); (3) The Board was prohibited from regulating the rates of any services deemed to be competitive, though the requirement that telecommunications companies file and maintain tariffs for competitive telecommunications services was continued; (4) The Board was mandated to ensure that competitive services were not subsidized by the prices charged for noncompetitive services; (5) The Board was granted the authority to determine the terms and conditions of intraLATA telecommunications service, (LATA is an acronym for Local Access Transport Area, a geographic region created during the break-up of AT&T; telephone companies are regulated with regard to their ability to provide intraLATA and interLATA service);1 1 These terms and conditions, explained in greater detail in the following section, include issues of consumer access to intraLATA toll carrier (whether consumers should be required to dial an access code to reach a competitive provider) and carrier compensation (whether competitive carriers should be required to compensate local carriers for use of its facilities to originate and terminate intraLATA toll calls). C-2 (6) The Board was granted express authority to approve alternative forms of regulation, which was defined as a form of regulation other than traditional rate base, rate of return regulation, to respond to changes in technology and the structure of the telecommunications industry. Such alternative forms of regulation could include the use of an index formula, price caps, or zones of rate freedom. An alternate plan was required to meet certain standards before being approved by the Board, such as ensuring the affordability of protected telephone services and producing just and reasonable rates; and (7) The role of the Division of the Ratepayer Advocate, as the successor agency to the Division of Rate Counsel of the Department of the Public Advocate2, to represent the public interest in the review of petitions or plans filed by local exchange and interexchange carriers under the provisions of the New Jersey Act was affirmed. Pursuant to the authority granted to the BPU under the New Jersey Act, New Jersey Bell Telephone Company (now Bell Atlantic-New Jersey) on March 31, 1992 filed its proposal for alternative regulation. After extensive hearings in which some thirteen interveners actively participated and the creation of a complete record, the Board approved Bell Atlantic’s Plan for Alternative Regulation (PAR) with modifications. Pursuant to that plan, Bell Atlantic-New Jersey has been regulated since 1993 under a regime known as “rate cap” regulation, which does not permit Bell to increase any charges for rate regulated services (deemed not competitive) while granting the company considerable discretion in pricing competitive services. If the company exceeds certain earnings thresholds for rate regulated services, a sharing of the excess earnings with ratepayers is required. In return for the BPU approving the PAR, Bell Atlantic-New Jersey agreed to materially accelerate the deployment of digital 2 Abolished by the State Legislature in 1994. (N.J.S.A. 52:27E-50 et seq.) C-3 switching and fiber optics throughout the state, with the ultimate goal of providing ubiquitous broadband to all customers by 2010. The current PAR, which was to expire on December 31, 1999, was extended by the Board for one year, until December 31, 2000. On December 30, 1999, Bell Atlantic-New Jersey submitted its proposal for a new plan of alternative regulation which the company has called its “Competitive Telecommunications Plan” (“CTP”).3 The proposal asks the Board to reclassify all remaining rate regulated services as competitive, effective January 1, 2001. On January 19, 2000 the Board initiated a proceeding to address the issues raised by this petition. The Ratepayer Advocate expects to play a central and active role in this proceeding. Application of Bell Atlantic-New Jersey, Inc. for Approval of a Modified Plan for an Alternative Form of Regulation and to Reclassify All Rate Regulated Services as Competitive Services. C-4 3 II. Promised Changes In Rates, Services And Competition: InterLATA And IntraLATA And Local Exchange Competition, Or How Federal And State Legislation Are Supposed To Benefit New Jersey Consumers “The art of progress is to preserve order amid change, and to preserve change amid order.” – Alfred North Whitehead In February 1996, President Clinton signed the Telecommunications Act of 1996 (“Federal Act”) into law, to introduce competition throughout the business and residential local exchange telecommunications markets. The primary goals of the Federal Act were removing the legal barriers which have prevented long distance carriers, local telephone companies and cable operators from entering each other’s markets and ensuring a level playing field for all in these newly competitive markets. Perhaps most significantly, the Federal Act dismantled the monopoly control of the local exchange market and conditionally permitted local telephone companies to compete in the long distance market. The Federal Act complemented the pro-competitive, deregulatory policies of the New Jersey Telecommunications Act of 1992 (“State Act”). As discussed above, the State Act deregulated many aspects of New Jersey’s intraLATA toll market2 while preserving many of the most important aspects of consumer protection. This discussion addresses many of the most significant aspects of how the Federal Act and the State Act were supposed to bring competition to New Jersey’s local, intraLATA toll and interLATA toll markets and addresses the reasons why we have yet to experience the full This and other technical terms can be found in the Glossary at the end of this publication. The intraLATA toll market can be easily, if over-simply defined, as those calls which are neither local nor interstate, but which originate and terminate within the same Local Access Transport Area (“LATA”). New Jersey has three LATAs: one covering the eastern portion of the 609 area code; one covering the western portion of the 609 area code and all of the 856 area code; and one covering the 973, 201, 908 and 732 area codes. C-5 2 degree of competition in these markets. Finally, this paper addresses the next steps the Legislature, the Board and the Ratepayer Advocate should take to ensure that New Jersey consumers will receive the benefits of competition for all telecommunications services. a. Telecommunications Markets And The Regulatory Schemes Which Apply To Them The difference between a local call, an intraLATA toll call and interLATA toll call, and the different rules and regulations which apply to each service are discussed in this section. In this section, recalling the break-up or divestiture of AT&T in 1984 may help in understanding the current state and structure of the telecommunications marketplace. Prior to 1984, AT&T provided all aspects of telephone service through its affiliates (the AT&T affiliate serving most of New Jersey was New Jersey Bell). However, in 1984, AT&T was ordered to divest itself of its regional affiliates, to structurally separate the monopoly local telephone service operations from AT&T’s competitive businesses, thereby creating several new independent companies from the former AT&T affiliates. These affiliates were known as the Regional Bell Operating Companies, commonly known as “RBOCs,” “BOCs” or "Baby Bells.”3 In this discussion we will use RBOCs. Along with divesting the RBOCs from AT&T’s ownership, distinctions between the types of services which could be offered by AT&T and the RBOCs were established.4 AT&T would continue to offer long distance, or interexchange services which were deemed The seven original RBOCs were NYNEX, Bell Atlantic, Bellsouth, Southwestern Bell, U.S. West, Pacific Telesis, and Ameritech. As a result of mergers, only four remain as of December 1999: Bell Atlantic, Bellsouth, SBC (formerly Southwestern Bell) and U.S. West. It should be noted that some local exchange carriers, such as SNET in Connecticut, were not wholly owned by AT&T, and therefore were not subject to the same regulatory rules and obligations as RBOCs. C-6 4 3 competitive, but it was not allowed to offer local service, which continued to be regulated as a monopoly. Local Access Transport Areas (“LATAs”) were created in each state which demarked the geographic limits of services offered by RBOCs. The RBOCs were allowed to offer local service and toll services within LATA boundaries, but were not allowed to offer long distance services that crossed LATA boundaries. The long distance service AT&T was allowed to offer is technically referred to as interLATA toll service. Most consumers simply call it long distance service. Since the term interLATA toll service has a particular meaning within the regulatory scheme being discussed, long distance service will be referred to in this paper as interLATA toll service. A LATA is an imaginary line which surrounds a geographic region. For the most part, all the area covered within a LATA is located within the same state. New Jersey has three LATAs: the Atlantic Coastal LATA covers the eastern portion of the 609 area code; the Delaware Valley LATA covers the western portion of 609 and the entire 856 area code; and the North Jersey LATA covers the 973, 201, 908 and 732 area codes. An interLATA call originates in one LATA and terminates in another. The court which supervised the divestiture created LATAs to define the jurisdictional limits between AT&T and other long-distance, or Interexchange Carriers (“IXCs”), separately from the jurisdiction of the RBOCs. The court also concluded that individual states could determine whether and how AT&T and other Interexchange Carriers could offer intraLATA toll calls (calls which originate and C-7 terminate in the same LATA, but are not “local calls”). Under the divestiture, the RBOCs were denied the right to provide interLATA toll service, but were permitted to provide intraLATA toll service as well as local telephone service. State public utility commissions have the authority to determine exactly what should be considered a local call. Generally, a local calling area encompasses a geographic area surrounding each exchange area, although there are different approaches taken to determine the size of a local calling area. These different approaches have resulted in very different-sized local calling areas, depending on the particular state. An exchange area is the geographic territory served by the local distribution network connected to one switching office. New Jersey generally has very small local calling areas. Most states’ local calling areas are geographically larger than New Jersey’s, but New Jersey’s high population density still permits consumers to reach a great many residents with a local call. In addition to this separation of services, there is a parallel division of regulatory authority. The Federal Communications Commission (“FCC”) has always had regulatory authority over interstate calls (calls originating in one state and terminating in another) while individual state public utility commissions (“PUCs”) retain regulatory authority over intrastate calls (calls originating and terminating within the same state). In New Jersey, this authority is vested in the Board of Public Utilities. As these telecommunications markets are subject to different regulatory requirements, competition was introduced into the different markets in varying degrees. First, and most significantly, the interLATA toll, or long distance market was deemed competitive at the breakup of AT&T in 1984. Because the regulatory environment promoted competition, and because the market was dominated by one national carrier, AT&T’s competitors, most notably C-8 MCI and Sprint, began offering competitive interexchange services. Because the states continued to regulate the incumbent carrier as a monopoly, there was virtually no competition in the local exchange market. Competition within the intraLATA toll market was subject to individual state law and developed slowly. This model of structural and regulatory separation within the telecommunications industry remained largely unchanged for the next several years. i. What Is The Status Of InterLATA, Or Long Distance Competition In New Jersey As Of December 1999? Competition in New Jersey’s long-distance market is currently robust. Many companies -- from well-known carriers such as AT&T and MCI to less well-known carriers such as Excel and ATX -- offer comparable services at competitive rates. Additionally, there are dial around carriers such as PT-1, as well as many calling card providers. This influx of carriers has dramatically lowered the prices offered. In fact, many telecommunications analysts believe long distance rates are not likely to go much lower, because lower rates are minimizing the long distance carriers’ profit margins. The Ratepayer Advocate has opined that increased competition and lower rates are most likely to become available when one carrier is able to meet all of a consumer’s telecommunications needs: local, intraLATA or regional toll calls, interLATA or long distance toll calls, as well as Internet service and perhaps even cable or satellite service.5 This concept, commonly known as “bundling” or “convergence” permits a carrier to offer greater discounts for one or more services because that carrier is providing multiple services and therefore has an opportunity for greater return on its investment. It is probable that consumers receiving bundled services will obtain the largest available discounts; for example, This issue is explored in greater detail in Section H on “The Impact of Mergers and Convergence on Competition” in this publication. C-9 5 an additional 10% off long distance service if you subscribe to the carrier’s local and regional toll service. Thus it is important to track the status of competition in the intraLATA toll and local market to find out when such bundled services might become available. ii. What Is The Status Of IntraLATA Toll Competition In New Jersey As Of December 1999? As discussed earlier, following the AT&T breakup, AT&T and other Interexchange Carriers were permitted to provide interLATA toll service, while the authority of Interexchange Carriers to provide intraLATA toll competition was left to be determined by individual state public utility commissions. Beginning in 1984, the Board required the blocking of all intraLATA calls, including local and regional toll calls, by a carrier other than the local exchange carrier.6 The Board revised this policy in 1988, permitting Interexchange Carriers to carry intraLATA toll calls provided they compensated the LEC for the use of its local phone lines for origination and termination of such calls through the payment of access charges. As noted previously, the New Jersey Act provided the Board with the authority to determine the terms and conditions of intraLATA toll telecommunications service. In response to requests from several Interexchange Carriers that the Board revise its policies and permit full competition for intraLATA services, the Board initiated an investigation in 1993 to determine whether intraLATA competition should be allowed. The Board first decided to examine whether to permit intraLATA competition on an access code basis (that is, making the caller dial an Interexchange Carrier’s code such as 10-XXX before dialing the called number), and if so, under what terms and conditions, and whether compensation to LECs for completed intraLATA toll calls should be continued or eliminated. Almost all local calls in New Jersey are intraLATA. But, not all intraLATA calls are local: many are toll calls. C-10 6 In 1994, the Board approved settlements between New Jersey’s local exchange carriers, Bell Atlantic-New Jersey, Inc. ("BA-NJ") and United Telephone Company of New Jersey, Inc. ("United"), which permitted the Interexchange Carriers to begin carrying intraLATA toll traffic on an access code basis effective July 1, 1994.7 Any consumer who wanted to use an Interexchange Carriers’ number to complete an intraLATA toll call was required to dial the Interexchange Carriers’ five digit access code prior to dialing the phone number of the party they were calling. The settlement with BA-NJ and United eliminated the requirement that the Interexchange Carriers remit compensation to the carriers for completing such traffic but established a transitional surcharge to be paid to them for any intraLATA traffic carried by Interexchange Carriers. Recognizing that intraLATA toll competition was not as widespread as anticipated, in January 1995, the Board began an investigation and rulemaking proceeding to determine whether it should eliminate the access code dialing requirement and replace it with intraLATA toll presubscription (that is permitting subscribers to designate a carrier for all intraLATA toll calls in the same way that consumers select a long distance carrier). In December 1995, following evidentiary hearings in which the Division of Rate Counsel of the Department of the Public Advocate,8 the predecessor agency to the Division of the Ratepayer Advocate, participated fully, the Board approved intraLATA toll competition on a presubscription basis and removed the transitional surcharge altogether. As a result of the Board’s decision, customers may now presubscribe to an Interexchange Carrier of their choice to carry all of The settlement did not affect the arrangements for the provision of intraLATA "1+," "0+," and seven digit dialed Message Telecommunications Service ("MTS"), which were to continue to be provided exclusively by the LECs until the Board ordered otherwise. 8 7 Abolished by the State Legislature in 1994. (N.J.S.A. 52:27E-50, et seq.) C-11 their intraLATA toll calls, just as they do for long distance calls, and they are no longer required to dial the five digit access code before placing each call. Since the introduction of intraLATA toll presubscription, competition in this market has grown considerably, although it is not as robust as in the long distance market. There are a few reasons why intraLATA toll competition is not yet as vigorous as it should be: (1) ownership of the local network makes provision of intraLATA toll service by the incumbent local exchange carrier more financially rewarding than by an Interexchange Carriers; (2) Interexchange Carriers’ inability to meaningfully enter the local market has prevented them from providing a bundle of local, intraLATA toll and long distance service which would further promote competition for all services; (3) Since BA-NJ has not yet satisfied its Section 271 obligations and fully opened its network to competitors, it is prevented from entering the long distance market and is unable to provide a bundle of local, intraLATA toll and long distance services which would further promote competition for all services; and (4) lack of consumer awareness of the competitive choices available to them. Through the positions we take in matters before the Board and through public outreach, the Ratepayer Advocate is working to remove these barriers and to eliminate the legal and regulatory distinctions between the different types of carriers in order to ensure a level playing field for all who wish to enter New Jersey’s telecommunications marketplace. Already, as a result of competition in the intraLATA toll market, many carriers offer lower rates and attractive calling plans to meet their customers’ needs. As the building blocks necessary to promote competition in all markets are put into place, New Jersey consumers will further reap the benefits of intraLATA toll competition. C-12 iii. What Is The Status Of Local Competition In New Jersey? Unfortunately, competition in New Jersey’s local telecommunications marketplace is minimal, particularly for residential consumers. There are many reasons for this lack of competition, since a number of legal and regulatory issues must be addressed before meaningful competition is introduced in New Jersey. The nature of these issues, how those issues are handled on the state and federal level, and the role the Ratepayer Advocate has played in addressing these issues for bringing competition to New Jersey’s local telecommunications market is discussed in this section. When the Board approved presubscription for intraLATA toll competition, it also initiated a new investigation and rulemaking proceeding to determine under what terms and conditions local exchange competition should be allowed in New Jersey.9 However, on February 8, 1996, while the Board was seeking written comments from interested parties on this issue, the Federal Act10 was signed into law, requiring the establishment of a competitive local exchange marketplace. The passage of the Federal Act dramatically altered the status of monopoly local exchange service by mandating the opening up of local telecommunications markets to competition. Under the Federal Act, local exchange carriers are required to make their networks available to competitors to use in part or in whole, for which the local exchange carrier receives compensation. The Federal Act contemplates three paths of entry into the local market for competitors: 9 See C.II. “Promised Changes in Rates, Services and Competition.” 42 U.S.C. §151, et seq. C-13 10 (1) (2) the construction of new networks (known as facilities-based competition); allowing competitors to rent portions of the incumbent LEC’s network to competitors on an unbundled basis (unbundled network elements or UNEs); and resale of the incumbent LEC’s services by the competitor at discounted wholesale prices. (3) In return for making their local markets open to competition, local exchange carriers who are RBOCs, such as BA-NJ, would be permitted to provide interLATA, or long distance, service, previously denied them under the terms of the AT&T divestiture.11 b. Why Have Telecommunications Carriers Spent Nearly Four Years Litigating Access To Entry Into The Local Exchange Market? The three paths of competitive entry into the local exchange market were the sparks which ignited litigation at the federal and state level from the day the Federal Act became law. Most of the litigation is about one of three issues: (1) the type of access to the local exchange carrier’s network required by the Federal Act; (2) the quality of access to the local exchange carrier’s network required by the Federal Act; or (3) the cost of access to the local exchange carrier’s network required by the Federal Act. While many of the same issues appear in both federal and state litigation, some of the issues are unique to New Jersey. The following discussion details the issues presented at both the federal and state level. i. What Issues Are Present In The Federal Litigation? As discussed earlier, the Federal Act contemplated competitive entry into the local exchange market in three ways: (1) facilities based competition; (2) the use of unbundled network elements; or (3) total service resale. Because the cost of building an entire In-depth discussion of the exact terms and conditions the RBOCs must meet is provided in Section B “The Emerging Competitive Landscape: New Jersey Initiatives To Promote A Competitive Telecommunications Marketplace.” C-14 11 telecommunications network is so expensive and so time-consuming, it was generally acknowledged that facilities-based competition was a long-term goal, and carriers would be more likely to use some or all of the incumbent’s network to provide service at least at the opening stages of competition. Initially, the FCC required local exchange carriers, the incumbents, to make the following network elements available to competitors: • • • • • • • local loops, including loops used to provide high-capacity and advanced telecommunications services; network interface devices; local circuit switching; dedicated and shared transport; signaling and call-related databases; operations support systems; and access to operator and directory assistance services. Additionally, the FCC required incumbents to “bundle,” or offer together, these network elements to the same degree they bundled the network elements for their own use. Incumbent local exchange carriers, the RBOCs, took the FCC to court, challenging its requirement to offer the listed network elements individually and in bundles. The court held that the FCC improperly required incumbent carriers to open their networks. The case was appealed to the U.S. Supreme Court which overturned the lower court decision and ruled that the FCC had the authority to require incumbent carriers to open their networks. However, the Supreme Court held that the FCC failed to demonstrate adequately why it was necessary to make these specific network elements available to competitors. Therefore, the Supreme Court ordered the FCC to re-examine its decision to require access to these seven network elements and to better explain why such access was necessary to promote competition. In September 1999, the FCC announced that it had reviewed its previous decision and determined that it was necessary to offer access to six of the seven network elements listed C-15 above or else a competitor’s ability to provide service would be impaired. The FCC determined that access to one of the previous network elements, operator and directory assistance service, was not necessary and therefore did not require incumbent local exchange carriers to make it available. However, the FCC did require that when an incumbent local exchange carrier does offer operator and directory assistance services to one competitive carrier, it must offer equal access to all competitive carriers. Additionally, the FCC added two more unbundled network elements to its list: sub-loop unbundling and access to dark, or presently unused, fiber optic cables. The Ratepayer Advocate supports the FCC’s decision and hopes that it signals the end of federal litigation challenging the opening of the local telecommunications market. ii. What Issues Are Present In New Jersey’s Local Telecommunications Market? The federal litigation had a significant impact on the introduction of competition in New Jersey because it created an air of uncertainty concerning the obligations to would-be competitors of BA-NJ, the dominant New Jersey incumbent local exchange carrier. Additional aspects regarding the implementation of the Federal Act also became subject to litigation in New Jersey. Under the Federal Act, states may not prevent telecommunications carriers from providing intrastate telecommunications service although they may impose certain competitively neutral requirements designed to assure universal service, public health and safety, quality of service, and protection of consumer rights. In New Jersey, the Board attempted to address these issues through a generic proceeding on local exchange competition, during which the Board reviewed four major issues needed to establish the circumstances under which a competitive local exchange market could flourish in New Jersey. Specifically, the Board was to determine: C-16 • • • • the cost of local residential exchange service; the resale rates that the ILEC could charge to competitors; the rates that ILECs could charge competitors to interconnect their respective systems; and the establishment of policies to ensure that universal service goals would be met in the new competitive local exchange marketplace. Evidentiary hearings were held as part of the Board’s Investigation of the Status of Local Competition12 (“Generic Proceeding”) in which several parties, including the Ratepayer Advocate, presented testimony regarding current pricing levels and their effect on the future of a competitive local telecommunications marketplace in New Jersey. The Ratepayer Advocate as well as some competitive carriers emphasized the need for the Board to make competitive entry affordable. Several competitive carriers testified that both resale and facilities-based competitive entry were overly expensive in New Jersey and did not realistically offer the potential for a robust competitive local exchange marketplace. Because the sole remaining means of competitive entry is the use of UNEs,13 it became clear that competition could not flourish without more reasonable rates for competitors to purchase UNEs from the incumbent carriers. Unfortunately, the Board did not fully address the competitive carriers’ need for affordable access to the network to stimulate competition. On December 2, 1998, the Board issued its written Order which set generic rates to be charged by the incumbent LECs for interconnection and unbundled network elements. The Board set average rates for competitors to purchase the “local loop” from Bell AtlanticNew Jersey and United Telephone Company of New Jersey (“United”) at $16.21 and $27.32, respectively. The Board also set discounts applicable to resale of BA-NJ’s services at 17.04% 12 BPU Docket No. TX95120631. UNEs are unbundled network elements. C-17 13 to 20.03%, and for United’s services at 13.72% to 14.63%.14 Currently these are the terms which competitors must agree to with BA-NJ and United in order to interconnect their networks and compete in their service territories. It appears that the rates set by the Board for access to the incumbent’s network far exceed the actual cost of the network, making the entrance of competitive carriers much more expensive than necessary. These rates appear to be one of the primary reasons competitors have not entered New Jersey’s local telecommunications marketplace. Although the Board approved resale prices were lower than those recommended by the FCC, the generic rates established by the Board were much higher than the default proxy rates established by the FCC for BA-NJ and higher than those recommended by the Ratepayer Advocate. Most significantly, however, the Board chose to implement these rates and discounts even if a carrier had an agreement with BA-NJ which provided for lower rates and greater discounts. The Board’s decision is being contested in court by AT&T and MCI. The Ratepayer Advocate has joined the legal proceeding challenging the Board’s decision. A decision by the Court has not been released as of December 1999. The Board’s decision which set rates which were too high to encourage competitive entry has also effectively denied competitive carriers the right to negotiate more pro-competitive terms. Rates vary depending on whether the competitor also purchases operator services from the LEC. C-18 14 iii. Are There Access Issues Which Affect Competition In New Jersey’s Local Market? Recognizing the dormant status of the New Jersey marketplace, the Board on its own motion in April 1998, initiated a legislative proceeding to determine the status of local exchange competitive offerings in the state, particularly for residential consumers, and to examine the barriers to such competition.15 The Ratepayer Advocate and BA-NJ, the predominant incumbent carrier, and competitors seeking to enter the local exchange market, including AT&T, MCI, Sprint, Conectiv, Cablevision-Lightpath and RCN submitted written testimony and presentations at legislative hearings before the Board. BA-NJ submitted testimony claiming that a competitive market was flourishing in New Jersey due to the availability of a wide range of competitors to serve New Jersey’s business and residential customers. However, information provided by the Competitive Local Exchange Carriers showed that BA-NJ still maintained 99% of the residential customer lines within the state. The Board heard extensive testimony during the hearings which identified several reasons for the current lack of competition for local exchange services in New Jersey. The conditions necessary for competition consistently identified were: (1) pro-competitive prices; (2) nondiscriminatory access to Operations Support Systems (“OSS”) of BA-NJ; (3) costbased access to BA-NJ’s unbundled network elements (“UNEs”); (4) enforcement of strict performance measures; and (5) timely dispute resolution procedures. In July 1998, the Board released its findings, “Status of Local Telephone Competition: Report and Action Plan” (“Report”),16 which identified the Board’s I/M/O the Investigation Regarding the Status of Local Exchange Competition in New Jersey, BPU Docket No. TX98010010. 16 15 Id. C-19 perspective on the two most significant barriers to competition: (1) the lack of standardized Operation Support Systems (“OSS”); and (2) the lack of access to Unbundled Network Elements (“UNEs”). The Report focused on these two critical issues and outlined the Board’s plans to address the issues through a collaborative process involving all stakeholders. Unfortunately, the findings did not identify the rates set by the Board in its Generic Proceeding as being excessive and inhibiting competition. A collaborative process which included all parties commenced following the issuance of the Board’s Report. Operations Support Systems (“OSS”) are the computer-based systems and databases that provide the essential customer business support functions the telecommunications carriers need to provide service: pre-ordering, ordering, provisioning, maintenance and repair, and billing. Without these functions, a telecommunications carrier cannot properly serve its customers. These functions are even more essential when operating in a competitive market for the new competitive carrier providing service to a customer who has switched from the traditional monopoly local exchange carrier. A competitor must be able to provide the same functions as the incumbent carrier in an effective manner to properly service its customers. Since the incumbent carrier currently possesses all of the information for local exchange customers, the competitor must rely upon OSS processes to provide electronic interfaces between the computer systems of the incumbent and the competitor to quickly and properly switch a customer’s service. Without a seamless and effective OSS interface between the two carriers, the competitor will be unable to serve local exchange customers. Unbundled network elements (“UNEs”) are the physical facilities of the network together with the features, functions, and capabilities associated with those facilities that connect customers to the network. Pursuant to the Federal Act, incumbent carriers must make C-20 UNEs available for purchase by competitors who seek to use them to offer service to local exchange customers. However, BA-NJ, the incumbent carrier throughout most of New Jersey, and its competitors differ as to how UNEs should be provided. BA-NJ has argued that UNEs should be made available on a piece-meal basis, requiring competitors to recombine the individual UNEs within the BA-NJ’s central office facilities through a procedure known as collocation, which requires the competitor to build its own facilities. The competitors in turn have argued that the UNEs be made available in a combined package, called a platform (“UNE-P”), allowing competitors to offer service to customers without a need for recombination of the elements or added collocation costs. c. The Technical Solutions Facilitation Team At The BPU “Any sufficiently advanced technology is indistinguishable from magic.” – Arthur C. Clarke The Board’s report outlined an action plan in which the Board addressed these issues, as well as other existing barriers and impediments to competition by the formation of a Technical Solutions Facilitation Team (“TSFT”). The TSFT consists of several staff members from the Board’s Division of Telecommunications, whose mission is to conduct collaborative settlement negotiations with all interested parties, with the goal of resolving outstanding issues between BA-NJ and the competitors and removing the “major barriers” to local exchange competition. Three separate TSFT tracks were established in the following areas: (1) UNE access; (2) OSS; and (3) performance standards, measurements and remedies. C-21 i. What Issues Were Raised Before The TSFT In Regard To Unbundled Network Elements? The Ratepayer Advocate actively participated in TSFT meetings regarding UNE access issues from September 1998 through January 1999. The main issue of contention between BANJ and its competitors remained access to UNE combinations, otherwise known as the UNE Platform or UNE-P. BA-NJ refused to offer the UNE-P, or any other combined form of UNEs, without certain sunset limitations and added disincentives, such as an additional charge to provide the elements on a connected basis, known as a “glue charge.” Many competitors argued that such restrictions were violative of the Federal Act, requiring incumbent local exchange carriers to provide nondiscriminatory access to UNEs and prohibited incumbents from separating UNEs prior to their purchase by competitors. The discussion became even more contentious when the initial rulings by the U.S. District Court, overturned certain sections of the Federal Act relating to UNE combinations.17 The parties to the TSFT were unable to reach a consensus on the issue of competitors’ access to UNE combinations, or the UNEP, and pursuant the Action Plan in the Board’s Report, the matter was submitted in March 1999 to the Board to issue a final ruling in the matter. The Board’s Summary Order regarding UNEs and collocation was issued in October 1999. As of December 1999, the parties are still awaiting the final decision of the Board. Meanwhile, Bell Atlantic-New Jersey filed tariffs to implement the Board’s October 1999 decision. On December 12, 1999, parties submitted to the Board their reply comments on Bell Atlantic-New Jersey’s filed tariff. 17 AT&T Corporation v. Iowa Utilities Board, et al., 525 U.S. 366, January 25, 1999. C-22 ii. What Issues Were Raised Before The TSFT In Regard To Operations Support Systems? The Ratepayer Advocate participated in TSFT meetings from October 1998 through February 1999 to resolve outstanding issues involving competitors’ access to BA-NJ’s OSS systems. The TSFT examined actions taken by the New York Public Service Commission (“NYPSC”) and its collaborative process, which developed an extensive issues matrix list consisting of over 300 technical operations problems experienced by CLECs attempting to access Bell Atlantic’s OSS. Using the New York Public Service Commission matrix list as a template, the TSFT formed a working subgroup consisting of technical personnel from BA-NJ and all interested competitors to evaluate the New York matrix for issues relevant to competitive operations in New Jersey, and to address any additional issues pertinent to competitive entry in the New Jersey local exchange market. The OSS subgroup held several collaborative meetings between BA-NJ and its competitors in which they discussed possible solutions to various technical difficulties experienced by competitors attempting to access BA-NJ’s OSS. The TSFT also monitored a similar process of review being conducted simultaneously in Pennsylvania, ordered by the Pennsylvania Public Utility Commission. At the conclusion of the TSFT OSS meetings, the parties resolved most technical issues. The TSFT OSS only focused on technical issues regarding access to BA-NJ’s OSS, but did not address several policy issues, such as the level and/or type of testing of the OSS systems that should be conducted. The collaborative process has resolved all but some two dozen issues. Policy guidance from the Board may be necessary to resolve some of them. As of December 1999, the preparations for testing of Bell Atlantic-New Jersey’s OSS are almost complete. Based on the experiences of other states, notably Pennsylvania and New York, it is not unreasonable to expect the test in New Jersey to take several months. C-23 iii. What Issues Were Raised Before The TSFT In Regard To Performance Measurements And Standards? The Ratepayer Advocate participated in a TSFT working group established in late February 1999 to examine performance measurements and standards which are intended to ensure that incumbent and competitive carriers have quantifiable service obligations which they must meet when interacting with each other. For example, if a BA-NJ customer switches to a competitive carrier, that competitive carrier must inform BA-NJ according to a standard protocol. BA-NJ must reply and make any necessary changes according to certain performance and time standards. These measurements and standards are necessary to ensure that consumers are able to change service providers without any inconvenience or delay as a result of miscommunication between the two carriers. Parties considered the actions taken on performance measurements in both New York and Pennsylvania for their feasibility for New Jersey. Several meetings were held at which the parties discussed differing views on BA-NJ’s obligation to provide service to competitive carriers and identified those areas of disagreement between the parties which could not be resolved by consensus. These matters were forwarded to the Board for final resolution. As of December 1999, there has been no final action establishing performance measurements. iv. What Action Did The Board Take As A Result Of The TSFT Meetings? On October 6, 1999, the Board released a Summary Order on the results of the TSFT meetings as they relate to UNE-P and certain other technical issues. The Board’s Order took some pro-competitive steps toward making UNEs and UNE-P available to competitive carriers such as: (1) requiring BA-NJ to provide UNE-P to competitive carriers serving residential customers and small business customers; and (2) requiring BA-NJ to offer a variety of C-24 arrangements for competitive carriers to collocate their facilities on BA-NJ premises. Additionally, the Board is in the process of hiring an independent company to test BA-NJ’s OSS. However, as of December 1999 the Board has not released Orders on performance standards and the OSS. The policies which will be established in the Board’s TSFT Orders are essential for the implementation of meaningful competition. It is unlikely that New Jersey will benefit from such competition until UNEs are available, an operational OSS is in place, and rigorous performance measures are established. d. Are There Any Other Outstanding Issues Which Could Affect The Introduction Of Local Competition? While the Ratepayer Advocate has always taken the position that access to UNEs and the provision of nondiscriminatory OSS for CLECs are key issues to the future of local exchange competition, they are not the only factors which will determine the future of local competition. There are several other important issues which should be addressed including: C Pricing - As discussed earlier, the Ratepayer Advocate believes the Board set the bar too high in pricing access to New Jersey’s telecommunications marketplace. Competitive providers are less likely to enter the marketplace when the cost is so high. New Jersey faces the possibility that, even after the telecommunications infrastructure is capable of handling competitive providers, it will simply be too costly to enter. Competitive pressures and the current state of the marketplace - Dozens of competitive carriers have received authority to provide local telecommunications service in New Jersey. Most of these carriers’ business plans focus on providing voice and data services to small and medium-sized businesses, rather than residential telecommunications services. These markets present higher profit margins and are easier to enter. Our concern is that the residential marketplace will not see benefits of lower bundled rates and technology. BA-NJ’s entry into the long-distance market - Once the FCC has determined that BA-NJ has opened its network to competitors and grants it the authority to provide bundled telecommunications services including intraLATA toll services, its competitors may make a greater effort to provide local telecommunications services to the residential market in order to remain C-25 C C competitive. For example, in New York, where Bell Atlantic received authority to provide intraLATA toll service on December 22, 1999, competitors such as MCI WorldCom and AT&T have begun to actively market local telephone service to residential customers. C New technologies - Several new technologies may create new ways for nontraditional telephony providers to reach the residential marketplace. For example, as wireless telephone service continues to become more widespread and its costs diminish, it is likely to provide greater competition. Also, the provision of local telecommunications services through a consumer’s cable television wire, being tried by several large cable operators, presents another opportunity to enter the local market in a non-traditional manner. Other technologies, such as Internet telephony and satellite telephony may not become significant competitors immediately, but may become more important in the near future. The Position Of The Ratepayer Advocate On Local Exchange Competition. During the last months of 1999, as a result of the TSFT meetings, New Jersey has taken several important steps toward the introduction of meaningful competition in the local exchange market. Throughout the Ratepayer Advocate’s involvement in the Board’s intraLATA toll and local exchange competition proceedings, our primary goal has been to create a level playing field throughout New Jersey’s telecommunications landscape and to permit new and competitive carriers an equal opportunity to compete for the right to serve New Jersey’s consumers. To that end, we have supported cost-based rates and equal access to the telecommunications network by competitors. The results of the TSFT collaborative efforts at this time are promising, albeit incomplete. In spite of recent positive developments, there are still several important steps to be taken before competition is truly available throughout New Jersey’s telecommunications marketplace. For example, a pro-competitive decision by the Board on performance standards and OSS testing is required. Additionally, the reversal of the Board’s decision on the price of access to the network, which acts as a barrier to C-26 competition awaits an outcome in the Federal District Court. The Ratepayer Advocate remains hopeful that the Board’s decision will be overturned. Competition demands access at lower rates. If such pro-competitive policies are implemented, the Ratepayer Advocate expects competition in the local exchange market to grow, with its effects extending to the intraLATA toll and interLATA toll markets as well. This flowering of competition can provide all carriers, both incumbents and competitors, a greater opportunity to provide bundled services and, in general, should result in lower prices, greater consumer choice and more rapid technological innovation and deployment for all classes of ratepayers. The Ratepayer Advocate will continue to promote fair and equal access to the telecommunications network and encourage the introduction and growth of competition for all telecommunications services throughout New Jersey. C-27 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON CONSUMER ISSUES ARISING FROM DEREGULATION JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa D D. CONSUMER ISSUES ARISING FROM DEREGULATION “If we don’t change, we don’t grow. If we don’t grow, we are not really living. Growth demands a temporary surrender of security. It may mean a giving up of familiar but limiting patterns, safe but unrewarding work, values no longer believed in, relationships that have lost their meaning. As Dostoevsky put it, ‘Taking a new step, uttering a new work, is what people fear most.’ The real fear should be of the opposite course.” – Gail Sheehy I. Area Codes Area codes used to be taken for granted. In the last few years, however, many New Jersey residents have taken notice because their area codes were changed. Indeed many telecommunications customers may see their area codes changed again over the next few years. However, the Ratepayer Advocate continues to encourage the New Jersey Board of Public Utilities (“Board”) to implement policies designed to make the distribution of telephone numbers more efficient, so the state could avoid the need for additional area codes, permitting New Jersey consumers to take their existing area codes for granted once again. Area code relief is necessary when the supply of available telephone numbers within a particular area code becomes insufficient to meet the needs of carriers, requiring an additional area code to be added. This state of affairs is known as “number exhaustion.” Over the last few years, both nationally and locally, there has been a great increase in the number of area codes. For example, since 1991, New Jersey has experienced the introduction of the 908, 973, 732 and 856 area codes, and by the year 2002, there may be additional area codes in the 973, 201, 908 and 732 area codes. There are many reasons for number exhaustion. One obvious reason is the emergence of new technologies such as cable modems, cell phones, pagers and fax machines, and the proliferation of new carriers all of which require D-1 telephone numbers, thereby increasing the need for available numbers. However, the primary cause of number exhaustion and the need for area code relief is an exceedingly inefficient system for the distribution of telephone numbers. For this reason, the Ratepayer Advocate has proposed that the current system needs to be completely overhauled if New Jersey is to be spared the expense and inconvenience of more new area codes. Area code relief may be implemented three different ways: a geographic split, an overlay, and number conservation. Under a geographic split, an area served by a particular area code is divided into two sections, with customers in one section maintaining their present area code while customers in the other section receive a new area code. Only the area code changes: the rest of the phone number remains the same. A geographic split is the standard manner of relief throughout the country, and has been implemented recently in the 201/973, 908/732 and 609/856 area codes. With an overlay, all consumers served by a particular area code retain their present area code, but, upon number exhaustion within that area code, all new subscribers within that same area receive a new, different area code. This means your neighbor, or even a second line added to your own home could receive an entirely different area code. Where an overlay is implemented, 10-digit dialing is mandated by the Federal Communications Commission (“FCC”) for all calls, including local calls. Historically, overlays have been the least popular form of relief, although as area codes require relief for a second or third time in a given geographic region, some state utility commissions have recently chosen to implement overlays. D-2 The final, and most important aspect of area code relief, is number conservation. Number conservation includes numerous technologies and policies such as rate center consolidation, number pooling, and permanent number portability. The goal of number conservation is to promote the most efficient use of telephone numbers. Sometimes, available numbers may be insufficient to rely on number conservation alone. However, in many cases, number conservation may preclude the need to add a new area code. The Ratepayer Advocate has recommended to the Board that aggressive conservation measures would slow down, if not halt, the need for additional area codes in New Jersey. Unless an enlightened, comprehensive, multi-faceted package of relief measures is introduced and implemented throughout the state, number exhaustion and the need for area code relief will be a recurring problem for the people of New Jersey every few years. The Ratepayer Advocate actively participated in the 201/973 and 908/732 area code proceedings and the recent proceeding for area code relief for the 609 area code. In the 609 area code proceeding, the Ratepayer Advocate strongly recommended number conservation, since the 609 area code faces number exhaustion primarily because the pool of telephone numbers are distributed inefficiently, not because of a depletion of resources due to consumer demand. We further recommended to the Board that, if it concluded that another area code cannot be avoided, a geographic split should be ordered in the best interests of consumers and competition. In its decision in the 609 proceeding, the Board agreed with the Ratepayer Advocate that a geographic split was the most appropriate form of area code relief for southern New Jersey. However, the Board, citing its interpretation of a recent FCC decision which detailed the role states may take in implementing area code relief, declined to impose many of the number conservation recommendations made by the Ratepayer Advocate. The D-3 analysis that follows reflects the specific concerns the Ratepayer Advocate raised in the 609 proceeding concerning area codes. It also details how the Board could implement aggressive number conservation measures throughout the state in a manner consistent with FCC rules, thereby permitting New Jersey to avoid the expense and inconvenience of further area code relief. a. Why The Current Method By Which Telephone Numbers Are Distributed Is No Longer Effective The Board order for a new area code for southern New Jersey in November 1999, resulted in six area codes in New Jersey. Each area code totals 7.6 million phone numbers. Therefore, these six area codes provide an astounding 45 million phone numbers, or nearly 6 phone numbers for each of New Jersey’s eight million men, women and children. Clearly, before the state adds additional area codes, the way numbers are distributed needs to be examined and reconsidered. Currently, when a carrier is authorized to serve a particular area, it must request phone numbers from the Number Administrator, Lockheed Martin, the company which was granted the right to become the Number Administrator by the federal government. The Number Administrator is a neutral party who “holds” numbers and “releases” them for use upon the request of a carrier. Numbers are assigned to rate centers, which are essentially central telecommunications offices serving consumers within a particular geographic area. A carrier must request numbers in each rate center within the geographic area in which it chooses to compete and where its consumers are located. The numbers are automatically assigned to carriers in blocks of 10,000 numbers (for example, (973) 648-0000 through (973) 648-9999) for each rate center, irrespective of the number of customers the carrier serves within the rate center. That means whether a carrier serves one customer or one thousand, D-4 it receives 10,000 numbers for that rate center. As a further example of this inefficient system, it should be noted that in the 609 area alone, there are 40 rate centers. Therefore, in order for just one carrier to provide service throughout the 609 area, it is assigned 400,000 numbers. Since the Board has authorized dozens of telecommunications carriers to compete in the local exchange marketplace, and each carrier requires its own supply of available numbers, this inefficient allocation of numbers greatly exacerbates the problem of number exhaustion. For this reason, the Ratepayer Advocate has recommended that the Board consider rate center consolidation. Consolidation would lower the number of rate centers throughout the state, thereby permitting each carrier to receive fewer numbers, making more efficient use of its numbers. Additionally, rate center consolidation is a means of conservation strictly within the authority of state commissions and not limited by FCC rules. However, the location of rate centers determines whether a given call a consumer makes is billed as a local call or a toll call.1 Therefore, consolidating rate centers would either expand the size of local calling areas or require telephone companies to adjust their definition of local and toll calls to account for the new, expanded areas covered by each rate center. Nevertheless, because of the benefits rate center consolidation can have on number conservation, the Ratepayer Advocate has urged the Board to consider this method in all future area code relief proceedings. 1 For example, calls that initiate from rate center A and terminate in nearby rate center B and C may be local calls, while calls that initiate from rate center A and terminate in distant rate center Y and Z would not be local calls. D-5 Another way the Ratepayer Advocate has recommended ending this gross misuse of numbers is “code splitting.” Code splitting means that, instead of distributing numbers in blocks of 10,000, numbers would be distributed in blocks of 1,000 (for example, (973) 6480000 through (973) 648-0999). Code splitting is one of the more accepted means of number conservation within the industry. Indeed, it is expected in the near future that numbers will be distributed to carriers in blocks of 1,000. But, the Ratepayer Advocate has determined that even these smaller blocks are still too large and inefficient to encourage maximum efficiency. As technology advances and state boards or commissions demand the most efficient conservation policies, the Ratepayer Advocate supports the distribution of numbers individually, further maximizing number distribution efficiency. Complementing code splitting, the Ratepayer Advocate has recommended that carriers should be required to return blocks of 1,000 numbers when assigned blocks are unused by carriers for a set period of time. Instead of allowing carriers to hold vast reserves of unused numbers, these numbers should be returned in blocks of 1,000 for reassignment to other carriers as needed. This provides for much more efficient use of current number resources and extends the life of numbers for future use. This is not intended to punish carriers with smaller customer bases, but rather to release unused numbers. A carrier could retain a block of 1,000 numbers for each rate center it serves and would be able to receive more numbers as needed. The Ratepayer Advocate also recommends that standards for reserving numbers be explicit and stringent, preventing carriers from stockpiling numbers. Reserved numbers are usually a block of sequential numbers maintained by a carrier often for a large client, anticipating that the client will some day need these additional numbers. While reserving numbers may be a legitimate industry practice, an explicit policy should be instituted which D-6 balances the legitimate need of carriers to reserve numbers for customer growth, with the societal interest in avoiding the stockpiling of otherwise available numbers. For example, the Board should both limit the time during which numbers can be held in reserve and the supply of numbers so designated. For example, if a carrier fails to use reserved numbers within one year, it should be required to make the numbers available to other consumers or return the numbers to the Number Administrator. This policy should also limit the quantity of numbers a carrier may hold in reserve absent a compelling need. Such a policy would further encourage responsible use of available numbers. The fact that service providers need only certify that their remaining numbers in a rate center will be exhausted within twelve months in order to obtain additional numbers in that rate center is another inefficient practice. The Ratepayer Advocate has recommended that the Board amend its current practice by requiring monthly disclosure of number use by all carriers. This filing should include an accounting by all carriers for each of the following categories of numbers currently used by consumers: reserved, “aging,”2 reserved for testing, or otherwise unavailable. Carriers should provide this information per 1,000 number block for each rate center. The Board would then be able to track whether some “unavailable” numbers were actually being stockpiled over time. This detailed information would also allow the Board to monitor the effectiveness of any number conservation measures it may implement in the future. The Ratepayer Advocate has also recommended that carriers be required to submit written documentation to the Number Administrator and the Board providing additional 2 Aged numbers are numbers which are taken out of service, usually due to disconnection or cancellation of the particular phone number. The number is temporarily held out of circulation (or, aged) for a period of time before it is reused. D-7 justification whenever they request a new block of numbers. To encourage the most efficient use, carriers should not be allowed to obtain an additional block of numbers within a rate center until that carrier’s currently-held block has a 75% fill rate. This 75% would include numbers in use, “aged” numbers, Board-approved reserved numbers, numbers reserved for testing, as well as any other numbers the Board determines are otherwise unassignable. The 75% benchmark should encourage efficient use and should not affect a carrier’s ability to compete. Finally, carriers that already have a block of 10,000 numbers should be required to assign available numbers from previously assigned 1,000 number blocks, and prevented from using numbers in the next sequentially higher block of 1,000 numbers until at least 75% of the numbers in the lower block have been assigned. Carriers with at least one 1,000 or 10,000 block in a rate center should also be required to return to the Number Administrator any additional 1,000 number blocks, held for more than nine months, and from which no numbers have been assigned, unless all other number blocks held by the carrier have fewer than 25% of all available numbers vacant. At the time the Board was considering its decision in the 609 proceeding, the FCC required a state commission to obtain a waiver from it before many of the standards promoting efficient number use could be implemented. The purpose of the FCC’s position was to ensure that efficient number use, a national priority, should be done on a consistent, nation-wide basis. Subsequent to the Board’s decision in the 609 area code case, the FCC granted requests by several states to waive FCC rules and implement interim number conservation policies similar to those the Ratepayer Advocate has recommended, in order to determine if these policies would actually result in more efficient number use. The Ratepayer Advocate has urged D-8 the Board to seek a waiver of the FCC rules in order to implement interim number conservation rules in New Jersey. However the Board has not decided to seek a waiver from the FCC at this time. On June 2, 1999, the FCC subsequently launched a Notice of Proposed Rulemaking concerned with implementing permanent rules which would grant state boards the authority to implement many of these conservation methods. The Ratepayer Advocate assumes that in the near future, the FCC will adopt many of its proposed rules, granting state boards permanent authority to implement number conservation policies. Until the FCC grants state boards permanent authority to implement number conservation, the Ratepayer Advocate proposes that the New Jersey Board should request interim authority until the FCC enacts permanent rules as well as conservation measures which are within its authority. Whether interim or permanent, the Ratepayer Advocate will continue to recommend that the Board request authority when needed to implement the most thorough and efficient number conservation policies in the country. b. What Is Number Portability And How Will It Effect Area Code Relief? To promote competition, the Telecommunications Act of 1996 (“Federal Act”) mandates local number portability (“LNP”) which permits customers to change their local service providers without changing their telephone numbers. The carrier that loses the customer deletes end user customer information from its LNP database. The new carrier adds the customer’s telephone number to its own database. These changes are coordinated between telephone companies and are intended to be transparent to the subscriber. The FCC has established timetables for the deployment of LNP by dividing the country into two segments -the 100 largest Metropolitan Statistical Areas (“MSAs”) and the balance of the country. Within D-9 the 100 largest MSAs, the FCC has scheduled implementation in five phases, the first of which took place March 31, 1998. However, the implementation of LNP has been fraught with technical and regulatory delays. Once LNP has been reliably implemented, the need for new telephone numbers should ease somewhat, as consumers will require fewer new numbers because they will automatically maintain their telephone numbers if they switch carriers or if they move. Thus, carriers will need fewer numbers. But unfortunately, the implementation of LNP will probably have only a minor effect on the number exhaustion problem, since the present system of number distribution is the primary cause of the numbers crunch in New Jersey. LNP is already available throughout much of the state, but it has not meaningfully halted number exhaustion, because carriers are still receiving assigned numbers in blocks of 10,000. Therefore, while the Ratepayer Advocate supports the convenience of number portability throughout the state, it alone will not solve the problem of number exhaustion. c. Is Number Conservation An Alternative Solution To Area Code Relief? Because any form of area code change causes consumers to incur costs and considerable inconvenience, in all previous area code proceedings before the Board, the Ratepayer Advocate has urged the Board to explore whether number conservation measures might be deployed to avoid the need for new area codes in New Jersey. The Board can best serve the public interest by requiring carriers to conserve numbers, rather than placing the burden of area code relief upon consumers. It is the position of the Ratepayer Advocate that, with a concerted effort to conserve numbers by all carriers, under the Board’s guidance, consumers throughout New Jersey may be spared the disruption that area code changes carry in their wake. D-10 d. Why Does The Ratepayer Advocate Recommend Long-term Area Code Reform? In the absence of area code number administration reform, New Jersey’s area codes will continue to “exhaust” prematurely, while tens of millions of phone numbers remain unused by customers. It has been suggested that as a result of continued utilization of current inefficient methods for assignment of telephone numbers, the 201/973 and 908/732 splits will be exhausted by the year 2001, and regulatory proceedings will have to begin again in 2000 to review the issue of area code relief in the northern and central parts of the state. Similarly, under current number administration practices, area code relief in the 609 region is expected to last only about six years. It is clear that to protect the vital public interest, number administration cannot continue as it has in the past. The Ratepayer Advocate has urged the Board to take the lead in implementing new approaches to number allocation and conservation that will promote a more efficient use of numbering resources for New Jersey. The Board cannot afford to rely upon or wait for the results of industry forums to resolve issues of long-term relief. Industry forums have been debating the threat of number shortages for years without arriving at a consensus for remedial action. Recognizing that federal action may be too little and too late, several states and carriers have taken an aggressive role in number conservation. New Jersey should be among those states, acting immediately and decisively to implement effective number conservation measures. The FCC has granted the following states, California, Florida, Massachusetts, New York, Maine, Connecticut, Texas, Ohio, New Hampshire and Wisconsin, the authority to implement number conservation measures such as thousand-block pooling, reclaiming unused and reserved blocks of numbers (or portions of those blocks), establishing number allocation standards, maintaining number rationing proceedings D-11 and implementing number block sharing. The Ratepayer Advocate has urged the Board to immediately initiate an ongoing investigation into number conservation measures and establish a task force to provide solutions for a more efficient management of telephone numbers in New Jersey. The task force would have three goals: P to provide the Board with recommended long-term number conservation measures that will extend the life of New Jersey’s current area codes; to provide a time line for implementation of these long-term solutions; and to recommend interim conservation measures consistent with these long-term solutions. P P This task force would be required to identify measures to conserve phone numbers by specific dates by requesting information regarding: P Number pooling, including central office code sharing at the “thousands” digit level; Recapturing of unused NXX codes that have already been assigned or codes used for special purposes such as testing; Exhaust dates for all area codes at the end of each quarter; Number utilization information at the end of each quarter; and The impact of permanent local number portability, when implemented, on number conservation. P P P P Perhaps most importantly, the Board should establish realistic but expedited deadlines for the staging and completion of task force work. Commissions and have been met by the industry. Such deadlines have been set by other D-12 e. If Area Code Relief Is Necessary, Should The Board Implement A Geographic Split Or An Overlay? Whenever area code relief has been implemented in the past, the Board has always chosen the geographic split. When it ordered geographic splits in the 201/973, 908/732 and 609/856 proceedings, the Board listed a number of reasons for favoring a geographic split instead of an overlay. Those reasons include: P A geographic split maintains the geographic orientation traditionally associated with telephone numbers; A geographic split avoids the inconvenience of dialing 10-digits for all local calls in the affected NPAs, and instead preserves 7-digit dialing for most local calls throughout the state; A geographic split avoids the inconvenience and confusion that could be caused by having more than one area code in a geographic area; With a geographic split, only some of the municipalities may be required to dial an area code to reach a portion of the town. With the overlay, all customers in all municipalities dial an area code plus seven digits; A geographic split is competitively neutral; A geographic split allows a period to educate consumers to the necessary transition to 10-digit dialing; and, The Board preserves its right in the next relief cycle to again consider an overlay option depending on the then existing status of permanent service provider number portability. P P P P P P The Ratepayer Advocate supported the Board’s reasoning in the previous proceedings, but each relief proceeding requires a fresh look to determine which form of relief is in the best interests of consumers. Over the last year, many state public utility commissions, consumer advocates and industry members have begun to reevaluate the issue of geographic split versus overlay, and D-13 in fact, have chosen to implement an overlay where area code relief is required. In New Jersey, members of the telecommunications industry have recommended overlays for the 201, 973, 908 and 732 area codes, which are awaiting relief at the Board. Recognizing the changes occurring throughout the industry, the Ratepayer Advocate has chosen not to oppose the implementation of an overlay in these area codes for the following reasons: P The imposition of additional area codes via the geographic split method would make the geographic area covered by the area code so small as to greatly diminish the value of the geographic orientation traditionally associated with area codes; The imposition of a geographic split would create numerous new “split towns” and it seemed unreasonable to make more towns divided in this way; As the public has become more aware of the role of area code relief, the Ratepayer Advocate concluded that the introduction of an overlay would not create the confusion and disruption it might have caused years ago, before the public has become aware of the issue; Implementation of an overlay will eventually ensure dialing parity among all residents of the state. All consumers will have to dial the same number of digits for a local call. The number of digits dialed will not depend on whether a consumer lives in an area which has received a geographic split or an overlay; As new carriers are beginning to hold a share of telephone numbers with the “traditional” area code, the competitive concern that only the incumbent carrier would hold telephone numbers in the traditional area code diminishes; Implementation of an overlay permits sufficient time to educate consumers about the coming area code relief; and As always, the Board maintains its right to determine, on a case-by-case basis what is the most appropriate form of area code relief in future proceedings. P P P P P P D-14 The Position Of The Ratepayer Advocate On Area Code Relief. Area code relief is, and will remain a constant issue for consumers until the Board implements and enforces a thorough number conservation plan. In order to do so, the Board should submit a request for a waiver of the FCC’s rules to implement number conservation methods on an interim basis. This waiver would extend until the FCC releases permanent rules addressing individual state authority to implement number conservation rules. The Board’s waiver should specifically request authority to implement many of the number conservation methods listed in this paper including, but not limited to code splitting, returning unused blocks of 1,000 numbers and requiring more efficient use of currently held blocks of numbers. The Board is not required to seek a waiver to implement rate center consolidation; therefore, it should implement this method when it implements the recommended number consolidation methods. When the FCC releases its permanent rules, the Board’s interim rules would be revised to incorporate the new rules. The implementation of meaningful number conservation rules by the Board along with other industry-wide measures such as number pooling may halt the need for additional area codes. Without a comprehensive plan to conserve telephone numbers, New Jersey will be forced to implement a minimum of four additional area codes by the year 2005. Adoption of a comprehensive plan for efficient number utilization now could obviate the need for additional area codes in the future. D-15 II. Payphones Most consumers use public payphones some of the time. It used to be a fairly simple matter to find a payphone and pay for the service at a reasonable rate. Recently, many callers have encountered any one of several problems while using public payphones, including rates that are not posted or are exorbitant. Since 1996 and the passage of the Telecommunications Act of 1996 (“Federal Act”),3 the regulation of payphones has changed. Currently payphone services are regulated by both the FCC and the Board of Public Utilities (“Board”), each agency regulating specific aspects of payphone service. The FCC generally regulates matters that have an impact on rates and charges, while the Board, generally, regulates matters related to the standards and manner in which payphone service is provided. a. Federal Regulation Of Payphones The Federal Act is the landmark legislation that deregulated the telecommunications industry to promote competition and innovation. Among its many measures to encourage and foster competition in the telecommunications industry, were provisions regarding payphone service. One of the federal provisions affecting payphone service involves the reconfiguration of accounting policies used by telephone companies, in an effort to bring payphone rates in line with market-based prices. The revamping of these accounting policies was generally focused on internal cost accounting systems of the various companies that are involved in the provision of payphone calls. Changed policies include the methods by which payphone operators and other providers of telecommunications services compensate each other for use of each other’s 3 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 151, et seq. (1996). D-16 network and equipment since several providers may be involved in the completion of a single payphone call. Congress, and the FCC, intended reformulation of these policies to eliminate accounting practices that obscure the relationship between rates and the actual cost of service.4 The FCC expected that this use of market economy principles rather than regulated government prices would bring payphone rates to fair and reasonable levels. But it nevertheless provided states the right to impose rates for payphone service where market forces were not sufficient to achieve the goals of Congress.5 Congress also recognized, the need for public interest payphones in rural and lowincome areas where standard residential telephone service may not be readily available. The FCC defined a public interest payphone as a payphone which (1) fulfills a public policy objective in health, safety, or public welfare; (2) is not provided for a location provider with an existing contract for the provision of a payphone; and (3) would not otherwise exist as a result of the operation of the competitive marketplace. For a detailed explanation of payphone accounting practices and methodologies, see I/M/O Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, et al.: Report and Order, CC Docket Nos. 96-128, 91-35, 11 FCC Rcd 20541 (1996) (“Payphone Order”). 5 4 See Payphone Order at ¶ 56, 61. While the FCC recognized that the states have historically regulated the payphone rates, the Federal Act significantly altered the manner in which payphones are regulated by establishing regulatory parity between payphones owned by local telephone companies and payphones owned by other entities. This regulatory shift affects rate structuring, which in turn affects state regulation of rates. But, as discussed above, the FCC will permit states to set payphone rates when market forces have not resulted in market-based rates. D-17 The FCC granted the states the discretion to establish funding policies for public interest payphones, so long as the costs of the programs are fair, equitable, and do not conflict with accounting procedures otherwise outlawed by the Federal Act. Furthermore, the FCC directed states to conduct inquiries into whether public interest payphones are being provided in adequate numbers, since it determined that public interest payphones are consistent with universal service principles (“universal service” refers to the policy, stated in the Federal Act, of assuring all Americans of access to telephone service at reasonable rates). Accordingly, states may undertake internal studies to determine whether payphones are provided in rural, low-income, or other areas where the installation of pay phones fulfills the public interest requirement of the Federal Act. In summary, the FCC has implemented rules that affect the accounting methodology used by payphone and other associated service providers in an effort to bring prices in line with market rates. These rules, which are intended to encourage competition, are expected to result in better service and lower fees for consumers. The FCC has, however, permitted the states to set rates where market forces fail to establish acceptable rates, and has delegated to the states the issue of day to day regulation of public interest payphones. b. State Regulation Of Public Payphones The Board regulates matters related to the quality of service provided by New Jersey payphone operators, including requirements to provide rate information to customers upon request. New Jersey law also requires each telephone utility to provide at least one coinoperated telephone to the public at all hours in each exchange in which the carrier operates; an exchange is a geographic area that usually comprises a city, town, or village and its environs. Other payphone regulations established by the Board include requirements that consumers D-18 should be able to complete operator and toll-free calls, and that access to 911 emergency services be available at no charge. State regulations also require payphone providers to provide, free of charge, rate quotes and information regarding how telephone service providers other than the one which owns the phone can be accessed, and to have printed on the payphone the toll-free numbers of both the telephone provider and the Division of Customer Relations of the Board of Public Utilities. These requirements enable consumers to file complaints about rates, charges, or other difficulties encountered when using payphones. Payphone providers are also required to abide by Board regulations that govern the handling of customer complaints. For these regulations to be effective the Board must enforce the requirements and customers must be aware of their rights and must complain to the Board when the rules are violated. As of December 1999 the Ratepayer Advocate is participating in proceedings involving regulation of payphones before both the Office of Administrative Law (“OAL”) and the Board. In the proceeding before the OAL a petition by the New Jersey Payphone Association is being reviewed which alleges that Bell Atlantic-New Jersey (“BA-NJ”) has engaged in anticompetitive actions. In addition, a request by BA-NJ for approval of its new tariff, which lists proposed rates and services, is being analyzed. At the Board, the Ratepayer Advocate is participating in proceedings concerning calling cards, operator-assisted calls, and rate caps on local coin calls. The Ratepayer Advocate supports measures that will result in clearer accounting by telephone companies by removing “hidden” subsidies from payphone rates. Although these measures can create higher per-call rates, the Ratepayer Advocate believes that repricing will further the introduction of competition in New Jersey, which should in turn lead to lower prices, greater choice, and better selection of service for consumers. D-19 The Position Of The Ratepayer Advocate On Payphones. At all proceedings before the FCC,6 the OAL and the Board of Public Utilities, the Ratepayer Advocate supports the availability of public payphones as a lifeline service for consumers who do not have immediate access to telephones and for consumers who cannot afford to subscribe to residential telephone service. Although regulations intended to protect such consumers already exist, these rules are meaningful only if the Board, the Ratepayer Advocate, and public payphone owners ensure that these standards are enforced. The Ratepayer Advocate agrees that some payphone rates seem excessive, resulting from current federal and state law. Nevertheless, consumers are entitled under state law to be fully informed as to how much a payphone provider will charge for a call before the call is placed and they are also entitled to free access to 911 services, as well as other consumer-oriented policies. The Ratepayer Advocate supports revisions to federal and state policies that will increase competition in the payphone market, which in turn should eventually lead to multiple providers competing with lower rates. Accordingly, the Ratepayer Advocate will continue to advocate payphone rules which promote competition and protect consumer interests. 6 Information about the FCC, including payphone services, can be found on the Internet at www.fcc.gov. A review of FCC activity can be found each day in the FCC’s Daily Digest; further, this document is e-mailed daily upon request, at no charge. The FCC website is divided into several categories, and provides a search engine for research into specific issues. Headlines and other news related to the telecommunications industry are also provided, and are updated regularly. D-20 III. Consumer Protection Issues In A Competitive Telecommunications Marketplace “Government is a contrivance of human wisdom to provide for human wants.” – Edmund Burke The ability of New Jersey residents and businesses to select their local telephone service providers raises new consumer protection issues for state regulators. The Federal Communications Commission (“FCC”) has determined that traditional protections of the monopoly environment are no longer appropriate in the competitive marketplace. By establishing regulations that protect consumer choice, the Board of Public Utilities (“Board”) can encourage the development of a vibrant and consumer-friendly competitive local telecommunications marketplace. Consumer protection safeguards that preserve the integrity of the marketplace must be adopted by the Board as soon as possible. If consumers do not trust all local telephone providers because of the actions of a few unscrupulous companies, they will be less inclined to participate in the competitive marketplace, and will consequently fail to realize its benefits. If deregulation is accompanied by fraud, misrepresentation, redlining, or discrimination, a major public backlash against competition in the telecommunications market could occur. However, if regulators establish and enforce basic consumer protections that prevent such negative effects, then consumers will be more comfortable participating actively in the market and more likely to support local exchange competition. This position paper provides an overview of several consumer protection issues that must be considered as New Jersey prepares for local telecommunications competition. These include: privacy of customer-related information; credit and collection issues, including review of policies governing payment arrangements for past D-21 due bills and disconnection; slamming; service quality indicators; and deposit policies that protect against redlining. It also sets forth recommendations by the Ratepayer Advocate that attempt to strike the proper balance between consumer protection and encouragement of vigorous local exchange competition. a. Privacy Of Customer Information The Federal Telecommunications Act of 1996 (“Federal Act”)1 prohibits the disclosure or use by any telephone company of information on the quantity, configuration, type, and amount of telecommunications used by any customer, except to bill for services or to provide related services. A telephone company must obtain a customer’s written consent in order to disclose such information. The Federal Act also places restrictions on the use of Customer Proprietary Network Information (“CPNI”), which is certain data that provides information about the services to which a customers subscribes, how those services are used by the customer. Although the federal CPNI rules can preempt state regulations, the FCC has thus far refused to exercise its authority to do so. But state rules can be preempted if they impose restrictions on carriers’ use of CPNI that are more stringent than those established by the FCC. “Other state rules, however, may not directly conflict with Congress’ balance of goals, for example those specifying various information that must be contained in carriers’ notice requirements, that are in addition to those specified in this order.”2 Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 151, et seq. (1996). FCC’s Second Report and Order and Further Notice of Proposed Rulemaking In the Matter of Implementation of the Telecommunications Act of 1996: Telecommunications Carriers’ Use of Customer Proprietary Network Information and Other Customer Information (Docket No. 96-115; February 26, 1998) at ¶ 18. D-22 2 1 The Ratepayer Advocate has advanced the position that a reasonable balance must be found between the release of information needed to develop a competitive market and the reasonable expectations of customers that their personal billing and payment information will remain private. The Ratepayer Advocate supports the drafting of a New Jersey privacy statute or regulation which requires the incumbent local exchange provider to make name and address information available at nondiscriminatory prices to all competitors. However, the release of other information -- including social security numbers, usage profiles, and credit histories -- should be prohibited without the express permission of the customer. State rules, however, should not change the ability of the incumbent local exchange carrier to communicate customer-specific information for the lawful purposes described in the Fair Debt Collection Practices Act3 or the Fair Credit Reporting Act.4 Providing telecommunications providers access to credit histories could allow competitors to target only those consumers with good credit records and shun those without. The Equal Credit Opportunity Act (“ECOA”)5 prohibits the denial of credit based on, among other criteria, race, religion, ethnic origin, receipt of public assistance, or the exercise of rights under federal consumer credit statutes Although the ECOA does not prohibit denial of credit based on credit histories, encouraging this practice by disclosing such information could tend to reduce the competitive options offered to low-income customers, who would be vulnerable to this type of discrimination. 3 15 U.S.C.A. § 1692 et seq. (1977) 15 U.S.C.A. § 1681 et seq. (1970) 15 U.S.C.A. § 1691 et seq. (1974) D-23 4 5 b. Reliability And Quality Of Service The Ratepayer Advocate urges the Board not only to monitor service quality in the emerging deregulated and competitive environment, but also to adopt a Service Quality Index as part of the Board’s review of Bell Atlantic-New Jersey’s Alternative Rate Plan, pending as of December 1999.6 In several states, including California, New York, Ohio, Minnesota, and Washington, recent alternative regulatory plans for telephone, electric, and gas utilities contain specific indexes of customer service and reliability for monitoring service quality standards and establishing penalties if performance deteriorates during the term of the plan. The standards include: expediency of installations; trouble report rates; installation and/or repair appointments missed; answer time at customer call centers: out-of-service reports; billing errors; board complaint ratios; and, customer satisfaction surveys. Penalties for failing to meet established standards include customer rebates and earnings reductions for the carrier. For example, the California Public Utility Commission implemented a quality of service In New Jersey, Bell Atlantic’s rates are currently subject to the Alternative Regulation Plan, which was approved by the then-Board of Regulatory Commissioners in 1993. The Alternative Regulation Plan provides, in part, that Bell Atlantic-New Jersey would not increase tariffed rates for rate regulated services until January 1996, and that the plan itself would remain in effect through the end of 1999; no rate increases ever occurred. Under the plan, absent revenue neutral rate restructures or exogenous events changes, adjustments to rate regulated services would be based on one-half of the Consumer Price Index (“CPI”) with several qualifications. (Order, at 31). The Plan also authorizes Bell to earn a 11.7% return for protected services; an intermediate threshold of 12.7% for rate regulated services, and a sharing threshold of 13.7%, with earnings exceeding 13.7% shared equally by shareholders and customers. (Order, at 44). See I/M/O the Application of New Jersey Bell Telephone Company for Approval of its Plan for an Alternative Form of Regulation. 143 P.U.R. 4th 297. D-24 6 monitoring program under the new incentive-based, price cap regulatory framework adopted for the state’s two largest local exchange telephone carriers, Pacific Bell and GTE California. “Price cap” refers to a regulatory structure in which a maximum price that can be charged is established by the regulating authority. The monitoring program requires reports and evaluations of service quality data from the carriers including: major service interruptions; customer opinion surveys; informal service complaints; and quality improvement and cost reduction plans.7 The New York Public Service Commission also implemented similar requirements in its approval of alternative regulation plans for Rochester Telephone Company8 and New York Telephone (now Bell Atlantic-New York),9 which included a specified floor for service quality levels, with penalties assessed if service quality, as determined by traditional measures, customer complaints, and customer satisfaction surveys, falls below that floor. The Ratepayer Advocate supports similar measures for New Jersey10 to ensure that customers do not suffer decreases in service quality. Penalties must be sufficient to make See Re Alternative Regulatory Frameworks for Local Exchange Carriers, I.87-1111-033, et al, Decision 89-01-031, California Public Utilities Commission (October 12,1989). See Re Rochester Telephone Company, Cases 93-C-0103, and 93-C-0033, Opinion No. 94-25, New York Public Service Commission, 160 P.U.R.4th 554 (November 10, 1994). See Re New York Telephone - Track II, Case 92-C-0665, New York Public Service Commission (June 16, 1995). The Ohio Minimum Telephone Service Standards provide a tiered bill credit to customers of up to one month free service for missed service appointments or excessive outages. The tiered approach applies, as well, to charges for the installation of new services and can result in the waiver of up to the full installation fee. Ch. 4901:1-5 of the Ohio Admin. Code. In Minnesota, US West has agreed to provide a cellular phone or a $100 bill credit and free access to voice mail and call forwarding for any customer whose primary line installation cannot be provided within seven days. In re: Investigation into US West Communications, Inc., Service Quality, Dkt. No. P-421/CI-95-648, Order Accepting Settlement with Modifications (May 2, 1996); Order After Reconsideration (June 12, 1996), 169 PUR4th 200 (1996). D-25 10 9 8 7 bad service less profitable than good service.11 Furthermore, service quality will be increasingly difficult to monitor as the issue of who bears responsibility for service degradation becomes more complex. The attempt to maintain or improve service quality in the face of increased competition will be complicated by the variety of companies that will interact with the incumbent local exchange service provider. Some companies will construct new fiber optic network facilities and market to commercial customers, while others will resell services bought wholesale from the incumbent. Others will provide basic and optional local exchange services by combining their own facilities with unbundled network elements from the incumbent. For these reasons, the Board should develop clear policies and standards to apply to all carriers -- not just incumbent carriers -- doing business in the State of New Jersey. If the competitive carrier deals directly with a new customer, for example, the Board should require the carrier to be responsible for the quality of service provided to the customer. c. Applications For Service; Deposits; Obligation To Serve; Redlining Competitive telephone providers that offer basic local service to both residential and business customers must not be permitted to discriminate unfairly through their application process or deposit policies. Federal law provides a partial, but not complete shield to prevent this outcome. The ECOA forbids discrimination and redlining, which bases offerings on zip codes or other factors that could discriminate on the basis of race or ethnicity. However, if The New York Public Service Commission required NYNEX to refund $50 million as a result of providing poor quality service. While $50 million is a large amount of money, it is only 0.4% of NYNEX’s consolidated $13+ billion in revenues. It is possible that NYNEX will continue to have service problems because, unfortunately, bad service is more profitable than good service. Ultimately, however, the solution is rigorous competition. In the absence of traditional regulatory ratemaking, only a fully competitive market ensures that customers get the best possible combination of price and service. Petition of New York Telephone Company, Case 96-C-0086; Case 96-C-0469, 1996 NY PUC Lexis 709 (Dec. 13, 1996). D-26 11 additional precautions are not put in place, any competitive carrier could: (1) establish its own credit screening test as a means of eliminating all but high volume or high income customers; (2) accept payments only by credit card; or (3) market exclusively to customers with long distance bills exceeding certain levels. If such activities are permitted, then many customers will be denied the opportunity to choose a competitive provider and the incumbent carrier will almost certainly remain obligated to serve most low income customers. Consequently, the Ratepayer Advocate recommends that the Board establish requirements that initially require new providers to: (1) file tariffs; (2) submit maps showing the geographic area that the company intends to serve; (3) comply with rules regulating the conditions under which service can be denied or a deposit can be requested as a condition of service; and (4) require any company offering basic exchange service to residential customers, to offer this service on nondiscriminatory terms to all customers in the service area selected by the company. Although the Board should consider prohibiting competitors from discriminating in the provision of residential or business services within the carrier’s stated geographic territory, niche marketers would be exempt from this requirement. These requirements resemble those enacted in New York and California. New York requires that all providers serve all customers without undue discrimination or preference within their self-selected service territory. California requires new facilities-based competitors to service all customers in the carrier’s territory or who are within 300 feet of its transmission facilities. Competitors should be permitted to require deposits that are based on a customer’s credit history with other telephone providers. But, competitors should not be permitted to require a deposit based on a customer’s previous creditworthiness in non-telephone related D-27 services. New York and California have adopted similar rules.12 The Ratepayer Advocate has also urged the Board to require telephone providers to offer toll blocks or caps as an alternative for customers who would otherwise be required to pay a deposit. A toll block prevents long-distance or toll calls from being placed from the telephone line. A toll cap permits a certain dollar amount of long-distance or toll call charges to be incurred during a particular period; after the level is reached, long-distance or toll calling is blocked. Such measures, however, should be implemented at the discretion of the consumer, not the carrier. d. Credit And Collection i. Right To A Payment Arrangement New Jersey customers currently have the right to avoid disconnection of service by negotiating a reasonable payment arrangement on the overdue amount. This right is closely linked to the provision of universal service, and the recognition that access to local telephone service is a “lifeline” service that enhances public health and safety. The Board should establish new state regulations that define a customer’s right to a payment arrangement on a non-discriminatory basis and the conditions under which competitive carriers can deny further arrangements, is important to ensure that this right is offered. New York policy establishes that a company can demand a maximum advance deposit of $75 and apply this payment to the customer’s first and subsequent local exchange bills. Recipients of public assistance are exempt from this requirement. The advance payment or deposit can be required when the customer has a prior unpaid balance to any telephone provider; telephone companies cannot take into account a New York customer’s non-telephone credit history. California has established that telephone providers can require a deposit not to exceed two months of requested service if the customer’s prior utility service credit history is unacceptable. D-28 12 ii. Disconnection Of Basic Local Service The Board has recently taken steps to prohibit telephone companies from disconnecting local phone service for failure to pay long-distance bills. The Ratepayer Advocate supports these proposals, recognizing the critical need for New Jersey citizens to be able to access local and emergency services by telephone. The Ratepayer Advocate notes that the Federal Communications Commission (“FCC”) has prohibited disconnection of lifeline service for failure to pay toll charges. “lifeline” is basic telephone service for residential customers that is offered at reduced rates. The bill adjustments are effected by a reduction of federal telephone-related charges that appear on all subscribers’ bills, and vary according to a state’s offering of similar reductions. The Ratepayer Advocate recommends that payments received by telephone carriers be assigned first to pay charges associated with local service. Remaining monies should then be used to pay bills for long-distance and other services, such as Call Waiting or other optional features. Local phone service providers should be permitted to disconnect customers only for non-payment of charges associated with that service. Long distance carriers and providers of non-basic telephone services should be permitted to discontinue service only upon reasonable notice to the customer. As of December 1999 Arizona, California, Ohio, Pennsylvania, Washington, and Wisconsin have adopted similar approaches. e. Slamming And Cramming Slamming refers to the practice of changing a long distance customer’s carrier without consent. Cramming refers to the practice of adding or changing services provided to a customer without permission, or the inclusion of charges on the consumer’s bill for services D-29 that were never provided. Federal and state governments have grappled with these issues with regard to long distance telephone service. Indeed, slamming is the FCC’s largest area of telephone-related complaints, resulting in some 20,000 complaints in 1998. New FCC rules, adopted on December 17, 1998, create stringent new protections for consumers who have been slammed. These rules relieve consumers who have had their telephone service providers changed without consent from paying charges imposed by the unauthorized carrier for up to 30 days after being slammed. Additionally, the FCC strengthened the verification procedures used to confirm telephone carrier switches, and broadened the scope of its anti-slamming rules to further protect consumers. The FCC also established new procedures to make it easier for consumers to file complaints about slamming and other telephone-related fraud, as well as to hasten resolution of consumer complaints. Under the new rules, any carrier that a consumer calls to report being slammed must inform the consumer that he or she is not required to pay any charges incurred during the first 30 days after the unauthorized switch. The FCC also established three methods to verify changes in a consumer’s choice of carrier: a consumer signature on an authorization form; an electronic authorization, usually resulting from a customer-initiated call to a toll-free number; and verification by an independent third party. These rules apply to selection of both local and long distance carriers. The local phone company that executes the switch is required to confirm the change with the customer. The FCC also requires that, when a carrier solicits a consumer to impose a “preferred carrier freeze” (that is, when the local phone company is notified that a customer is prohibiting any change in toll call or long distance carriers), the carrier must explain how such a freeze may be lifted. D-30 Finally, the FCC noted that its verification methods do not preempt state law; states must at a minimum use the federal verification methods, but may add additional verification procedures for intrastate carrier changes. The Ratepayer Advocate supports the rules established by the FCC. In addition, the Ratepayer Advocate supports rules that provide customers the right to rescind any contract for local exchange service within three business days after receipt of the written Terms of Service Brochure or other contract; failure to receive the written contract should extend the right of rescission. On August 24, 1998, Governor Whitman signed anti-slamming legislation into law. Codified at N.J.S.A. 56:8:-86, the statute prohibits service providers from making any change in service without complying with federal or state procedures. Violators can be fined up to $7,500 for a first offense, and up to $15,000 for a subsequent offense. Pursuant to the statute, the Board has undertaken a rule-making proceeding to adopt anti-slamming regulations that will be added to the State’s Administrative Code. The Division of the Ratepayer Advocate filed comments in this proceeding on July 21, 1999, in support of the Board’s proposed rules. As of December 1999, the proposed rules, which largely mirror federal regulations, were still under Board review. In the interim, the New Jersey Division of Consumer Affairs has posted consumer advice on its Internet web-site13 (this site can be accessed through the State of New Jersey government home-page). The Consumer Affairs page offers information on how to avoid being slammed and steps consumers can take when they discover that they have been slammed. The website address of the New Jersey Division of Consumer Affairs is: http://www.state.nj.us/lps/ca/home.htm. D-31 13 f. Disclosure Requirements When customers change services they should be entitled to a clear description of the services to which they have subscribed. The development of a competitive local exchange market relies on informed consumers. Consumers need easily comparable information on price and other key contractual terms and services to make informed choices. In the absence of uniform disclosure standards, consumers will be less likely to obtain the information that can help stimulate a vibrant open marketplace. In order to inform customers of the contractual terms by which they are bound, providers should be required to issue “plain language” Terms of Service Brochures within 1015 days of initiating service. This brochure should include “plain language” information about rates and charges, cancellation, and renewal and/or notice of termination provisions. This brochure should also include customer inquiry/contact information to the Board of Public Utilities’ Division of Customer Relations and information on lifeline eligibility for low income customers. i. Monthly Bill A Terms of Service Brochure should describe the following: # Price. The price of telephone service should be disclosed in a simple and uniform manner to make comparison shopping possible and promote market efficiency. The customer’s selected plan should be highlighted. Providers of local exchange service should disclose monthly charges for this service and list services other than basic dial tone that are included. A telephone service provider should also be required to disclose both the most economical or lowest rate available as well as the qualifications, terms, and rates for lifeline service or other telephone service available for qualified low-income customers. Contact and Complaint Information. Providers should inform customers how to contact the carrier and how to file a complaint. A toll-free telephone number should be provided. # D-32 # Collection Procedures. The bill should inform consumers of what will happen if the customer does not pay the bill in full and whether alternative payment arrangements are available. Dispute Resolution. The consumer should also be advised that the carrier is regulated by the Board of Public Utilities, whose Division of Customer Relations staff is available for assistance with resolution of consumer complaints, and the bill should provide the appropriate phone numbers at the Board of Public Utilities. # These measures will ensure that New Jersey consumers can make informed, intelligent choices in the new competitive telecommunications marketplace. ii. Proposed Board Rules On Termination Of Residential Service In July 1999, the Board proposed new rules concerning the termination of residential telephone services. Under the proposed rules, a customer will be able to maintain local service as long as that portion of the bill, including the federally mandated subscriber line charge and applicable taxes, is paid. These rules were proposed because of the compelling public interest in consumers being able to reach emergency services. Additionally, the ability of family members to communicate with each other outweighs any possible financial impact on long distance carriers that may result from the rules. Although long distance carriers may argue that they will sustain increased collection costs and an increase in uncollectible bills, they can protect themselves with the use of toll-blocking and other systems to ensure that the amount of uncollectible debt will not pose an unmanageable burden. As of December 1999, these rules have not been adopted. The Board has deemed these rules consistent with FCC standards on disconnection of local phone service. In fact, New Jersey’s rules would be more protective than the FCC rules because they would apply to all classes of residential telephone customers as opposed to the limited applicability of the FCC rules to lifeline customers only. The FCC, however, D-33 recently amended its own rules and eliminated the “no disconnect” provision to lifeline customers following a court decision that the Commission does not have jurisdiction to impose such a rule.14 If adopted by the Board, these proposed rules will provide New Jersey telephone customers the legal protection needed to maintain basic local telephone service as long as that portion of the charges are paid. The Ratepayer Advocate has consistently sought to secure the rights of New Jersey telephone customers to essential telecommunications services at affordable rates. We urge the Board to formally adopt the proposed rules in the very near future. The Position Of The Ratepayer Advocate On Consumer Protection. The Ratepayer Advocate supports comprehensive consumer protection in a deregulated telecommunications marketplace to guard against deceptive business practices in the new competitive environment and to ensure the availability of basic phone service to all New Jersey residents. Customer expectations of privacy in their personal information must be protected. Credit and collection policies must be fair and applied in an even-handed manner. Consumer frauds such as slamming and cramming must be dealt with swiftly and decisively so that unscrupulous competitors will not be tempted to enrich themselves at the expense of an unwary public. See In the Matters of Federal-State Board on Universal Service, Access Charge Reform: Sixteenth Order on Reconsideration in CC Docket No. 96-45, Eighth Report and Order in CC Docket [No.] 96-45, Sixth Report and Order in CC Docket [No.] 96-262, CC Dockets No. 9645, 96-262, ¶ 34 (rel. Oct.8, 1999), citing Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393, 421-424 (5th Cir. 1999). D-34 14 As even more of the telephone network is pieced up among an ever increasing number of carriers the Ratepayer Advocate has insisted on high and air-tight standards of service quality and network integrity, to ensure that reliable service of this lifeline facility is ensured. Service providers and consumers must have clear guidelines within which a transition to a competitive telecommunications marketplace can occur. The opportunity for New Jersey consumers to make intelligent choices from many clearly identified and verifiable service options should lead to increased savings and enhanced service options in the telecommunications marketplace. The most important initiative in achieving that vision, however, is education of the public of their rights, choices and alternatives, which the Ratepayer Advocate considers one of its highest priorities. D-35 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON SOCIETAL CONCERNS OF THE TELECOMMUNICATIONS ACT OF 1996 JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa E E. SOCIETAL CONCERNS OF THE TELECOMMUNICATIONS ACT OF 1996 “It is also time for us to reaffirm our commitment to ensuring that all Americans benefit from the communications marketplace. The new digital economy is being principally defined by its power to unlock markets, to transform retailing, and to create unimaginable wealth for a privileged few in our society. But I believe this New Economy must also be defined by its power to unlock the potential of all our people–by its power to educate our poorest children, to lift up people in rural and inner-city communities and Native American communities, to empower people with disabilities, and to repair and revitalize the social fabric of our communities.” –William E. Kennard, Chairman Federal Communications Commission October 18, 1999 I. Universal Service, Low Income Consumers, And High Cost Areas Prior to the passage of the Federal Telecommunications Act of 1996 (“Federal Act”),1 universal service meant providing as many Americans as possible with access to telephone service at affordable prices. Under the Federal Act, however, the definition of universal service has been expanded to provide defined benefits to three key classes of subscribers: (a) low-income consumers; (b) subscribers in rural or other geographic areas which are costly to serve; and (c) schools, libraries, and rural health care facilities.2 In addition, the system of cost reallocations and formulas used to collect and distribute universal Telecommunications Act of 1996, Pub. L. 104-104, codified at 47 U.S.C. § 153, et seq. (1996). 2 1 See Support for Schools and Libraries discussed later in this Section. E-1 service funding has been revised. The primary issue remaining to meet these goals concerns the fundamental question of who pays? Among the sweeping provisions of the Federal Act to advance universal service were changes in the previous mechanisms used to fund these efforts. Before passage of the Federal Act, charges to long distance carriers and rates for certain intrastate services were priced above cost, thereby enabling local exchange carriers to keep rates for basic local telephone service at affordable levels. But, the Federal Act required that these universal service support mechanisms be restructured. Thus, both federal and state policy makers are now faced with extraordinary challenges. The Ratepayer Advocate has been involved in proceedings at both state and federal levels to ensure that all New Jersey ratepayers will be able to reap the benefits of competition. These benefits include deployment of the latest technology, lower prices, and ensuring that universal access is affordable for all classes of customers, as required by the Federal Act. a. The Federal Act And Universal Service Goals For New Jersey In its rulemakings implementing the Federal Act, the Federal Communications Commission (“FCC”) set forth its plan for establishing a system of universal service support that would be generated through charges that are competitively neutral. That is, they are to be paid equally by all providers of telecommunications services based upon revenues. Revised universal service goals as codified in the Federal Act and implemented by the FCC seek to ensure that the long-standing commitment to maintaining affordable rates throughout the country, first adopted as national policy in the era of monopoly market structure, is maintained in a competitive environment. A great deal of work remains to be completed by both the FCC and the Board in order to ensure the provision of universal service support by both federal and state mechanisms. E-2 The Ratepayer Advocate has recommended that the Board take three incremental steps to implement universal service policies in New Jersey: (1) New Jersey should develop its own program for universal service, based on the specific goals and needs of our state; (2) New Jersey should evaluate the extent to which the federal program, as ultimately funded and operated, can contribute to the advancement of state goals; and then, (3) New Jersey should adjust the funding and other requirements of its state-specific fund or funds, based on the actual level of federal support available to New Jersey. The Ratepayer Advocate remains committed to the proposition that rates in New Jersey must be affordable for all subscribers, while recognizing that the Federal Act requires universal service reforms to accommodate and encourage competition. Overall, proper implementation of the universal service provisions of the Federal Act is critical to the provision of telecommunications services to all New Jersey subscribers at affordable rates. Additionally, the Ratepayer Advocate opines that affordable rates can best be maintained through state support mechanisms that complement existing federal support mechanisms to provide as much support as is necessary. i. Low Income Programs The need to ensure the availability of telephone service for low-income consumers was acknowledged specifically by the FCC prior to the passage of the Federal Act. The FCC established two programs as support options available to states for reducing the monthly costs of basic service for low-income subscribers. In 1985, the Lifeline Assistance Program (“Lifeline”) was established. Lifeline reduces a customer’s monthly charges in amounts ranging from $3.50 to $7.00, conditioned, however, on the provision of state matching funds. Lifeline Connection (Link Up), the second FCC assistance program, provides low income E-3 consumers with discounts of up to $30.00 on connection charges for telephone service, as well as interest on installment payments for up to one year. The matching state funds requirement had prevented low-income consumers in New Jersey from participation in the federal Lifeline program, since matching funds were not provided. Nevertheless, after the FCC reevaluated all of its existing Universal Service programs following enactment of the Federal Act, it modified the Lifeline and Link-Up programs. The expanded Lifeline program now provides a baseline amount of $5.25 in federal support for low-income residents, without any state-matching requirement. Additional federal support equal to one-half of any state funding is also available, up to a maximum of $7.00 in federal support. The maximum support available for low income consumers with matching funds, has been increased from $7.00 to $10.50. Maximum Lifeline Support Available For Low-Income Subscribers Federal support available in all states: Additional federal support w/o need for state matching funds: * Additional federal support available w/ state support: * State support to match federal support: Total support to lower monthly bills: $3.50 $1.75 $1.75 $3.50 $10.50 per month * The provision of these amounts is subject to the establishment of state Universal Service measures. These recent modifications to the Lifeline program have allowed New Jersey consumers to begin receiving some benefits previously unavailable under the program. Since implementation of the Federal Act’s requirements, all eligible telecommunications carriers are now required to offer Lifeline service to qualifying low income customers. All three of the local exchange carriers operating in New Jersey have received approval from the Board to offer Lifeline service. E-4 However, as there is currently no provision for matching funds in New Jersey, low income consumers can only receive the minimum benefit of $5.25 from the federal program. In 1997, in a litigated proceeding before the Commissioners, the Board examined all aspects of universal service as part of its generic proceeding on local exchange competition. This investigation contemplated the establishment of a state universal service fund to provide the matching funds needed for low-income consumers to receive the maximum $10.50 benefit from the Federal Lifeline program. In 1997, Bell Atlantic-New Jersey (“BA-NJ”) was required to provide an interim Lifeline program under a Stipulation between the company, the Board and the Ratepayer Advocate. The Stipulation was approved by the Board in its Order accelerating BA-NJ’s infrastructure deployment requirements under its Opportunity New Jersey (“ONJ”) program. In the Stipulation, BA-NJ was required to provide a $7.00 benefit to all eligible Lifeline customers. The Board permitted BA-NJ to limit the Lifeline benefit to only those customers who subscribed to its Low Use Measured Service, which limited a customer’s outgoing calls to a monthly usage allotment of 20 message units (approximately 100 minutes). This policy precluded BA-NJ’s customers who subscribed to its Moderate Use Measured Service (75 message units), as well as the majority of BA-NJ’s customers who received Flat Rate Unlimited Service from receiving the Lifeline benefit. The Ratepayer Advocate urged the Board to require BA-NJ to remove the restrictions which ultimately were shown to limit the success of the program, having had adverse affects on Lifeline consumers, who could be charged additional fees for exceeding their monthly message unit limit. In June 1999, during the Board’s review of BA-NJ’s performance as required under the 1997 Stipulation, information provided by BA-NJ showed the Lifeline enrollment figures to E-5 be a dismally small percentage of the projected population eligible for Lifeline services in New Jersey, with only 7,000 out of a potential pool of 400,000. The Ratepayer Advocate again renewed our requests to the Board to lift the restrictions of measured service for BA-NJ’s Lifeline program. In December 1999, the Board acknowledged the need for changes to BANJ’s Lifeline program that addressed the low take rate, and ordered BA-NJ to extend its Lifeline program to both its Moderate Use and Flat Rate services. In addition, BA-NJ was required to implement expanded outreach efforts designed to inform and educate eligible consumers on the benefits of the Lifeline program. The Position Of The Ratepayer Advocate On Universal Service For Low Income Customers. The Ratepayer Advocate has always supported measures to be taken to ensure that regulators and carriers continue to advance Universal Service goals. Accordingly, in 1997, the Ratepayer Advocate proposed that the Board establish a Statewide Universal Service Fund to ensure that all low-income subscribers receive the full benefits available under the federal assistance programs.3 With respect to assistance for lowincome households, the Ratepayer Advocate recommends the following: BENEFITS: The Lifeline discount should be set to ensure full receipt of federal funds available to the state. The state funding level should be set at the amount required to take maximum advantage of federal support. A Statewide Universal Service Fund can provide the state matching funding needed to receive the maximum amount of $10.50 reduction in end charges for low-income subscribers. Full participation in the Link-Up program, which helps to defray installation costs, should also be required. In 1997, the Ratepayer Advocate estimated that the New Jersey Universal Service Fund for low income subscribers would require annual funding totaling $11,467,000. E-6 3 ELIGIBILITY: Eligibility criteria should include enrollment in any of the public assistance programs (Medicaid; Home Energy Assistance program (“HEAP”); Food Stamps; Aid to Families with Dependent Children (“AFDC”); Supplemental Security Income - Medicaid (“SSI”), Blind, Disabled and Aged; public housing assistance or Section 8 support; Lifeline Utility Credit/Tenants Lifeline Association; Pharmaceutical Assistance to the Aged or Disabled (“PAAD”); General Assistance, or income below 150 percent of poverty. These criteria should ensure that the population most likely not to have telephone service will be eligible for lifeline assistance. ADMINISTRATION:Automatic enrollment in Lifeline programs should be provided for all who participate in any of the major assistance programs cited above. Self-certification with periodic, partial verification to check on enrollment should be relied on to achieve the highest penetration level and to keep administrative costs down. OUTREACH: Vigorous outreach efforts are required to inform the population these programs are intended to serve. The Ratepayer Advocate has recommended that specific measures be taken to address the need for adequate education for consumers on the availability of these programs. The Ratepayer Advocate is committed to working with the Board and the industry to ensure that consumers are educated about available low-income assistance programs so that low-income residential ratepayers receive the benefits of all state and federal programs for which they are eligible. Special rates or subsidies for low-income ratepayers will not only help to ensure universal service for all residents, but will also increase the carrier’s revenue stream, reduce uncollectibles, reduce disconnections, and retain customers. If we do not ensure that low income residents have affordable telephone service, today’s low income residents will continue to be excluded from the benefits of advanced telecommunications and the economic and social benefits that they provide. Telecommunications is, after all, a lifeline service. E-7 ii. Support For High Cost Areas Some communities, mostly rural towns and cities, are more costly to serve because of their remote locations, difficult terrain, or low population density. These are called high-cost areas. The high costs are absorbed through a system of cost reallocation that distributes a portion of the high costs among all telephone subscribers across the nation. The allocation of high costs among all users of telecommunications services ensures that telephone service remains affordable for all subscribers in high-cost areas, and increases the value of telephone service for all subscribers by increasing the number of persons connected to the country’s telephone network. Without these measures, the price of telephone service in such areas would be prohibitive and beyond the means of many residents. States can play a major role in distributing these subsidies and enforcing the obligations on telecommunications carriers to serve these high-cost areas. Without sources of revenue to cover the shortfall, carriers will not serve these areas. Pursuant to the recommendation of the FCC Joint Board studying universal service, funding for high cost support will be raised by increased charges on: (1) second lines into residences; (2) business phone lines; and (3) long distance providers for the completion of long distance calls. States must determine the methodology they will use to determine the level of support to be provided for high cost areas. In 1997, the Board held hearings on recommended cost methodologies for determining high cost support in its universal service portion of the generic proceeding on local exchange competition. As of December 1999, the Board’s decision on the cost methodology for high cost areas is still pending. E-8 The Position Of The Ratepayer Advocate On Support For Telecommunications Services To High Cost Areas. The Ratepayer Advocate supports the Federal Act’s affirmation of the importance of universal service by creating and funding adequate funding mechanisms. Universal service policy must ensure that all of New Jersey’s consumers, including low-income and those residing in high cost areas, are not excluded from the benefits of a competitive telecommunications marketplace. Accordingly, the Ratepayer Advocate urges the Board to take the following course of action to advance universal service policy in New Jersey: C Establish a high cost fund that is consistent with an appropriate treatment of the costs of the local loop for purposes of determining the cost of universal service. The Ratepayer Advocate supports assistance for carriers serving high cost areas to ensure the availability of a choice of carriers throughout the state for all ratepayers. Effective competition requires an appropriate level of telecommunications services available in all areas of the state for all customers, including high-cost areas. For the state to put into practice its policy of encouraging competition, additional measures must be taken to provide telecommunications services to high-cost areas. The benefits of competition cannot be realized in high cost areas without regulatory policies that provide competitors with appropriate incentives to serve these areas. The Board should establish a High Cost Fund to provide funding to any eligible carrier serving a high cost area on a per-customer basis, in order to ensure that competitive services are available in all areas of the state. Competition without a High Cost Fund may offer the benefits of competition only in low cost urban areas, while leaving rural customers with few, if any, competitive alternatives or benefits. Thus, the problems of high cost areas will be compounded: little competition, higher rates, fewer E-9 choices and less service. The Board must establish a mechanism for determining the level of universal service fund support, which provides for the appropriate treatment and recovery of network costs and expenses. The Ratepayer Advocate has estimated that the universal service fund to provide support for high cost areas New Jersey would require annual funding of $16,494,000. This approach will ensure that all services making use of the local loop share equitably in recovering its costs, and will provide targeted assistance to high cost exchange areas of the state, without creating an unduly large fund or unnecessarily enlarging the burden on carriers paying into the fund. E-10 iii. Support For Schools And Libraries “Education, then beyond all other devices of human origin, is the great equalizer of the conditions of men, – the balancewheel of the social machinery.” – Horace Mann, 1848 The Telecommunications Act of 1996 (“Federal Act”)4 established as a national priority the provision of affordable telecommunications technology for schools and libraries. The Federal Act requires telecommunications providers to offer discounted services to eligible schools and libraries, subject to the availability of federal funds. These services include access to state-of-the-art highspeed transmission, internal wiring of all school facilities, and discounts for traditional telephone services. All telecommunications carriers are required, upon request, to provide services to eligible schools and libraries at discounted rates. The Federal Act also explicitly authorizes states to establish their own “universal service” policies, so long as these policies are not inconsistent with federal directives. The FCC permits carriers the flexibility to decide whether, how and how much of their costs they chose to recover from consumers for universal support5. The FCC recommends labeling any consumer charge as “Federal Universal Service.” Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 153, et seq. (1996). 5 4 See Truth-in billing First Report Order and FNPRM, FCC 99-72, (Released May 11, 1999). E-11 (a) Provisions Of The Telecommunications Act Of 1996 Mandate That Telecommunications Carriers Provide Discounts To Schools And Libraries In the Federal Act, Congress directed the FCC and the states to take the steps necessary to establish universal support mechanisms to ensure the delivery of affordable telecommunications services to all Americans. In addition, the Federal Act included, for the first time, schools and libraries among the eligible beneficiaries of federal universal support mechanisms. Among the Federal Act’s universal service requirements was the mandate that telecommunications carriers provide advanced services to schools and libraries at a discount, affording the promise of distance learning opportunities and Internet access for all schools and libraries throughout the nation. Congress also recognized that state action was appropriate, and even necessary, to fulfill the national promise of ubiquitous access to the Information Superhighway. The Federal Act left it up to the FCC to determine eligibility standards for schools and libraries, the precise amount of money needed to fulfill the goals of the Federal Act, and the administrative structure of the program. The FCC released its Universal Service Rules on May 8, 1997.6 These rules directed that discounts would be available to eligible schools and libraries for the purchase of all commercially available telecommunications services, Internet access, and internal connections. Both the installation and maintenance of internal connections were eligible for discounts. All telecommunications carriers that provide interstate telecommunications services were required to contribute to the fund. Each carrier’s assessment for the See In the Matter of Federal-State Joint Board on Universal Service, CC Docket No. 9645, Report and Order (Adopted May 8, 1998). E-12 6 schools and libraries discount program was based on its proportionate share of interstate and intrastate end-user telecommunications revenues. The FCC also determined that funds for eligible schools and libraries would be distributed on a first-come, first-served basis beginning January 1, 1998. These funds are commonly referred to as e-rate funds. The discounts ranged from 20% to 90%, with higher discounts provided to the most disadvantaged schools and libraries. The level of economic disadvantage were measured by the respective school’s eligibility for the federal school lunch program. The fund was capped at $2.25 billion per year; funding for the second year was also set at $2.25 billion.7 The FCC originally established that for the first year $2 billion would be awarded on a “first-come, first-served” basis, and a set of “priority rules” would govern the disbursement of the last $250 million, with the poorest schools receiving priority. Eligible schools included all elementary and secondary schools (public, private and parochial), as defined by the Elementary and Secondary Education Act of 1965, so long as they had endowments of less than $50 million. Eligible libraries included public or nonprofit libraries that met the definition of the Library Services and Technology Act, which operated with a budget separate from any institution of learning (school libraries were funded as part of the schools). Subsequently, the FCC clarified its ruling, declaring that, rather than a cap of $2.25 billion per year, a total of $625 million would be available for e-rate funding for the first six months. The FCC also redefined the term “first-come, first-served,” deciding that all applications received within a 75-day “window” would be deemed to have the same place “in line.” “Commission Establishes Year 2 Funding Levels for the Schools, Libraries, and Rural Health Care Federal Universal Service Support Mechanism,” Federal Communications Commission, FCC 99-121 (May 27, 1999). E-13 7 (b) E-Rate Issues That Affect New Jersey Schools And Libraries 1. Limited Federal E-Rate Funds Will Leave Some New Jersey Schools Without Advanced Technology Resources New Jersey schools jumped at the chance of providing affordable Internet access to their students. Nearly 1,700 applications for federal e-rate discounts were received from New Jersey’s schools, school districts, and libraries alone.8 New Jersey ranked seventh in the number of applications submitted during that first 75-day period, and the New Jersey Department of Education deserves much credit for those truly remarkable numbers.9 New Jersey’s schools and libraries applied for more than $74 million in e-rate discounts: which would provide direct benefits to 63% of our public school districts, 50% of our private schools, and 33% of our libraries throughout the state. As of October 1, 1999, $23,214,412 in federal e-rate assistance had been committed to New Jersey’s eligible schools and libraries. This represents 2.3% of total national benefits provided by the federal program.10 New Jersey schools and libraries are taking advantage of the opportunities afforded by the Federal fund. Following are the figures that reflect how many schools and libraries in New Jersey have applied for discounts from the Universal Service Fund during the 75-day window of opportunity, which closed on April 15, 1998: 464 from single schools (public and non-public) 955 from school districts (public) 220 from library consortium 27 from multiple entities 1,666 applications from New Jersey’s schools and libraries Applications represent 1,556,807 students and 8,673,144 library patrons. See “Facts on the Universal Service Fund,” New Jersey Department of Education Website, http://www.state.nj.us/education/techno/teleact/erateqa.html (1999). 10 9 8 N.J. Department of Education. See, DOE website at http://www.state.nj.us/education. E-14 But some New Jersey schools and libraries that applied for federal assistance were not allocated the benefits of the discounts because there was simply not enough money to go around. During the initial funding period, 17.5% of New Jersey requests went unfunded -- a total of $13 million.11 Therefore, New Jersey cannot afford to rely solely on the federal erate discount program to meet the needs of state schools and libraries for affordable telecommunications services. First, the actual experience of the initial application period demonstrated amply that the federal e-rate fund will be depleted prior to receipt of discounts by all schools and libraries that applied in a timely fashion. In addition, recent action by the FCC, as well as attacks on the e-rate by telecommunications carriers and in Congress, call into question the future of this federal universal service program. Congress has recently introduced legislation that would reduce the current 3% federal excise tax by two-thirds for five years, during which time proceeds from the tax would be designated for schools and libraries.12 The bill would also strip the FCC of its involvement in e-rate administration, and vest responsibility for the program with the National Telecommunications and Information Administration (NTIA), a branch of the Commerce Department. The e-rate has come under criticism in Congress, by members who questioned the authority of the FCC to impose these charges on consumer bills. Unfortunately, withdrawal of support on See “Facts on the Universal Service Fund,” New Jersey Department of Education Website, http://www.state.nj.us/ndjed/techno/teleact/erateqa.html (1999). 12 11 "Schools and Libraries Internet Access Act,” H.R. 1746 (1999). E-15 the federal level may coincide with the increasing readiness of schools and libraries to bring technology to students and patrons. 2. Computer Technology Remains Unaffordable For Most New Jersey Public Schools Many New Jersey schools have invested heavily in computer technology and are already providing their students with essential training. But, because some cannot afford access to telecommunications services, the benefits of that computer equipment can not be fully realized. Schools simply do not have funds to pay commercial telecommunications rates to access the Internet. A 1999 New Jersey Public School Technology survey by the New Jersey Department of Education indicated that approximately 31.21% of New Jersey public school students do not have access to the Internet.13 Affordability of access to telecommunications services offering the potential to leverage the benefits of other educational resources, is the missing link. 3. New Jersey Schools That Obtain A Federal E-Rate Discount May Still Find The Cost Of Implementing Technology Plans Prohibitive According to the New Jersey Department of Education, 906 of the state’s 2,303 schools -- nearly 40% -- are more than 50 years old, with 86 schools older than 90 years. Based on 1992 data provided by the Public Affairs Research Institute of New Jersey, more than half of the school buildings in six counties in the northern third of the state are over 50 years old. In the special needs districts, as identified in Abbott v. Burke, 14 64 percent of the buildings See “1999 New Jersey Public School Technology Survey,” New Jersey Department of Education, http://www.state.nj.us/njded/techno/survey/results/internet1.htm. The survey reports that an average of 28.2% of students in schools that have an Internet connection do not have access to the Internet. Additionally, 5.2% of New Jersey public school students are in schools that do not have Internet access. Abbott v. Burke, 119 N. J. 287 (1990) at 310; Abbott v. Burke, No. 622-96 slip op. (N. J., May 14, 1997) E-16 14 13 are over 50 years old. In hearings before the Board in 1997 for example, Neil DiLorenzo, Assistant Principal of Wildwood High School observed: “My school community is committed to moving forward into the 21st century, but my school building -- constructed in 1917 -- stands in the way. The school is three stories high, and our construction costs for wiring and [Internet] access to classrooms is a major impediment to our progress.” These older schools are faced with costs of contractors to drill through old masonry walls, a much more expensive process than the costs of installation of wiring in newer schools. This increased cost is evident in an example provided by the New Jersey Department of Education, which estimated that the wiring costs for classrooms in a 50-year-old school building would be $125,000 per school because most schools built after 1950 have drop ceilings, and some even have raceways or conduits for easy installation of wiring. For large urban areas of the state, where one school district may contain 10 or more buildings over 50 years in age, the wiring costs could be prohibitive to meet the goal of providing at least one computer for every five students. If enormous expenses for internal wiring are required, urban districts may still find post-federal discount costs prohibitively expensive. In such cases, a state universal service fund could be tapped to insure that there is an equivalent opportunity for older, urban schools to obtain internal wiring. The Ratepayer Advocate recommended in testimony before the Board, summarized below, that the Board and the Ratepayer Advocate should jointly develop E-17 guidelines for use of the state fund in circumstances where extraordinary infrastructure expenses called for its use. The Position of the Ratepayer Advocate On The Need For A New Jersey Universal Service Fund. In 1998, the Ratepayer Advocate proposed, for the Board’s consideration, a state universal service fund of $40 million to establish a sufficient safety net to provide funding for those schools that do not receive funding from the federal universal service fund, as well as for costly inside wiring costs for schools plagued with ancient infrastructure.15 The total recommended funding requirement of $40 million for schools and libraries was based upon the costs for discounted services available for federal universal funding, as quantified within the Ratepayer Advocate’s report, Before 2000: Funding Technology in New Jersey’s Schools and Public Libraries By the End of the Century (Sept. 1997)16. This report provided the State Senate Special Committee on Telecommunications with a technology cost model, which quantified the costs associated with providing computers in public schools and public libraries, as well as the costs of providing Internet access for all public and nonpublic schools and public libraries in New Jersey. The calculation included both recurring and non-recurring costs related to the development of elements such as in-school networks, district networks, Internet connections, See I/M/O the Investigation Regarding Local Competition for Telecommunications Services: Direct Testimony of Stuart Schnur (Filed on Behalf of the Division of the Ratepayer Advocate) BPU Docket No. TX95120631 (August 19, 1997). Available on the Ratepayer Advocate’s website at www.njin.net/rpa, or by request in writing to: The New Jersey Division of the Ratepayer Advocate, 31 Clinton Street, 11th Floor, P.O. Box 46005, Newark, NJ 07101. If requesting a copy in writing, please include a check in the amount of $10.00, made payable to the NJ Division of the Ratepayer Advocate to cover the cost of production and postage. E-18 16 15 and basic exchange service. Based on an analysis of the FCC discount matrix upon which the discounted federal benefit was calculated, it was estimated that New Jersey schools would be eligible, on average, for a 50% discount, or half of the total $80 million that the Ratepayer Advocate estimates would be needed to provide access to educational technology for all students. Although the federal program has proven beneficial for the state’s schools and libraries, it is urged that the Legislature and Board should implement a state universal service fund to provide funding where federal allocations fail to meet the needs of state public schools and libraries. Any remaining portion of the fund that was not distributed in the first calendar year would be carried over for use in the following year, with a corresponding decrease in the assessments of the telecommunications providers for contribution to the fund. Only a state universal service fund can guarantee that educational technology will be available to schools and libraries throughout the state on an affordable -- and equitable -- basis. This conclusion was particularly evident in the Spring of 1998, when the federal e-rate discount program began the job of determining how to allocate $625 million among schools and libraries all over the nation that had requested over two billion dollars in telecommunications discounts. The Ratepayer Advocate supports the establishment of priorities so that the State of New Jersey will realize the objective of a 21st century classroom without walls, where students’ only limitations will be their curiosity and ability to create. The Ratepayer Advocate urges the Board to render a favorable decision on the Ratepayer Advocate’s proposal for a state universal service fund. Alternatively, the Ratepayer Advocate urges the New Jersey Legislature to enact legislation creating such E-19 a fund, which will ensure the provision of modern telecommunications services to the state’s schools, libraries, and rural health centers at affordable rates. Such action would advance the public interest by providing New Jersey residents access to the benefits of evolving technologies and telecommunications services. Universal Service has long been a goal of federal and state law-makers. The 1934 Communications Act, which created the FCC, stated that the agency should “make available, so far as possible, to all the people of the United States a rapid, efficient, nationwide, and worldwide wire and radio communication service with adequate facilities at reasonable charges.” The 1996 Federal Act focused these intentions by establishing standards for the provision of affordable service to low-income subscribers, schools and libraries, and rural health care providers. Notably, the Federal Act also provides for an expanded definition of telecommunications services that are eligible for inclusion under Universal Service principles to ensure that all Americans have access to the evolving technology of the competitive telecommunications marketplace. Although the Ratepayer Advocate supports the federal program, the limits and uncertainties associated with the federal education rate or e-rate discount program means that educational technology may still remain prohibitively expensive for many New Jersey schools and libraries. The establishment of a state-based e-rate fund for New Jersey could ensure that all of our state’s schools and libraries would receive adequate discounts for access to the information superhighway. A state-based universal service fund will offer schools and libraries unprecedented opportunities to improve the quality of education in New Jersey by ensuring that each New Jersey K-12 school obtains the level of telecommunications discounts established by E-20 the FCC. The fund should also provide additional financial assistance to schools where the cost of wiring classrooms is prohibitive because of the age of the physical plant. In the 1997 universal service proceeding before the Board, the Ratepayer Advocate proposed a state universal service fund for schools and libraries of $40 million, allocating $38 million for schools and $2 million for libraries. The fund is to provide a sufficient safety net for those schools that do not receive funding from the federal universal service fund, as well as monies for the high costs of inside wiring for schools with ancient infrastructures. The Federal Act clearly directs the states to participate in development and implementation of Universal Service programs. The Ratepayer Advocate encourages the New Jersey Legislature and the Board to ensure that all New Jersey consumers, regardless of their locale or income, have affordable access to developing communications services and technologies in their children’s schools and in public libraries. E-21 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON CABLE TELEVISION JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa F F. CABLE TELEVISION “Edward R. Murrow once said about television that, ‘This instrument can teach, it can illuminate and, yes, it can inspire. But it can do so only to the extent that humans are determined to use it to those ends. Otherwise it is nothing but wires and lights in a box’...” “Around this time last year, less than 100,000 homes had cable Internet hook-ups. Now, close to threequarters of a million do...” –William E. Kennard, Chairman Federal Communications Commission Steadily increasing cable rates and the lack of competition in the provision of cable television services are a source of frustration to consumers and legislators alike, on both local and national levels. The federal government has taken steps to deregulate cable rates and services which limit the role of local franchise authorities, that is, municipalities and the New Jersey Board of Public Utilities (“Board”), in regulating cable rates and services. When it deregulated the cable industry, Congress anticipated that the marketplace would encourage competition and would require cable operators to be more innovative and pro-consumer in order to maintain their market share. In particular, Congress anticipated that consumers would benefit from lower rates and new and innovative services. However, the Ratepayer Advocate, while supporting competition and the benefits it provides to consumers, is concerned that actual competition must exist before government abandons its traditional regulatory and consumer protection roles. In the case of the cable television industry, it is clear that consumers have not as yet benefitted from deregulation of cable rates and services as anticipated. This paper addresses the most significant reasons competition has not developed in the cable television market, and what the Ratepayer Advocate has done -- and still must do -- to encourage meaningful competition. While many of the legal and policy decisions that can F-1 encourage competition must come from Congress and the Federal Communications Commission (“FCC”), there are still significant roles for the Board, New Jersey legislators and the Ratepayer Advocate to play in encouraging the growth of a competitive cable market while protecting New Jersey’s cable consumers. Prior to the passage of the Cable Television Consumer Protection and Competition Act of 1992 (“1992 Cable Act”), the FCC did not regulate rates for cable television service. Rates for basic cable service were regulated by local franchise authorities and cable service rates increased significantly. In response to rising cable rates, Congress passed the 1992 Cable Act and directed the FCC to establish rules to govern rate regulation of service tiers offered by cable systems that are not subject to effective competition. The FCC set up a dual regulatory scheme: the local franchise authority (which in New Jersey is the Board) regulates the Basic Service Tier (“BST”) while the FCC regulates the Cable Programming Service Tier (“CPST”). The FCC’s authority to regulate the rates charged by cable systems for the cable programming service tier (“CPST”) ended on March 31, 1999. This means that the FCC is no longer empowered to receive or act upon consumer complaints regarding cable television service. However, local franchise authorities continued to have regulatory authority over rates charged for the BST. The BST includes, at minimum, the local broadcast signals distributed by the cable operator and any public, educational, and governmental access channels. A cable operator may, at its discretion, include additional channels within the BST. The BST also includes charges for the equipment necessary to provide cable service. As a practical matter, however, local franchise control over the BST is limited. In accordance with FCC standards and F-2 procedures, operators may request and receive annual rate increases for inflation, system upgrades, programming cost increases, equipment, and other costs. The CPST includes any tier of programming, other than the BST, offered by the cable operator. The CPST will be scrutinized by the FCC only if it receives a complaint from a subscriber or the local franchise authority. The CPST does not include premium channel programming offerings (such as HBO, Cinemax and Showtime) and per-program offerings (such as pay-per-view). Such offerings are not subject to any rate regulation whatsoever. The theory behind this deregulatory approach was to create programming markets unencumbered by rate regulation and programming rules, thereby encouraging operators to enter and expand their markets. It was anticipated that existing regulations would further diminish when a cable operator faced effective competition. “Effective competition,” a term of art, is considered the point at which sufficient competition exists within a given market to sufficiently impose discipline over rates and services as a replacement for government-enforced regulation. Recognizing that competition has not developed as intended under the 1992 Cable Act, Congress took additional deregulatory steps in the Telecommunications Act of 1996 (“Federal Act”) to further encourage competitive cable and non-cable video programming (i.e., satellite-based services) (collectively, multichannel video programming distribution, or “MVPD”). Specifically, the Federal Act includes provisions which: ! ! ! ! prohibit restrictions on the use of certain over-the-air reception devices; permit cable operators to offer discounted bulk rates in multiple dwelling units; provide for competition in multichannel video equipment markets; allow the entry of utility companies into video markets; F-3 ! establish Open Video Systems, a cable-type service that is regulated differently than standard cable systems, in order to encourage Local Exchange Carriers (“LECs”) to enter the video programming market; expand the definition of “effective competition,” to promote the deregulation of all rates and services; and remove rate regulation for expanded basic rates and services (the CPST) as of March 31, 1999. ! ! I. Cable Regulation And Deregulation “Everyone knows about the power of television. Except for the printing press, no innovation has so spectacularly transformed our culture. Only a laboratory plaything when it was born, today television shapes every civilization worldwide. The preeminent mode of transmitting information, television provides a commonality of experience that constitutes the global perspective.” – Mark Draper, President, National Education Task Force, 1995 a. What Effect Has Cable Rate Deregulation Had On Cable Rates And Services? Both nationally and locally, federal cable rate deregulation has largely failed to encourage competition within the market. Competition between two or more franchised systems in the same service territory is practically nonexistent. Alternative service providers and advanced technologies have yet to weaken cable operators’ monopoly control of the market. Cable continues to increase subscribership, the number of homes capable of receiving cable television and the number of consumer subscriptions to premium channels. Although non-cable video programming -- most notably direct broadcast satellite (“DBS”) services -has increased both the size of its customer base and its share of the market, this share is currently so small that cable programming continues to dominate the MVPD market. For example, in 1997, 87% of consumers received their non-broadcast video programming from their cable operators. In 1998, this figure was 85%. F-4 The absence of competition in the video programming market has permitted operators to continually increase cable rates. For example, nationwide, from June 1997 to June 1998, cable operators increased their rates 7.3% for regulated programming and equipment, with additional increases for unregulated programming. This pace far exceeds increases in inflation. Clearly, monopoly control of the cable and MVPD market has permitted cable operators to continue to raise rates without concern for loss of market share that would otherwise be present in a truly competitive market. b. What Can The Ratepayer Advocate Do To Curtail The Continuing Rise Of Cable Rates? Under the current regulatory scheme, the Ratepayer Advocate has been doing all that is legally permitted to do to limit increases in BST cable rates. We participate actively in all proceedings seeking rate increases -- as well as any other proceedings that may affect cable rates and/or services -- conducted before the Board of Public Utilities. The Ratepayer Advocate is also an active party in all cable rate proceedings at the Office of Administrative Law and our efforts have resulted in millions of dollars in refunds, rate decreases, and rate freezes for many of New Jersey’s cable subscribers.1 The Ratepayer Advocate also testified on January 29, 1998 before the New Jersey State Assembly, recommending that the Assembly conduct an investigation into the structure of the entire New Jersey Video Program market, to determine whether current rate regulation is adequate in light of marketplace realities.2 However, since most of New Jersey’s cable consumers continue to pay increased rates annually to retain cable services, the Ratepayer Advocate cannot support the present state of See, In the Matter of Various Filings of New Jersey Cable Systems Owned By Cablevision Systems Corporation and Global Settlement of Said Filings Approving (A) Maximum Permitted Rates For Basic Service and (B) the Costs of Regulated Equipment and Installations, BPU Docket No. CR93110470 et al. (May 24, 1999). A copy of this testimony is located on the Ratepayer Advocate’s website: http://www.njin.net/rpa. F-5 2 1 regulation which does not adequately protect consumers. The current regulatory structure does not provide the Board of Public Utilities, the Ratepayer Advocate -- or any other arm of state government -- proper authority to regulate cable television in the consumers’ interest. Fundamental changes in laws defining the federal and state roles in cable rate regulation are clearly needed. c. What Are The Fundamental Changes The Ratepayer Advocate Considers Necessary For Meaningful Cable Rate Regulation? The Ratepayer Advocate supports the restoration of authority to the states to regulate all cable rates and services. Such a change requires a fundamental restructuring of the present regulatory model, which is controlled almost entirely by federal law. The degree of regulation (or deregulation) should reflect the market conditions within each state and each franchise area, and should be implemented on a sliding scale: the greater degree of competition a cable operator faces, the less regulation it should be subjected to. When consumers enjoy the benefits of a truly competitive market, regulation should be phased out entirely, as it means that market forces are sufficiently developed to discipline both rates and services. If such an advanced state of competition is reached, and consumers are not experiencing corresponding rate and service benefits, minimal regulation may be needed. However, until such time as the federal government chooses to restore cable television regulation to the states, permitting more significant roles for the Legislature, the Board and the Ratepayer Advocate to protect ratepayers’ interests, the Ratepayer Advocate continues to focus its efforts on: (1) continual monitoring of the cable television market to determine which current and proposed federal legislation promote competition and consumer choice; (2) filing comments on proceedings before the FCC and the Board; (3) informing New Jersey’s representatives in federal and state government of our support for or opposition to proposed F-6 legislation affecting the provision of competitive cable programming; and (4) scrutinizing, analyzing and fully litigating petitions filed with the Board for rate increases of the BST. The Ratepayer Advocate has urged Congress to adopt policies which promote market entry of direct competitors. Congress recently passed federal legislation which permits satellite providers to carry local broadcast programming. This change in the law should materially assist in promoting competitive programming by satellite dish which will now more closely resemble that provided by cable systems. We are hopeful that this will enhance the ability of satellite providers’ to compete against cable. Additionally, the Ratepayer Advocate supports the introduction of non-traditional providers, such as municipalities and utility companies into the programming market. It is only when cable operators are part of a robust, fluid, and competitive video programming market that they will temper their rate increases and consumers will benefit from both lower rates and greater choices. d. Will Meaningful Competition And Effective Regulation Protect Consumers’ Interests? The problems New Jersey cable television consumers face are the problems any consumer served by a monopoly faces: rate increases for service and equipment, with no choice of services from other providers. In its Fifth Annual Report on Cable Industry Prices, released in December 1998, the FCC addressed numerous issues regarding rates and services, concluding that consumer benefits are greater from competitive and regulated entities than F-7 from noncompetitive and unregulated entities. Some particularly noteworthy conclusions reached in the Report are: C C C Cable operators without competitors charge higher average monthly rates for service and equipment than operators facing competition; Cable operators facing competition increase the number of channels offered more than noncompetitive operators; Cable operators in competitive markets decrease the average monthly rates per channel, while the average monthly rates for cable operators not subject to competition have increased; Noncompetitive cable operators are nearly 50% more likely to attribute rate increases to inflation than competitive cable operators, while competitive cable operators are more likely to attribute rate increases to system upgrades; Regulated cable operators offer more channels than unregulated cable operators; Regulated cable operators on average charge less per-channel than unregulated cable operators; and Regulated cable operators charge less for equipment than unregulated cable operators. C C C C These conclusions underscore the value of competition, as well as the need for regulation where competition does not exist. Such conclusions should come as no surprise, since competition cannot thrive in a deregulated, monopoly market. e. Were CPST Cable Rates Deregulated On March 31, 1999? Pursuant to the Federal Act, FCC regulation of the Cable Programming Service Tier (“CPST”) expired on March 31, 1999. This deregulation was intended to reward operators because Congress had assumed that by this date, operators would face increased competition as the result of the Federal Act’s pro-competitive, deregulatory policies. However, the competition Congress envisioned has clearly not been realized. The Ratepayer Advocate opposed the end of FCC regulation over the CPST and supported several pieces of federal F-8 legislation which would have tied additional CPST deregulation to increased competition. Although these measures ultimately were not adopted, the Ratepayer Advocate still maintains that cable television deregulation should be tied to a demonstration of increased competition in the marketplace. f. What Is The Ratepayer Advocate’s Position On Cable Late Fees? Although the Board has proposed regulations for cable late fees,3 as of December 1999 no such regulations have been adopted, and most cable operators charge between $5.00 and $15.00 per month when a cable bill is not paid on time. Cable operators in New Jersey and around the country charging late fees grossly disproportionate to the costs actually incurred as a result of late payments, are being sued in class action suits. Under the proposed Board regulation, a cable operator in New Jersey would be limited to a late fee not to exceed $3.00. Although the proposed regulation will reduce excessive late fees that some cable companies have charged, the Ratepayer Advocate has concluded that even the $3.00 maximum fee is excessive, since cable operators seem to have inflated their cost justifications for the late fee. However, since the proposed regulation standardizes and generally lowers cable late fees, the Ratepayer Advocate supports the proposal. Nevertheless, we will continue to recommend to the Board that late fee charges should recover only the actual additional costs the operator incurs as a direct result of a late payment by a consumer. 3 N.J.A.C. 14:18-3.24. F-9 g. Why Are Consumers Served By Small Systems Treated Differently Than Consumers Served By Larger Operators? The Federal Act does not extend the few remaining regulatory protections discussed earlier to consumers who are served by small cable operators. The FCC defines a small cable operator as one that serves 50,000 or fewer subscribers in a franchise area, serves in the aggregate fewer than one percent of all subscribers in the United States, and is not affiliated with any entity whose gross annual revenues exceed $250,000,000. This additional deregulation of small operators is to ensure that small operators, many of whom serve rural communities, are not overwhelmed with costly service requirements and rate regulations. Many of these areas served by small operators are not attractive to competitors or large operators, who may find small franchises not worth the investment. While the Ratepayer Advocate acknowledges the concerns of small operators, we do not believe that the burden of current regulatory requirements is so great as to cause them significant harm. Most importantly, while these operators may be small in comparison to large operators such as Comcast, Cablevision or TCI, as far as the consumer is concerned, they are still the monopoly provider -- the only game in town. Therefore, the Ratepayer Advocate supports holding small cable systems to the same regulatory rules and standards as all other regulated cable operators. h. How Will The Recent Mergers And Acquisitions Of Cable Operators Affect Cable Consumers? Since 1996, ownership of many local cable franchises has changed, with companies buying, selling and sometimes trading one franchise for another in order to concentrate their customers into particular geographic areas. This is known in the industry as “clustering” because it concentrates a company’s franchises and customers into larger groups, or clusters. F-10 The Ratepayer Advocate believes clustering may present unique benefits to consumers, as it permits cable operators to design more efficient networks. On the other hand, clustering also raises serious concerns about the viability of the possibility of competition in the local cable market. Ultimately, because so little is known about clustering’s practical effect on the marketplace, the Ratepayer Advocate neither actively supports nor opposes the recent mergers, acquisitions and transfers that have taken place in the New Jersey cable market. However, we will continue to monitor the effects of clustering locally and nationally, and when its effects on the local market become better defined, the Ratepayer Advocate will prepare a more specific position on this issue. The greatest potential benefit of clustering is that it permits operators to realize the economies of scale they claim are necessary to provide advanced services, such as telephony and Internet access. The Ratepayer Advocate supports both diversity among telecommunications providers, as well as the availability of “one-stop shopping.” If clustering enhances the ability of cable operators to enter the local telephone market and provide Internet access together with cable services, then clustering may prove to be one of the more effective ways to encourage competition for these advanced services. However, despite the fact that nearly all of New Jersey cable consumers are currently served by one of the large national cable conglomerates, as of December 1999 there is little evidence of any cable operator competing in New Jersey’s telephone marketplace. Clustering may also have a down side. By concentrating local cable franchises, cable operators may, in fact, make it more difficult for a competitive cable operator to enter a municipality. By dominating a clustered, extended local market, the monopoly operator can make an investment in technology and services that would be fiscally unwise or impossible for F-11 a competitor to match, absent a large base of customers. Potential competitive operators are unlikely to compete against a clustered incumbent, as the competitor would have to invest in an infrastructure equal to the advanced infrastructure of the clustered incumbent at considerable expense. Furthermore, an established cable operator is unlikely to enter an area where it would be in head-to-head competition with an incumbent cable system. It will more likely focus investment within its own clusters, where its monopoly control may tend to permit a quicker return on investment. Though clustering may permit cable operators to provide competitive telephone and Internet service, and encourage investment for increased programming, these benefits may come at the cost of perpetuating a monopoly in the provision of cable television. Since telecommunications carriers, satellite providers and utilities have yet to meaningfully enter New Jersey’s MVPD market, monopoly cable operators can still implement rate increases without any concern for competitive rates and services. II. The Road To Competition a. How Do The Ratepayer Advocate’s Positions Promote Competition? The Ratepayer Advocate has consistently supported deregulation as the best way to achieve competition, but only following the development of increased competition. Unfortunately, competition between cable operators is not likely to happen any time soon and some regulation must be maintained to protect consumers. In the near future, it may be more likely that competition will come from providers who are capable of offering multiple services bundled together, like Internet service, telephony, alarm service and/or traditional cable services. F-12 Below are some of the more promising initiatives that may provide competition with choice for ratepayers. i. Municipal Overbuilds Municipalities throughout the country are finding that one way to end monopoly control over the local cable market and create competitive choices for consumers is to build their own infrastructure for the provision of cable television and other telecommunications services. This process is called a municipal overbuild. A municipal overbuild can provide local communities with competition for the cable television dollar. Also, municipal overbuilds provide a municipality with the most advanced technology which can be used for other services, such as telecommunications and Internet access. Since municipal overbuild technology is often newer and more advanced than the incumbent local cable operator’s infrastructure, it may also be capable of providing more channels with clearer reception than the technology of the incumbent cable operator. In its Fifth Annual Report on Cable Industry Prices, released in December 1998, the FCC found that municipally-owned cable systems have one of the lowest rate structures, both per-channel and overall monthly charges, among categories of operators, and also provide one of the highest average number of channels to their subscribers. Most importantly, however, municipal overbuilds provide real competition. News reports from Kentucky, Iowa, Washington and around the country provide examples of cable companies slashing rates and investing in infrastructure in order to minimize the potential exodus of their consumers to the new municipal system. The threat of a municipal overbuild by itself may be enough to “encourage” the local cable operator to upgrade the local infrastructure and halt rate increases. F-13 Municipal overbuilds have been criticized by cable operators. These operators have vehemently opposed local referendums on municipal overbuilds. Other critics argue that the government’s proper role should be to promote competitive markets, not participate in them. The Ratepayer Advocate supports the right of local governments to create a municipal infrastructure that serves the information age needs of its community; however, when a municipality competes in the market, it must not compete unfairly. Ultimately, a municipality that decides to go into such a business must be prepared to act like a business, investing in goods and services for which it reasonably believes a market is available. The decision to invest in a municipal overbuild must be a reasoned one, not just one born out of frustration with the incumbent cable operator. There are a variety of models throughout the country which municipalities may consider, covering everything from municipal construction and ownership of a network to municipal partnership with a commercial firm actually building and managing the overbuild network. ii. Satellite Operators If, as the Ratepayer Advocate has suggested, competition fails to develop between cable franchises, satellite operators may be the most effective competitor to the entrenched cable monopoly. Historically, satellite operators have had numerous regulatory issues to overcome before they could provide meaningful competition to cable, and most of those problems had to be resolved at the federal, not state level. Most significantly, satellite operators were prevented from providing local broadcast signals in the same manner as a cable operator, although recently-passed federal legislation permits DBS transmission of certain local broadcast signals.4 By the year 2002, all the local broadcast signals which must be carried by 4 Satellite Home Viewer Improvement Act of 1999, 17 U.S.C. §102 et seq. F-14 your local cable operator will also have to be carried by your satellite operator. Also, satellite service requires expenditures for equipment and installation which are not present in cable service as well as additional costs for equipment to receive service on additional television sets within the home. Whether satellite operators’ newly granted authority to provide local broadcast programming will make the service more competitive and whether satellite service can be priced to compete against cable service remains to be seen. Until these outcomes are better understood, the Ratepayer Advocate will continue to agree with the FCC that satellite service is not a complete substitute for cable service. Additionally, federal policy should not equate national satellite penetration rates with local competition. Nationally, for every 100 people who subscribe to some form of MVPD, 85 receive cable, approximately 10 receive satellite service, while the remaining 5 receive video programming from other services. However, these figures do not represent the degree of satellite penetration in New Jersey, where little more than 2 out of every 100 MVPD consumers receive satellite service. Satellite service is disproportionately used in rural states, where building a cable television infrastructure is less practical and over-the-air reception more limited than in more densely populated states. For example, in Montana, nearly 24 out of 100 MVPD subscribers receive satellite service, or, more than 10 times the number in New Jersey. The implications of this are significant, because a national policy that presumes satellite service provides some meaningful competition to cable television is wholly inappropriate for New Jersey at the present time. That is why the Ratepayer Advocate supports a less centralized approach to cable rate regulation: differing degrees of competition within local markets make a national cable policy unresponsive to the needs of consumers. F-15 iii. Local Exchange Carriers (“LECs”) The Federal Act envisioned local telephone providers (or, Local Exchange Carriers, also known as LECs) entering the video program market. To that end, it created an entire new category of service provider: Open Video Systems (“OVS”). OVS is a platform similar to cable, and largely provisioned using coaxial cable. Unlike traditional cable, however, OVS operators have the legal obligation to reserve up to one-third of their system’s capacity to non-affiliated programmers, who have the legal right to have their programming carried on the OVS operator’s system. This obligation, combined with most LECs interest in maintaining or expanding their presence in the increasingly competitive telecommunications market, has prevented OVS from gaining meaningful market share nationally or locally. Therefore, for the purpose of anticipating future competition, OVS must be considered a non-factor for the time being. As noted above, Congress’ vision of telecommunications carriers as competitive OVS providers has yet to be realized. However, LEC entry into the competitive video programming market may come through other means. Recently, Bell Atlantic signed a marketing deal with DirecTV, a major Direct Broadcast Satellite (“DBS”) provider. Under the agreement, Bell Atlantic will market, install and provide DBS service under its own name. The Ratepayer Advocate is encouraged that a company of Bell Atlantic’s financial resources and market strength has entered the field and may provide an alternative to the incumbent cable monopoly, though it also raises some concerns. Bell Atlantic’s deal has led some in the cable industry to claim that cable operators within Bell Atlantic’s territory are now subject to “effective competition.” Effective competition is a threshold that, when reached within a local market, F-16 relieves the local cable operator from any rate regulation. The claim that cable operators within Bell Atlantic’s service territory are subject to effective competition merely because Bell Atlantic has signed this marketing deal is patently inaccurate and premature. The basis for a claim of effective competition is a section of the Federal Act which states that when [A] local exchange carrier ... offers video programming services directly to subscribers by any means (other than direct-to-home satellite services) in the franchise area of an unaffiliated cable operator which is providing cable service in that franchise area, but only if the video programming services so offered in that area are comparable to the video programming services provided by the unaffiliated cable operator in that area. 47 U.S.C. 543 (l)(1)(D) (Emphasis added) As noted in the italicized portions, Congress specifically rejected ILEC provision of service via satellite as meeting the effective competition standard. Additionally, the FCC recently determined that the availability of LEC-provided DBS must “substantially overlap” the service area of the cable television operator. While the Ratepayer Advocate is not aware that any cable operator within the state has yet made this effective competition argument, we would currently oppose such an argument as premature should it be made. iv. Utility Companies The Federal Act also includes legislation encouraging energy utility companies, such as electric and gas, to provide telecommunications and cable services. This procompetitive deregulatory proposal is an excellent idea, as utility companies have many assets that could encourage competitive entry into the video programming market. These assets include: rights of way, advanced digital networks which have previously been used only for internal communications, computerized systems for billing, collection, and F-17 customer service, familiarity with their customers and substantial financial resources, as well as brand name recognition. Utility companies such as Conectiv and GPU are using their assets to provide telecommunications services, but at this time, they are not providing competitive cable services. The Ratepayer Advocate is hopeful, however, that over the next few years utility companies may begin to make their presence felt. The Ratepayer Advocate has learned valuable lessons from observing utility companies in other parts of the country, where greater inroads into the cable market have been made. For example, in Massachusetts, after Boston Edison, an electric public utility, entered into a joint venture with RCN, a cable operator, to use its public rights-of-way and facilities to provide cable service, Boston Edison was accused of unlawfully transferring assets paid for by ratepayers to RCN, thereby providing the cable operator with a competitive advantage at consumers’ expense. This is the kind of ratepayer concern the Ratepayer Advocate addressed in its filings before the Board regarding the expansion by New Jersey utility companies of their present services to include telecommunications. Briefly, we have requested that Board approval to utility companies offering such services must be conditioned on structural separation to ensure that the competitive telecommunications provider is functionally separate from its utility parent (structural separation refers to the creation of separate corporate entities to ensure that revenues from rate-regulated businesses are not used to subsidize non-regulated competitive ventures). Also, the telecommunications provider must compensate its parent for use of utility facilities and rights-of-way. Finally, standards of conduct must ensure that utility customer information may not be used by the cable subsidiary for marketing and operations. These conditions are necessary to ensure that a utility which chooses to provide telecommunications or cable services has the same opportunities as its competitors -- no F-18 greater, no less -- to compete for a consumer’s business. III. Future Cable Services: Regulation Or Open Access? a. What Is The Ratepayer Advocate’s Position On “Open Access” To Cable Modems? As cable operators expand their offerings beyond traditional cable services, many are beginning to offer access to the Internet through a cable modem. A cable modem downloads Internet information at speeds far faster than a standard telephone modem. A basic disagreement exists between the cable operators and Internet Service Providers (ISPs), such as America Online, over the ability of ISPs, to provide competitive Internet access service to consumers by using the cable network. Currently, cable operators require their cable modem service customers to also subscribe to the cable operator’s ISP. Competing ISPs want open access to the cable modem so that consumers will have freedom to choose their ISP. Access to the Internet via a cable modem has the potential to provide great benefits to consumers. Most significantly, Internet access via a cable modem may be up to ten times faster than access by telephone lines and a standard 56 kbp computer modem. Additionally, Internet access via a cable modem does not require the consumer to “dial in” to the ISP: all a consumer has to do is turn on the computer and the customer is immediately connected to the Internet. Traditional Internet access by telephone lines requires the consumer to “dial in” to the ISP. The call travels from the consumer over the local telephone company’s network to its termination point at the ISP chosen by the consumer. F-19 At that point, the consumer is connected to the ISP’s servers and other electronics which provide access to the Internet. In addition to providing this vital “connection point,” many ISPs provide additional, exclusive content for their subscribers as part of their service. Under the traditional model, Internet access is provided by the ISP designated by the subscriber, and the means to reach the ISP is provided by standard telephone lines. Internet access via the cable modem changes this model in two significant respects. First, it bypasses the telephone network entirely by connecting the consumer to the Internet via the same cable that carries television programming. The cable operator owns and controls the equipment that connects the consumer to the Internet as well as the means to reach the equipment, the coaxial cable. The cable operator also provides its own ISP as part of its cable modem service. Presently, consumers who receive Internet access from their cable provider may access and receive content from another ISP, but the consumer is still required to pay for the cable operator’s ISP, regardless of whether the consumer uses or wishes to use the cable operator’s ISP. This raises the issue commonly known as the “open access” problem. The open access issue may best be described as follows: cable operators providing Internet access require consumers to pay for the transmission over the cable operator’s network to the Internet as well as for the cable operator’s ISP. If a consumer wants to use another company as its ISP, the consumer may do so, but first the consumer must pay for the cable operator’s ISP in addition to the physical connection from the consumer to the ISP. ISPs not associated with the cable operators want to be able to lease space on the cable operators’ network and provide consumers access to the Internet over the network as well as their own content without the consumer first having to pay for the cable operator’s ISP. These ISPs are concerned that if consumers are required to pay for the cable operator’s ISP just to F-20 get connection to the Internet, they will not want to pay additional charges for a competing ISP. Cable operators are also able to impede the flow of content from disfavored sources while promoting rapid transmission of content from favored sites, which raises basic freedom of speech concerns. Under the model preferred by most ISPs, the cable wire and modem serves as a road, owned by the cable operator, but available for ISPs to travel upon (for a fee) so that they may access consumers directly, rather than making the consumer first pay a toll at the cable operator’s ISP. Cable operators oppose the open access model for several reasons. First, they argue that if they are required to provide open access, it will diminish their ability to profit from the service by limiting their capacity to recoup the investment costs necessary to provide highspeed Internet access. Second, cable operators note that their service permits a consumer to access any ISP they choose. Third, they claim that they are under no legal obligation to provide open access to their cable network. While the debate on open access is just emerging, the Ratepayer Advocate has begun to formulate a position on the issue, based on the arguments presented and the information available. The Ratepayer Advocate’s position is guided by our consistent support for increased choice for consumers through fair competition in the marketplace and unimpeded exchange of information. For this reason, we believe that the cable operators’ position may inhibit competition and may not therefore, be in the best interests of consumers. As long as cable operators have no obligation to provide open access to the cable lines, they will effectively have monopoly control over high speed Internet access via the cable wire and the information carried over their networks. Cable operators contend that the market for broadband Internet access is wide open, and competitors such as local exchange telephone companies offering high-speed DSL (digital F-21 subscriber line) service, wireless services and satellite services will provide a competitive “check” on a cable operator’s ability to set and control rates for high-speed Internet access. While the Ratepayer Advocate is hopeful that broadband Internet access will stimulate a sufficiently broad and vigorously competitive market that will encourage competitive entry by many service providers using a variety of technology platforms, the sort of market development which would support the position of cable operators has not yet emerged. In the absence of readily available, clearly competitive alternatives for broadband, such as widespread deployment of DSL by telecommunications carriers, the Ratepayer Advocate believes it is still important to protect the interests of consumers on the issue of open access. Finally, cable operators claim that they are under no legal obligation to provide open access to their cable networks. This claim has been presented in state proceedings which have addressed the issue of whether the Local Franchise Authority (LFA), such as a city, town, or village, may require a cable operator to provide open access as a condition for approval of a local cable franchise and is currently under review in a case before the United States Court of Appeals for the Ninth Circuit.5 In City of Portland, the local cable franchise authority required AT&T Broadband Information Services (“AT&T BIS”) to offer open access to its service as a condition for approval of the transfer of the local cable franchise from TeleCommunications, Inc. (“TCI”) to AT&T BIS.6 Since the LFA’s action in the Portland case, LFAs around the country have been split in their approach to the issue of open access as a condition of a franchise transfer: several have conditioned their approval of a franchise transfer 5 AT&T Corp. v. City of Portland, CV 99-65 PA (D.Ore. June 3, 1999). In New Jersey, when TCI transferred its cable franchises to AT&T BIS, the Ratepayer Advocate asked the Board to consider the issue of open access in the approval of the transfer. However, the Board did not address this proposal. F-22 6 on providing open access; some have not; and still others have chosen to reserve their right to review the issue in the near future. The issues in the Portland case are complex, including whether Internet access provided through a is a “cable service,” an “information service” or a “telecommunications service” for regulatory purposes, and, depending on which type of service it is, whether a cable operator may be legally bound to provide open access. While these issues are being debated, the marketplace may provide answers, or at least respond to the problem. AT&T BIS has recently announced that it will permit certain ISPs open access to its consumers in the near future. This appears to be a step in the right direction, although it is still too early to tell whether these preliminary agreements will ensure consumers access to all competitive ISPs without having to first pay the cable operator for its ISP service as well. The issue of open access to high speed cable modem service may remain unresolved well into the future. Most likely, it will be resolved in the boardrooms of cable operators and ISPs as much as in the courts and at regulatory commissions. However, to the greatest degree possible, the Ratepayer Advocate will promote the introduction of high speed cable modem service as well as open, reasonably-priced access for high-speed Internet service because consumers deserve a vibrant competitive marketplace that provides affordable choice. F-23 The Position Of The Ratepayer Advocate On The Cable Television Industry. In the limited number of areas throughout the country where meaningful competition from a second cable television provider exists, real savings and consumer benefits have been realized. However, New Jersey consumers have not benefitted from competition for their cable service. Furthermore, federal deregulation of cable television service has inhibited the Board and the Ratepayer Advocate from limiting rate increases for cable service. While it seems likely that some New Jersey residents may be able to receive services from a competitive cable operator in the near future, many simply will not. Though the Federal government has recently eliminated many of the legal barriers which constrained satellite operators from fairly competing for cable customers, it is not yet clear that this change in the law will be enough to make satellite service directly competitive with cable. The promise of the Federal Telecommunications Act of 1996, that utilities of all kinds will be encouraged to enter markets for telephone, cable television, and Internet access, has yet to materialize in New Jersey to any great extent. Until real competition to the cable television industry emerges from whatever source or sources, the Ratepayer Advocate will participate in regulatory proceedings and processes at every level, both state and federal, to protect the interests of consumers who are captive customers of what is today, a monopoly enterprise in New Jersey. It is only when a competitive market is realized that all providers will have to compete for subscribers on the basis of offering the best services at the lowest rates, thereby providing those consumer benefits envisioned in the Federal Act. Of additional concern to consumers is the recent development and deployment F-24 of broadband technology through cable modems. These new “fat pipes” use existing cable lines for high-speed digital transfer of data. The recent mergers of cable companies with telecommunications carriers, combined with a single Internet service provider has presented the new issue of consumer access to reliable and affordable Internet services. Since cable modems appear to be emerging as the leading platform for residential broadband, and cable companies are not currently considered common carriers required to provide nondiscriminatory access to their networks, industry developments have stimulated a national debate over broadband access. Some jurisdictions have required cable operators to make interactive broadband accessible to all competitors while other local regulators have decided to grant franchise rights without requiring nondiscriminatory access. The issue which is now before the U.S. Court of Appeals for the Ninth Circuit may determine the future landscape of the information age. F-25 THE FCC’S CABLE TELEVISION CONSUMER BILL OF RIGHTS With the end of FCC regulation, the FCC expects competition in the cable market to develop in the future. Such competition could serve to keep cable services prices reasonable. In the meantime, the FCC has published the following “Cable Consumer Bill of Rights” to educate consumers about their rights in the deregulated marketplace. ! Consumers should expect a fair deal from their cable company, with reasonable rates that fairly reflect the costs of doing business; Consumers should expect an explanation from their cable company whenever rates for the programming service tier are raised, particularly when cable companies attribute price increases to increases in the cost of obtaining programming; Consumers are entitled to write or call their cable companies whenever they have complaints about the cable services being provided on the various channels, or about program cost increases, and they should expect a speedy response; Consumers are entitled to file complaints with their local government regarding basic service tier cable rate increases and service quality. Consumers are entitled to provide their own inside wiring for cable hookups; Consumers will be able to purchase and use set-top boxes at competitive market prices as of July 1, 2000; Consumers have the right to contact local, state and national advocacy groups with grievances that are not being adequately resolved by their cable operators; and Consumers unhappy with their local cable company should have the opportunity to explore competitive alternatives for video programming service available from DBS and other providers. ! ! ! ! ! ! ! F-26 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON MUNICIPAL TELECOMMUNICATIONS ISSUES AND STRATEGIES JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa G G. MUNICIPAL TELECOMMUNICATIONS ISSUES AND STRATEGIES “Determine that the thing can and shall be done, and then we shall find the way.” –Abraham Lincoln I. Wireless Telecommunications Services And Cell Tower Placement We communicate in a world that is increasingly moving away from traditional wireline telephone service to cellular phones, pagers, and beepers. These devices afford consumers the freedom and mobility of wireless telephony and other communications services. In fact, the Federal Communications Commission’s (“FCC”) most recent study on the growth of wireless telephony concluded that 55 million people, representing 20 percent of the nation’s population, own a wireless telephone. Several studies indicate that the growth of wireless telephony and other wireless telecommunications services will continue well into the future. Wireless telecommunications are transmitted through radio frequencies, not unlike broadcast television or FM and AM radio signals. Therefore, just as an antenna is necessary for the reception of those signals, an antenna is necessary to transmit and receive wireless telecommunications services. While most wireless telecommunications products have a small antenna attached to them, the real work in transmitting wireless telecommunications signals is done by large, powerful antennas, which are placed on structures commonly known as cell towers.1 The term “cell tower” is something of a misnomer. Cellular Telephony is a particular type of wireless service, just as Personal Communications Services, Specialized Mobile Radio Services and Commercial Paging Services are wireless services. In fact, towers which house cellular transmitters may also contain antennas to transmit these other wireless services. Additionally, some “towers” do not house cellular transmitters and might more appropriately be called poles, as they resemble large utility poles with antennas attached crosswise, near the G-1 1 Depending on the distance between the calling party and the called party, several cell towers may be needed to complete a wireless call. For example, if you make a wireless phone call from Newark to a wireless phone in New Orleans, cell towers will link both the origination point of your call as well as its termination point. To visualize this, imagine a relay race: the radio frequency carrying your phone call sprints from your handset to the nearest cell tower antenna. (All radio frequencies are limited by distance, some encountering large objects, such as mountains or areas populated with tall buildings, which block the signal and prevent it from continuing further.). As you travel while talking, you are getting further from the tower handling your call and closer to another cell served by its own tower. As your signal to the tower grows weaker and your proximity to the other tower gets closer, the network transfers the signal to the closer tower, which picks up the frequency and transmits the signal in a similar fashion. However, as in a relay race, cell towers must be located strategically in order to continue and complete the journey: if a cell tower is not located in the area where the signal can reach, like the runner who has exerted all her energies in a short, yet critical leg of the relay race, only to find there is no one to accept her baton, the transmission will fail and the call will be unable to reach its final destination. Accordingly, cell towers must be strategically located throughout the country in order to ensure the reliable transmission of wireless telecommunications services. This need sometimes presents problems. While many wireless transmission antennas can be attached to existing structures, such as water towers, apartment buildings and utility poles, others must be built specifically on cell towers and sited in very specific areas. top of the poles. However, such towers and poles are commonly referred to as “cell towers,” and will be referred to as such in this paper. G-2 The construction and siting of cell towers often ignites opposition in the affected communities. Cell towers are often viewed as unsightly, unattractive structures which may overshadow nearby homes or offices, raising aesthetic and health concerns, as well as apprehensions that their presence might have a negative impact on property values. This paper provides information concerning the rights of municipalities when companies want to build cell towers in their communities, including information municipalities can use to: (1) draft a municipal ordinance that addresses the issues to be considered upon review of a proposal to construct a cell tower; maximize cell tower use by all wireless carriers, and minimize aesthetic concerns and the potential affect on property values; confirm that federal guidelines on health and safety issues are considered and met; and develop the record necessary to withstand legal challenges should a municipality determine that a request for construction and siting of a cell tower must be denied or modified. (2) (3) (4) This paper also discusses issues generally related to the use of public rights-of-way by telecommunications providers. a. The Law Affecting Cell Tower Construction And The Use Of Public Rights Of Way The advent of competition and the introduction of new telecommunications technologies has created new issues, unique to municipalities. The ancillary regulation of telecommunications providers by local governments is affected by federal law. Communications carriers often must avail themselves of rights-of-way, either for the installation of antenna-towers for the provision of wireless communications services, placement of pole lines to support aerial cable, or for street-cuts, to install underground fiber or cable. G-3 The Telecommunications Act of 1996 (“Federal Act”)2 addresses these issues specifically, stating that while the Federal Act is not intended to usurp the authority of local governments, those local governments likewise cannot impose any regulations that have the effect of being a barrier to market entry.3 The Federal Act also contains regulations that specifically address actions related to the provision of wireless services.4 In New Jersey, franchises or consents for the use of rights-of-way granted by local authorities, must be approved by the New Jersey Board of Public Utilities (“Board”).5 The Board may impose reasonable conditions on the construction, maintenance, equipment, service or operation of facilities used over public rights-of-way to ensure that the public interest and convenience is maintained. Municipalities may impose reasonable fees for actual services provided by the local government agency, but may not impose fees or other assessments, whether by way of franchise fees, rights-of-way fees, or gross receipts tax on any energy or telecommunications company.6 While federal law permits a state or local government to require “fair and reasonable compensation from telecommunications providers on a competitively neutral and nondiscriminatory basis for use of public rights-of-way,”7 New Jersey law limits the collection of fees to the cost of service and does not permit a competitively neutral and nondiscriminatory fee to be assessed for use of the public rights-of-way. Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. § 153, et seq. (1996). 3 2 47 U.S.C. § 253. 47 U.S.C. § 332. N.J.S.A. § 48:2-14. N.J.S.A. § 54:30A-124, et seq. 47 U.S.C. § 253(c). G-4 4 5 6 7 Municipalities must also contend with other consequences that flow from the installation of new telecommunications facilities. For example, cell towers for wireless communications raise concerns about adverse visual impact, and possible unhealthful affects of electro-magnetic radiation from radio-frequency emissions, discussed in greater detail below. Street cuts for the installation of cables cause traffic disruptions during the period of installation, and decrease the useful life of the street that is repeatedly torn open and repaired. Three to nine utility cuts can decrease the service life of pavement up to 30%; more cuts can reduce the useful life of a street by 50%.8 Faced with these concerns, local governments apply zoning, franchise, and other applicable state laws to telecommunications providers and try to ensure that their regulations do not run afoul of federal standards. The proliferation of wireless facilities also may require the involvement of many public agencies, as the installation of facilities in historic or environmentally sensitive areas can require coordination among federal, state, and local authorities dealing with environmental zoning and other concerns. Legislation and court decisions are charting the course which industry and governments must follow. The Federal Act states that “no State or local statute or regulation, or other State or local requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate service.”9 Under federal law, fees charged for access to rights-of-way must be fair and reasonable, non-discriminatory, and competitively neutral.10 Ghassan Tarakji, City of San Francisco, The Effect of Utility Cuts on the Service Life of Pavements in San Francisco: Study Procedures and Findings (San Francisco State University, 1995). 9 8 47 U.S.C. § 253(a). 47 U.S.C. § 253(c). G-5 10 In particular, the Federal Act requires that any denial by a state or local government of an application made by a wireless telecommunications provider to place, construct, or modify personal wireless service facilities must be in writing, and based on substantial evidence.11 This last requirement has been found to “not affect or encroach upon the substantive standards to be applied under established principles of state and local law.”12 Speaking generally, wireless facilities most often require the installation of antennas atop buildings, or the construction of cell towers, which often reach more than 100 feet above the ground. Municipalities facing applications for wireless facilities should consider the impact federal regulations might have on their rights-of-way fee structures. There are several methods to consider when a municipality establishes fees for use of rights-of-way. Valuation of a right-of-way can be arrived at based on a rental or fair market value. This requires either the determination of the “rental value” of the right-of-way, or the “opportunity cost” to the municipality for not having access to that area. Opportunity cost formulas assume that the space would otherwise be used for public purposes. Fair market value can also be determined by looking to private industry such as railroads, for example, for guidance regarding fees charged for use of their space. In addition, cost accounting principles can be used to allocate “management costs” to telecommunications firms that utilize rights-of-way.13 The National Association of Telecommunications Officers and Advisers (“NATOA”) has recognized that commercial use of public property requires equitable, fair, and reasonable 11 47 U.S.C. § 332(c)(7)(B)(iii). AT&T Wireless Services of Florida, Inc. v. Orange County, 994 F.Supp. 1422, 1426 (M.D. Fla. 1997). See, generally, Jennifer Worstell, “Section 253 of the Telecommunications Act of 1996: A Permanent Physical Appropriation of Private Property that Must be Justly Compensated,” Federal Communications Law Journal, V50, No.2 (1998). G-6 13 12 compensation for its use. This association of local government officials from around the country prepared a statement of Local Government Principles relating to rights-of-way.14 The statement recognizes that developments in telecommunications technologies create greater demands on public rights-of-way. “This, in turn,” NATOA says, “requires more intensive management of the rights-of-way to ensure orderly use, maintenance of public safety, reliable delivery of essential services, and equitable treatment of all users.”15 The statement discusses principles of compensation, respective roles of public and private entities in planning, and federal, state, and local government partnerships. These issues will likely become increasingly important to local officials as communications companies “build out” their networks to reach beyond major metropolitan areas. Parties adversely affected by a municipality’s decision that may be inconsistent with the rules enumerated in 47 U.S.C. §332(c)(7) may petition the appropriate court, which is required to act on an expedited basis. If the basis of the municipality’s decision is the environmental effects of radio frequency emissions, the affected party may petition the FCC directly. Local governments should look to recent court decisions for guidance on many of these matters. The Federal Act provides only general guidelines for zoning and franchising authorities to follow. Court decisions from across the country have started to define these issues, as carriers and municipalities argue the processes and merits of various local procedures that are beginning to “fill in the holes” and provide guidance to local governments. In Maryland, a court ruled that a local government’s method of regulation of rights-of-way Local Government Principles Relating to Rights-of-Way Management and Compensation & Ownership of Telecommunications Facilities, National Association of Telecommunications Officers and Advisors, Ad Hoc Committee for Rights-of-Way Policy (August 20, 1998). 15 14 Id., at 2. G-7 created illegal barriers to market entry (ordinance prohibited company from using rights-ofway unless franchise was obtained; in order to obtain franchise, company was required to complete lengthy application form and pay a $5,000 fee, which was then subject to multi-tiered approval process before the County which could reject the application at any time, followed by a requirement to file annual reports and submit an annual gross revenues fee, and a prohibition on sales of the franchisee’s stock without prior County approval).16 In New Hampshire, a municipality was permitted to charge a telecommunications carrier real estate taxes for the land on which telephone poles were installed.17 Courts have examined the sections of the Federal Act that require local zoning decisions against wireless service providers to be written and supported by “substantial evidence.” The courts have also reviewed Section 253 of the Federal Act, which precludes state or local regulations that prohibit or have the effect of prohibiting the provision of personal wireless services, or which “unreasonably discriminate” against providers of functionally equivalent services.18 Written local decisions must be supported by substantive facts and evidence, rather than general, conclusory statements.19 A local zoning board may deny a permit for the construction of communications towers where “a legitimate visual or aesthetic concern exists”20 (see discussion of camouflaged towers, below). The testimony of real estate 16 Bell Atlantic v. Prince George’s County, 49 F.Supp. 2d. 805 (D. Md. 1999). New England Telephone and Telegraph v. City of Rochester, No. 97-647, 1999 N.H. Lexis 83 (Sup.Ct. N.H. 1999). See, i.e., Omnipoint Communications, Inc. v. Foster Township, 1999 U.S. Dist. Lexis 6351, at 6 (U.S. Dist. PA 1999). 19 18 17 Id. at 10. Id. at 10, citing Cellular Telephone Co. v Town of Oyster Bay, 166 F.32 490, 495 (2d. Cir. 1999).. G-8 20 appraisers and, in some instances dealing with historic areas, experts in preservation, can also be useful. In New Jersey, the Supreme Court recently overrode a local zoning decision that sought to prohibit construction of a 90' cell tower in an industrial area.21 In that case, the local zoning board denied a variance for the cell tower in the least-restrictive zone of the borough, in which warehouses, various kinds of manufacturing, office buildings, and research facilities are permitted; further, a Conrail track runs through the area, and residential uses are prohibited.22 The Law Division reversed the decision of the local board, but on appeal, the Appellate Division affirmed the decision of the local zoning board. The Supreme Court reversed the Appellate Division, and upheld the ruling of the Law Division.23 In reversing the Appellate Court, the Supreme Court focused on the zoning status of the industrial area in which the tower was to be erected, the impact the tower would have on that area, and the unavailability of alternative sites that could support effective wireless service.24 This case is noteworthy because it is the most recent guidance from New Jersey’s highest court, and indicates the importance attached to evolving technologies, such as wireless, being able to develop their networks in order to meet consumer demand. The Supreme Court has indicated that municipalities must substantiate their decisions, and may not take defense of their positions lightly. In a case involving the Fair Lawn Board of Adjustment, the Supreme Court noted that judicial review of a local zoning decision is usually New Brunswick Cellular Telephone Company d/b/a Comcast Cellular One v. Borough of South Plainfield Board of Adjustment et al., 160 NJ 1 (1999) (“New Brunswick”). 22 21 Id. at 11, 12. Id. at 9, 10. Id. at 14-16. G-9 23 24 limited,25 but the Supreme Court has noted that local control over land use cannot unreasonably prohibit the construction of cell towers. The New Jersey Supreme Court has recommended guidelines that local governments can employ when reviewing applications for the construction of cell towers.26 These guidelines include the presumption that issuance of an FCC license satisfies the requirement that the proposed use will serve the public welfare, and the Court’s warning that municipalities should attach expert testimony to assertions that a proposal will have an adverse effect on property values and land-use master plans.27 The Ratepayer Advocate recommends that municipalities incorporate these guidelines in their review processes, so that costly and administratively burdensome litigation might be avoided. b. The Adoption By A Municipality Of “Best Practices” Until the Board or the courts settle definitively the standards municipalities should follow, a municipality is well advised to create a series of “best practices” which, if followed, present the greatest opportunity to ensure that its decision to approve or reject a cell tower construction proposal will not be overturned. Below are some “best practices” a municipality should generally follow. 25 Smart SMR v. Fair Lawn Board of Adjustment, 152 NJ 309, 327 (1998) (“Smart”). Smart at 336. Id. G-10 26 27 i. Drafting A Tower Zoning Ordinance28 Even before a municipality may be presented with a request to build a cell tower, it should implement a tower zoning ordinance. This ordinance should ensure that a timely, thorough, and proper review will be conducted upon receipt of a request to build a cell tower. This review should satisfy the requirements set forth in 47 U.S.C. §332(c)(7), as well as include requirements that have been interpreted by the courts. When drafting its tower zoning ordinance, a municipality should realize that Congress and the FCC strongly support the development of the wireless telecommunications industry, and, through the enforcement of 47 U.S.C. §332(c)(7), will not permit municipalities to arbitrarily prevent the construction of wireless telecommunications facilities. In fact, the FCC and the wireless telecommunications industry have developed guidelines that municipalities and industry members can follow when there is a dispute regarding the proposed construction and siting of a cell tower.29 Local governments may serve their constituents best by working with the industry and the community in a collaborative effort. Specifically, 47 U.S.C. §332(c)(7) imposes the following restrictions on the effect a local zoning ordinance can have on a personal wireless service provider: C No regulation can unreasonably discriminate among providers of functionally equivalent wireless services; The material in this section is adapted from materials developed by the law firm of Miller & Van Eaton, Washington, D.C.. That document, and other documents addressing general tower zoning issues can be found at http://www.millervaneaton.com. A copy of the guidelines are at the end of this discussion. For additional information, see the FCC’s website at http://www.fcc.gov and review the information pertaining to the Wireless Telecommunications Bureau and the Local and State Government Advisory Committee. G-11 29 28 C C C No regulation can prohibit or have the effect of prohibiting the provision of services; The municipality must act upon a request for authorization to place, construct, or modify a personal wireless facility within a reasonable time; The municipality cannot regulate on the basis of the environmental effects of radio frequency emissions to the extent that facilities are in compliance with the FCC’s regulations concerning emissions; and The municipality must issue any denial of an application in writing and support that decision by “substantial evidence” contained in a written record (this written record must contain all the steps taken by the applicant and the municipality, establishing the basis for the locality’s denial of the application). The municipality should also examine its present zoning policies concerning the C construction of cell towers or other structures. In doing so, the municipality should consider the following issues: C C How does the municipality’s current policy regulate towers and antennas? How much of the municipality’s area is composed of industrial-zoned areas? Often, communities are more concerned with the placement of towers in residential areas and prefer to place towers on industrial-zoned land. Does the municipality want to encourage the use of fewer, yet higher, towers which contain multiple antennas or does it prefer a greater number of shorter towers which may contain only a single antenna? Parties affected adversely by a municipality’s decision that may be inconsistent with the rules enumerated in 47 U.S.C. §332(c)(7) may petition the appropriate court, which is required to act on an expedited basis. If the basis of the municipality’s decision is the environmental effects of radio frequency emissions, the affected party may petition the FCC directly. Co-locations require taller towers with greater separation between additional towers. Are extensions to existing towers dealt with in the current ordinance? Including a provision which addresses extensions is recommended to bring existing towers into full compliance with any new ordinances. Does the municipality own land that may be appropriate for the location of cell towers? Some communities pursue the option of placing towers on municipal land and receiving the fees paid by the telecommunications providers. Are there any size or noise restrictions that need to be addressed? Is maintenance and design of the structure addressed in the ordinance? G-12 C C C C C C C C How are application, registration, processing, and inspection fees addressed in the ordinance? Is there a policy for variances? Is there an existing appeals process? When the municipality determines that a new or revised tower ordinance is required, it should prepare clear answers to these questions in the event that its decision is challenged by an aggrieved party. Of course, in order to limit the possibility that there will be an aggrieved party as a result of a municipality’s decision, the municipality should determine both the community’s and the industry’s needs and priorities through public hearings, and incorporate these concerns into the municipality’s determination on a cell tower placement or construction request. Below are some additional concerns likely to be raised by the community and/or the industry: C Are aesthetics important? If so, municipalities may wish to require stealth or camouflaged towers and antennae where appropriate. Camouflaged towers (such as those made to look like trees or church steeples) are more costly to build, yet they often serve to ameliorate the community’s concerns that the tower will be unsightly. Is placement of towers in public space or parks preferred or opposed? The municipality may permit tower construction in areas opposed by residents only if the applicant satisfies its burden of proof in the municipality’s zoning variance proceeding. Does the community want to encourage or limit the use of particular areas? If so, the community should prepare a study by a tower siting engineer and radio frequency engineer establishing why these particular areas are appropriate or inappropriate for a tower. If the community wants to encourage co-location, it can require any applicant that does not intend to co-locate its facilities to go through the variance procedure. C C C G-13 C The community may establish tower and surrounding area maintenance rules that reflect the community’s concerns. While these suggestions and a review of other municipalities ordinances may provide guidance to a community, each individual community must determine its own specific needs and draft an ordinance which reflects them. Generally, courts have shown little sympathy toward communities which have made no provision for siting towers anywhere within the municipality, and which summarily rejects applications for tower construction, and even less sympathy for municipalities which have not established a thorough, written record supporting their decisions to reject the tower construction. ii. Guidelines For A Community That Receives A Request To Build A Wireless Telecommunications Facility Once a municipality has passed an ordinance addressing the construction and placement of wireless telecommunications facilities, guidelines are needed by which review of requests to build wireless telecommunications facilities will be conducted. If a community determines that a request to build a tower in not in its best interest, the record must be complete and persuasive. Here are some “dos” and “don’ts” to consider upon review of a request: C Do provide a written decision, detailing all the reasons for the decision, including all evidence that led to the decision and affirming that all relevant evidence was considered. Do Not adopt a staff recommendation without explanation or provision of a decision detailing the reasons for the decision. Do base your decision on the consideration of testimony of residents affected by the placement of the facility as well as on the testimony of experts on siting, health concerns and property values. Do Not rely solely on the residents’ testimony which may be based on incorrect assumptions as to the size and shape of a proposed tower, as well as its effects on property values. Residents are often overwhelmed by emotional concerns regarding the G-14 C C C building of a tower and, while these concerns are understandable, they will not be sufficient to support a municipality’s decision on appeal. C Do introduce evidence that a different configuration of antennae or a different plan for the area (fewer but higher antennas, more but lower antennas) makes the proposal unnecessary. Do Not reject the proposal merely because it is unattractive or unsightly. Do provide a lengthy, in-depth review of the applicant’s proposed business plan. Do Not fail to state that the municipality is fully aware of the company’s intentions and how these intentions are inconsistent with the needs of the community. Do Not speak in general terms about the effects of cell towers in general, but focus the decision instead on the specific tower proposed and the conditions it creates (the amount of land it requires, the degree of emissions it gives off, the amount of lighting it will require, the distance over which it will be visible). iii. Some Additional Concerns (a) The Effects Of Radio Frequency Emissions There are concerns that the emission of radio frequencies from cell towers presents a health hazard. The FCC has considered the effects of radio frequencies emissions from transmitters on human health and safety, and has adopted radio frequency guidelines (developed by the American National Standards Institute), which all FCC-regulated transmitters must meet. Provided a transmitter meets the standards contained in 47 C.F.R. §1.1307(b) and 47 C.F.R. §24.52, the transmitter is considered to be within FCC guidelines, and radio frequency emissions are not considered a threat to human health or safety. In accordance with 47 U.S.C. §332(c)(7), a municipality may not reject the construction of a proposed tower on the basis of its radio frequency emissions, provided its radio frequency emissions are predicted to be within FCC guidelines. C C C C G-15 (b) Camouflaged Towers One of the most frequent reasons given by communities opposing cell towers is that they are unsightly. In an effort to ease this concern, some tower manufacturers are developing towers that look like trees, church towers, or other large structures. Often, camouflaged towers ameliorate some, if not all of a community’s concerns over the aesthetic harm caused by the placement of a traditional cell tower. A municipality may consider asking for a camouflaged tower as a means to meet the industry on a proposal to construct a cell tower. While these camouflaged towers are considerably more costly to build, the industry will often concede this point in order to maintain the community’s good will. (c) Additional Aesthetic And Safety Concerns Before a cell tower can be built, the FCC requires a Federal Aviation Authority (“FAA”) determination that the tower will not pose an aviation hazard. To ensure that a tower does not present a threat to low-flying aircraft, the FCC has the authority to require the painting or illumination of cell towers. Often, cell towers are required to have red lights attached to their highest points. However, in some cases, high intensity white lights are required to ensure the tower’s visibility. Such high intensity lighting has a greater environmental impact, particularly if the cell tower is to be located in a residential area. One municipality successfully fought the construction of a cell tower in a residential area because it would have required high intensity white lighting. Therefore, when reviewing a proposal to build a cell tower, the municipality should be aware of the color and required illumination of the proposed tower in addition to its size and shape. G-16 The Position Of The Ratepayer Advocate On Cell Tower Placement And Construction. The impact of federal law on municipal authority to determine how and where wireless telecommunications providers may construct cell towers is of great concern to the Ratepayer Advocate. The impact of cell tower construction on the quality of life in New Jersey’s communities must be balanced with encouragement of competition for all telecommunications services, as well as the introduction of new services such as those which result from wireless transmission which are of great economic importance to the State of New Jersey. The Ratepayer Advocate supports state legislation which would adopt the requirements of 47 U.S.C. §332(c)(7) and sets predictable, enforceable parameters on the manner in which cell towers can be sited. This legislation should also protect wireless telecommunications providers from restrictions that are inconsistent with the provisions of 47 U.S.C. §332(c)(7). These guidelines, consistent with the principles discussed in this paper, will ensure a thorough review of cell tower siting in keeping with the legal requirements of 47 U.S.C. §332(c)(7) and its interpretation by the courts. The Ratepayer Advocate believes that all stakeholders will benefit from new and better wireless telecommunications services when municipalities adopt guidelines which encourage cooperation between the residents and industry representatives on cell tower siting. G-17 II. Municipal Telecommunications Networks And Other Initiatives “Someday I would like to stand on the moon, look down through a quarter of a million miles of space and say, ‘There certainly is a beautiful earth out tonight’.” –Lieutenant Colonel William H. Rankin In February 1996, the Telecommunications Act of 1996 (“Federal Act”) was signed into law, opening the doors to competition throughout the business and residential local exchange telecommunications markets so that the legal barriers which have prevented long distance carriers, local telephone companies and cable operators from entering each other’s markets are removed. The Federal Act unbundled the monopoly control of the local exchange market and conditionally permitted local telephone companies to compete in the long distance market. Unfortunately, despite the pro-competitive policies of the Federal Act, many consumers have yet to experience the benefits of competition, particularly for local telecommunications services. In response, municipalities throughout the country have determined that one way to end monopoly control over the local telecommunications network and create competitive choices for consumers is to build their own municipal telecommunications infrastructures for the A provision of telecommunications services. municipal telecommunications infrastructure can provide local communities with something they might never otherwise enjoy: competition for their telecommunications dollar. A municipal telecommunications infrastructure may also provide a municipality with the most advanced technology for other services, such as Internet G-18 access and cable television, as well as telecommunications choices for the needs of local government. Some telecommunications carriers have criticized municipalities for building telecommunications infrastructure, arguing that it is the government’s role to promote competitive markets, not compete in them. These carriers have vehemently opposed local referendums on building a municipal telecommunications infrastructure. The Ratepayer Advocate supports the right of local governments to create a municipal telecommunications infrastructure to serve the information age needs of its community. But to the degree that a municipality participates in the market, it must not use its authority to compete unfairly. All such investments must be expended in accordance with the requisite local laws. Ultimately, a municipality that decides to go into such a business must be prepared to act like a business, investing in goods and services for which it reasonably believes a market is available. Therefore, the decision to invest in a municipal telecommunications infrastructure must be a reasoned one, not just one born out of frustration with the incumbent provider. There are a variety of models throughout the country which municipalities may consider, ranging from municipal construction and ownership of a network to municipal partnership with a commercial firm which builds and manages the overbuild network. a. The Importance Of Advanced Local Telecommunications Networks As digital technology advances, local governments must be ready to act and use information age strategies to improve delivery of services and to promote investment in their communities. Some local governments and policy makers are considering the promise of technological advances in telecommunications to address particular community needs. Municipalities across the country have undertaken the challenge to build municipal G-19 telecommunications networks. These early “settlers” on the telecommunications frontier were motivated by town residents’ rejection of rising rates and the failure of the incumbent carrier to provide residents and businesses with state of the art communications technologies and advanced services. Several municipalities around the country have undertaken the development of municipally owned telecommunications systems. The perspective gained and the lessons learned from the history of these municipal pioneers can provide other municipalities with benchmarks and solutions as they design municipal telecommunications networks. One of the first municipally owned telecommunications networks was established in 1989 in Glasgow, Kentucky. Others have since been established in Cedar Falls, Harlan, Hawarden and Waverly, Iowa; Coldwater, Michigan; and Tacoma, Washington. Glasgow, Kentucky has experienced mixed success. The Glasgow municipal telecommunications infrastructure was expected to be an the economic engine to power Glasgow into economic prosperity during the information age. The most frustrating element of building the Glasgow municipal telecommunications infrastructure was meeting the project’s budget, as the need for increased appropriations and investment exceeded the anticipated amounts. The unexpected financial burden upon Glasgow has been used by opponents of municipal telecommunications infrastructure to question the viability of building such networks. On the other hand customers of the municipal carrier and state regulators approve of the service improvements and lower rates the municipal telecommunications infrastructure has provided its customers. G-20 In Tacoma, Washington, a city of 185,000 residents, the municipal council sought to boost the municipal power company’s efficiency and competitiveness by building a high capacity telecommunications network to provide high speed data links to businesses as well as cable television service to homes. Consultants to Tacoma estimated that a high capacity broadband network linking the power substations would cost $15 million. For an additional $30 million, the network was expanded to reach residents and businesses. These costs would be recovered over ten years from the cable revenues diverted from the incumbent cable franchise. Tacoma was thereby able to provide a competitive telecommunications infrastructure with fiber-optic miles sufficient to accommodate future needs. This plan caused concern that Tacoma would compete with the local regulated telephone carrier and cable franchise. Recently, the city of Hawarden, Iowa, responded to the incumbent telecommunications carrier’s unwillingness to provide the city’s 2,500 residents with adequate service by building a $4.3 million fiber optic-enhanced coaxial system. The Hawarden Integrated Technology, Energy and Communications (“HITEC”) project was financed with a $500,000 reserve from the two electric and gas utilities as well as $3.8 million in bonds. The thought of developing Hawarden’s own telecommunications infrastructure had begun prior to 1996. The passage of the Federal Act eliminated the barrier to entry in the cable and telephone business. Legal controversy began when the city applied to the Iowa Utilities Board for a Certificate of Public Convenience and Necessity to operate a telephone service over cable. After a year of complex litigation, the Supreme Court of Iowa agreed that, under the Federal Act, the city could not be precluded by state law from exercising the right to be a local cable operator. The city now forecasts profitability in ten years, and predicts the attraction of industry and professionals to G-21 the city in need of a dependable telecommunications system. The city anticipates that an influx of new businesses will lead to a larger tax base and, in turn, increased city revenues. These projects were undertaken only after proper study and financial evaluation. It is highly advisable that any local entity entertaining entry into the telecommunications market obtain a feasibility study which includes cost evaluations, as well as a strategic plan that contemplates both political and legal concerns. b. Private/Public Partnerships Bring Advanced Telecommunications Services To Under Served Individuals And Communities A second, more focused approach to bringing advanced telecommunications services to a community are through smaller public/private partnerships which provide a particular service, such as Internet access, to under served individuals. The Newark, New Jersey Millennium Project is an example of such a partnership.. The Millennium Project was founded in January 1998 as a not-for-profit corporation established to bridge the “digital divide” in Newark. The “digital divide” is the term used to describe the limited access to advanced telecommunications services -- particularly the Internet -- in inner-city and low income communities in comparison to the much greater access available in suburban and wealthier communities. As advanced technology plays a greater role in our lives -- in the office, at the factory and in our homes -- access to these technologies is critical to economic success and personal enrichment throughout the United States. For example, in 1998, more than 40 percent of American households owned computers and 25 percent of all households had Internet access: nearly a 100 percent increase from the prior year. Most experts predict that this increasing growth in the importance of, and access to, advanced telecommunications services and the Internet will continue well into the future. At the same time, however, certain communities, particularly those with many low income G-22 residents, residents with limited formal education and minority residents are not experiencing a corresponding growth in access to advanced telecommunications services and the Internet. Without active measures taken to combat the current trend, experts forecast that these disenfranchised communities will become further removed from these vital components of industry and society. In Newark, the Millennium Project is presently pursuing the strategic goals of building five state-of-the art training centers: one in each ward of the City of Newark to provide residents with the skills needed to compete in the workforce of the new millennium. The Project’s immediate goal in the first year is to train a minimum of 200 persons at each site and 500 persons at each site in each succeeding year for four years. But the Project assumes that the gap between technological “haves” and “have-nots” will not be closed through these technology efforts alone. The Project’s larger goal is to connect 10,000 low and moderate income families in Newark to the Internet. Such efforts could be duplicated in other New Jersey cities and throughout the country. Programs such as the Millennium Project help bridge the gap between those that have access to advanced telecommunications services and those that do not, thereby eliminating the digital divide between communities. The Ratepayer Advocate is working with the members of the Millennium Project to help make their goal a reality. We encourage all members of New Jersey’s private industry -- particularly those who may be able to provide low-cost or free telecommunications services -- to work within their communities to ensure that all New Jersey residents benefit from the telecommunications revolution. The Position Of The Ratepayer Advocate On Municipal Telecommunications Networks. The Ratepayer Advocate supports a study to be undertaken by the legislature and G-23 various agencies of the State of New Jersey, including the Board of Public Utilities, to inquire about the feasibility of development and installation of municipal telecommunications networks in New Jersey including low income urban areas. Such networks, if feasible, could promote competition and provide all subscribers with advanced telecommunications services, thus furthering both state and federal objectives. The prospect of a “digital divide” is troubling. We urge New Jersey policy makers, both regulatory and legislative, to insure access to broadband facilities for low income consumers, those who live in high cost areas, and all schools and libraries. G-24 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE POSITION PAPER ON THE IMPACT OF MERGERS AND CONVERGENCE ON COMPETITION JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa H H. THE IMPACT OF MERGERS AND CONVERGENCE ON COMPETITION “And in this new era we face a fundamental challenge: how do we foster competition in an era of convergence? How do we pry open monopoly markets and how do we protect competition once we do?” –William E. Kennard, Chairman Federal Communications Commission December 9, 1999 In February 1996, the Telecommunications Act of 1996 (“Federal Act”) was signed into law, opening the doors to competition throughout the business and residential local exchange telecommunications markets. As discussed elsewhere in this publication, the primary goals of the Federal Act are removing the legal barriers which have prevented long distance carriers, local telephone companies and cable operators from entering each other’s markets and ensuring a level playing field for all in these newly competitive markets. The Federal Act also removed the legal barriers which prevented many companies, such as local water, electric and gas utilities, from providing telecommunications services. Perhaps most significantly, the Federal Act ended the monopoly control of the local exchange market and conditionally permitted local telephone companies to compete in the long distance market. What the Federal Act has done, in effect, is to open every conceivable telecommunications market to competition, permitting carriers to serve multiple telecommunications markets which has largely reshaped the telecommunications industry. Now, many telecommunications providers have decided that in order to compete in the deregulated marketplace, they must reinvent themselves as multiple services providers that offer local, long distance, Internet access, and wireless services. Still other companies, most notably utility providers, have decided to use their assets, such as rights-of-way, poles or conduits, billing systems and customer recognition, to provide multiple telecommunications services. H-1 As a result of these overwhelming changes in the law and the structure of the telecommunications industry, traditional telephone and utility service has changed permanently. This paper on Mergers and Convergence defines these changes and explains how they are affecting the New Jersey telecommunications marketplace and how the Ratepayer Advocate is working to promote competition and protect consumers in the fast moving telecommunications marketplace. I. Mergers “Commerce, which has made the citizens of England rich, also helped to make them free, and this freedom has encouraged commerce even more.” -- Voltaire, 1734 a. What Is A Merger? A merger is most easily defined as the joining of one company with another to form a new entity. A merger can take place through various means, such as the transfer of assets, or the outright purchase of one company by another. This paper will focus not only on the means by which mergers take place but also on the recent developments in the telecommunications industry in which two companies merge to increase the scope of their service offerings, the geographic range of their service territory and/or to introduce new and advanced services. b. Why Have There Been So Many Telecommunications Mergers In The Last Few Years? Many mergers have occurred in the telecommunications industry within the last few years for one reason: opportunity. When the Federal Act tore down the barriers which prevented carriers from competing in multiple telecommunications markets, it provided carriers the opportunity to increase their service offerings, to expand the geographic scope of their territory, and to receive additional sources of income, particularly in largely unregulated, highH-2 profit segments of the telecommunications industry, such as data transmission and Internet access. As carriers considered the opportunity to offer multiple services, they had to decide how the company could provide all these different services? Most companies chose one of two solutions: they either relied on their own facilities and financial resources; or combined their facilities and financial resources with one or more other companies already providing other services. Few carriers chose the first option. Most chose to merge their facilities and resources with other carriers to expand their service offerings. Perhaps the most obvious example of this “urge to merge” is AT&T. A few years ago, AT&T was the nation’s largest long distance provider, a distinction which it retains. However, since the passage of the Federal Act, AT&T has purchased Teleport Communications, merged with cable television providers Tele-Communications, Inc. (“TCI”), and is attempting to merge with MediaOne. It has strengthened its business ties with international carrier British Telecom and has acquired wireless carriers McCaw and Vanguard Cellular Systems (“Vanguard”). Each merger brings AT&T a step closer towards becoming a full-service telecommunications provider. For example, the TCI and MediaOne mergers provided AT&T with a coaxial cable into the homes of approximately 40% of the nation, permitting AT&T to provide local and long distance telephone service to consumers over the company’s own facilities, rather than over the facilities of the incumbent local exchange carrier. This access also makes AT&T the nation’s largest cable television company and provides AT&T the opportunity to become one of the nation’s largest high-speed cable modem Internet Service Providers (“ISP”). An ISP is a company like America On-Line (“AOL”) or Erols. The acquisition of McCaw and Vanguard helped AT&T achieve nearly nationwide cellular phone coverage, thereby permitting the H-3 merged company to become the first national wireless carrier. Through these mergers and acquisitions, in a few short years, AT&T has gained the facilities to become a multi-service provider instead of a long distance carrier that primarily provided long distance services. While the Ratepayer Advocate welcomes the entry of new carriers and the expanded service offerings of other telephone carriers, the effect of mergers on consumers is of paramount importance. Some of the most frequently asked questions concerning mergers are discussed below as well as a brief summary of the role the Ratepayer Advocate is playing when proposed mergers come before the Board of Public Utilities for approval. c. Does The Ratepayer Advocate Support Mergers? The support of the Ratepayer Advocate for a proposed merger depends on the facts of the individual proposal. A desirable merger is one which opens the telecommunications marketplace to new or greater competition and/or the introduction of new services. An undesirable merger is one which inhibits or prevents competition or stifles innovation. The specific impact of each merger must be examined very carefully. For example, the merger between AT&T and TCI may be good for consumers because it provides AT&T access to TCI’s customers’ homes for the provision of additional telecommunications services, including local telephone service and high-speed Internet access. On the other hand, the merger may not be beneficial for consumers because AT&T initially proposed to limit competitive ISPs’ access to its high-speed cable modem service, which will block competition for that service. More recently, AT&T has taken steps to provide greater ISP access to its broadband network. The H-4 issue of broadband access is now before the courts; precisely how this will develop is not clear as of December 1999. d. What Role Does The Ratepayer Advocate Play In Reviewing Proposed Mergers? Most proposed telecommunications mergers are reviewed on the state level by the Board of Public Utilities, and on the federal level by the Department of Justice and the Federal Communications Commission (“FCC”). When a proposed merger is filed at the Board, the Ratepayer Advocate requests an investigation to determine whether the proposed merger benefits consumers by opening the marketplace to new or greater competition and/or the introduction of new services or whether it is likely to foreclose competition or stifle innovation. Based on the results of an analysis of the merger proposal, the Ratepayer Advocate will urge the Board to approve or reject the proposed merger. In many cases, such as the AT&T/TCI merger1 or the Bell Atlantic/NYNEX merger 2, the Ratepayer Advocate has recommended that the Board qualify its approval of the proposed merger on the condition that certain procompetitive conditions are implemented. The Ratepayer Advocate has had mixed success in securing consumer benefits and the implementation of pro-competitive policies in the Board’s review of several proposed mergers. For example, in the Bell Atlantic/NYNEX merger, the Ratepayer Advocate was instrumental in obtaining a commitment by Bell Atlantic to accelerate its construction of a high-speed statewide digital network, provide schools and libraries with advanced telecommunications I/M/O the Agreement and Plant of Restructuring and Merger of AT&T Corporation and Tele-Communications, Inc., BPU Docket No. TM99020051. I/M/O the Board’s Review of the Amended and Restated Agreement and Plan of Merger Dated as of April 21, 1996 by and between NYNEX Corporation and Bell Atlantic Corporation, BPU Docket No. TM96070504. H-5 2 1 capabilities and share the savings created by the merger with consumers. On the other hand, the Board rejected the Ratepayer Advocate’s request that it condition its approval of the Bell Atlantic/GTE merger on sharing merger savings with consumers.3 Similarly, the Board declined the Ratepayer Advocate’s request that it qualify its approval of AT&T’s merger with TCI on the condition that AT&T grant competitive ISPs open access to its high-speed cable modem service. It should be noted that the Ratepayer Advocate can only recommend the inclusion of conditions that provide benefits for consumers. Only the Board of Public Utilities has the authority to approve or deny these recommendations. e. How Can Consumers Benefit From Mergers? The Ratepayer Advocate believes consumers can benefit from mergers in several ways. First, consumers can benefit if the Board requires the merged company to share with consumers the corporate savings received as a result of the merger. Second, consumers can benefit if a merger promotes a competitive, diverse marketplace. Third, consumers can benefit from mergers through receiving the “bundled” services of the merged company. As noted above, numerous companies are striving to offer multiple telecommunications services packaged, or “bundled” together. In order to encourage a consumer to subscribe to multiple services, such as local and long distance telephone service and Internet access, companies often provide discounts on individual services such as 10% off local rates if you receive long distance or free Internet access if you receive all your telephone service from the carrier. These discounts permit consumers to receive lower rates than they would otherwise. I/M/O the Joint Petition of Bell Atlantic Corporation and GTE Corporation for Approval of Agreement and Plan of Merger, BPU Docket No. TM98101125. H-6 3 II. Convergence “The computer, television, networks. These are three formidable technologies, but now these three imposing technologies are fusing. They are merging to form an informational infrastructure whose change-producing power, I predict, will be equal roughly not to their sum but to the square of their arithmetic total.” –Mark Draper, President, National Education Task Force, 1995 a. What Is Convergence? Convergence is a relatively new phenomenon within the utility industry in which one company provides multiple services, in addition to its traditional utility service. While the discussion on mergers noted the growth of bundled telecommunications service providers, convergence often includes, but extends beyond telecommunications services. For example convergence can refer to the provision of additional services such as energy, home alarm service, tower citing for wireless services and appliance repair by a traditional utility provider, such as a electric company. Convergence can also include the offering of electric, gas and telecommunications services from one provider. b. How Did The Convergence Phenomenon Start? Convergence began for the same reasons as mergers: deregulation provided the opportunity. First, the Energy Policy Act of 1992 brought competition to the wholesale electric market and gave federal regulators authority to ensure fair competition through open access to the network and the marketplace. Then, the Federal Act removed the barriers which prevented traditional utility companies, such as electric, gas and water companies, from providing telecommunications and information services. As traditional monopoly utility companies found themselves under the threat of competition for their monopoly service, they looked to telecommunications services as a new marketplace that they could easily enter and serve. H-7 c. How Have Traditional Utility Providers Transformed Themselves Into Converged, Multi-Service Providers? Traditional utility companies already possess the infrastructure necessary to provide telecommunications services. This infrastructure includes poles, antenna towers, land, conduits, rights-of-way, and fiber optic networks. Additionally, they have billing systems, name recognition, call centers staffed with service representatives, and are familiar with the consumers within their geographic region. Control of these assets and prior experience place utility companies at a distinct advantage over new telecommunications providers, which often have relatively limited resources and capital, no name recognition, and are unfamiliar with the local telecommunications marketplace. Furthermore, these new providers are required to either build a network from scratch or negotiate with an incumbent carrier to lease part of its network, whereas the converged company already owns and controls the infrastructure necessary to provide telecommunications service. Converged companies have chosen to enter the telecommunications marketplace in several different ways. One way is to lease its network to a competitive carrier, which then directly provides telecommunications services to consumers. Under this approach, the utility company does not offer telephone service directly to the public, but rather, permits other carriers to use its network for that purpose. This approach decreases the need for the competitor to rely on access to the incumbent local exchange carrier’s network. Many competitive carriers believe that gaining access to the incumbent carrier’s network is difficult because they are using the incumbent’s network to compete for the incumbent’s customers. But under the leased-network approach taken by certain converged entities, the converged entity is not competing with the carriers that use its network. Such an approach can assist competitive carriers in obtaining the access they need to enter and meaningfully serve the H-8 marketplace. A second way is for a company to actually enter the marketplace as a facilities-based carrier. By providing telecommunications service directly to consumers, a converged company bypasses the incumbent local exchange carrier’s network and is able to use its billing facilities, customer service representatives, network engineers and maintenance crews to serve consumers. Since both means of entry serve a pro-competitive purpose, the Ratepayer Advocate does not prefer or recommend either methodology over the other. d. Have New Jersey Consumers Benefitted From Convergence? New Jersey consumers are beginning to receive the benefits of convergence. For example, two energy companies, Telecom, which is a subsidiary of GPU Energy, and Conectiv, formed by the merger of Atlantic Energy and Delmarva Power and Light, now provide telecommunications service in New Jersey. Telecom leases its network to other carriers and Conectiv provides service directly to consumers. Some consumers, then, will have the choice of receiving service from Conectiv or one of the carriers using Telecom’s network. While the number of consumers who currently enjoy this option is small, it will continue to increase in the future. e. Does The Ratepayer Advocate Support Convergence? Generally, the Ratepayer Advocate’s position on convergence is the same as on mergers: we support convergence activity when it promotes competition and permits the introduction of new services. However, convergence raises new issues not present in most mergers. For example, most of the utilities entering the convergence marketplace are using assets -- poles, towers, land, easements, conduits, rights-of-way, fiber optic networks, billing and marketing facilities -- paid for by ratepayers in a monopoly environment. While the H-9 converged provider needs to use these assets to provide service, the Ratepayer Advocate is concerned that the converged provider is simply balancing its investment in new services on the backs of its traditional utility ratepayers. To that end, in proceedings before the Board which approved the applications of Telecom and Conectiv to provide telecommunications service, the Ratepayer Advocate recommended that the Board impose certain safeguards before a converged provider is permitted to expand its service offerings to include telecommunications. These safeguards included: (1) structural separation between the traditional utility and its affiliates, thereby ensuring that assets of the regulated entity are not able to cross-subsidize the competitive entity; and (2) comparable and non-discriminatory access for competitors to the network -- including transmission and distribution lines. The Position Of The Ratepayer Advocate On Mergers And Convergence. Mergers and convergence are radically changing the shape of the telecommunications industry. Whereas traditional telecommunications and utility providers once operated in separate and distinct markets, they are now able to eliminate market distinctions and offer multiple services. Consumers can benefit through the lower prices and increased services competition brings. However, mergers and convergence are not necessarily synonymous with competition. Proposed mergers must be reviewed by state and federal regulators to ensure that the merger will not foreclose competition through the creation of a de facto monopoly or prevent open access to the telecommunications network. Also, consumers deserve to share in the savings created as a result of the merger. Similarly, the entrance of a converged entity into the telecommunications marketplace must only be permitted after it is demonstrated that there is a structural separation between regulated, traditional utility operations and H-10 unregulated, converged activities, with assurance of open access to its network. The Ratepayer Advocate supports mergers and convergence activities that open the telecommunications marketplace to new or greater competition and/or the introduction of new services that do not inhibit or prevent competition or stifle innovation. H-11 THE STATE OF NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE A CALL FOR ACTION FROM THE RATEPAYER ADVOCATE TO PROMOTE COMPETITION, ENCOURAGE TECHNOLOGY INNOVATIONS AND ENSURE THESE BENEFITS TO ALL NEW JERSEY CONSUMERS JANUARY 2000 31 CLINTON STREET, 11TH FLOOR P.O. BOX 46005 NEWARK, NJ 07101 TEL. (973) 648-2690 EMAIL: njratepayer@rpa.state.nj.us FAX: (973) 648-2193 WEBSITE: http://www.njin.net/rpa I I. A CALL FOR ACTION FROM THE RATEPAYER ADVOCATE TO PROMOTE COMPETITION, ENCOURAGE TECHNOLOGY INNOVATIONS AND ENSURE THESE BENEFITS TO ALL NEW JERSEY CONSUMERS “Never be afraid to try something new. Remember, amateurs built the ark. Professionals built the Titanic.” -Anonymous The Ratepayer Advocate has prepared these comprehensive Position Papers on current telecommunications issues to provide insight and guidance for policy makers in New Jersey at all levels of government, so that telecommunications policies, whether created through legislation, regulation or otherwise, will serve the needs of New Jersey, its residents and economy. The fundamental question remains: Where do we go from here? This document concludes with a list of Proposed Actions that the Ratepayer Advocate believes New Jersey should take to harness the opportunities presented by the New Jersey Telecommunications Act, the federal Telecommunications Act of 1996 and the rapidly evolving high tech telecommunications industry, so that access to advanced technologies will make New Jersey “Open for Business” for industry and residents: the vision embraced and reinforced by Governor Whitman, most recently in her State of the State message on January 11, 2000. I-1 CREATING A COMPETITIVE MARKETPLACE IN NEW JERSEY: LET’S NOT LOSE THE RACE TO OUR NEIGHBORING STATES The Ratepayer Advocate believes that it should be the highest of priorities for policy makers to provide the conditions which will not just permit, but in fact, will stimulate a vigorously competitive telecommunications marketplace in New Jersey. The urgency in this proposal is heightened by the fact that several other states, particularly our neighboring states of New York and Pennsylvania are making rapid and concrete advances. New Jersey should learn from the aggressively pro-competitive policies adopted in New York and Pennsylvania. The New York Public Service Commission has made decisions on issues of rates and access that have resulted in New York being the first jurisdiction to obtain long distance authority for its RBOC, Bell Atlantic-New York. Similarly, the decisive actions of Pennsylvania regulators and legislators acting in close cooperation, have resulted in sweeping regulatory policies which provide a clear path for achievement of Pennsylvania’s goals for competition. Substantial reductions in charges for unbundled network elements (UNEs) rates and access charges, and creation of a Pennsylvania universal service fund are among the changes effected in Pennsylvania. New Jersey must likewise implement the goals of the federal Telecommunications Act. All stakeholders, including the legislature, the regulatory agencies and representatives of consumers and telecommunications providers must work together to insure that New Jersey is “Open for Business.” A dialogue must be established and maintained with the neighboring states that have made headway in meeting the goals of the Federal Act so that New Jersey can achieve parity in opening the New Jersey marketplace. Bringing closure on policies and issues affecting telecommunications service and rates I-2 is among the first steps to be taken if we are to reach the goals of a competitive marketplace. To promote competition in the Garden State, New Jersey must move decisively and affirmatively to address and resolve the following issues. We must: (1) establish a firm yet aggressive schedule for comprehensive testing of Bell Atlantic-New Jersey’s OSS functionality, to ensure seamless processing of customer orders by competitive carriers; establish firm and final conditions that permit ready availability for competitive carriers to unbundled network elements (UNEs) and the assembled platform of combined UNEs of incumbent carriers; promptly conclude meaningful and enforceable performance standards for inter-carrier relations; substantially reduce the generic prices established by the BPU for unbundled network elements (UNEs); and promote the rapid deployment of advanced telecommunications technologies, such as Digital Subscriber Line (DSL) services, cable modem services, wireless, and satellite technologies, to stimulate the creation of information age infrastructure that will provide maximum consumer choice and competitive prices for all consumers. (2) (3) (4) (5) I-3 FEDERAL POLICYMAKERS ARE AFFECTING NEW JERSEY CONSUMERS: LET US ALL SPEAK ON BEHALF OF OUR RATEPAYERS Proceedings at the FCC will continue to exert significant influence over New Jersey’s telecommunications marketplace. The ultimate decision to permit Bell Atlantic-New Jersey to offer long distance service will be made by the FCC, after the BPU submits its recommendations to the FCC. A great many other issues being considered by the FCC also apply to New Jersey, such as, the identification of specific network elements that must be offered to competitive carriers as unbundled network elements (UNEs); line sharing of local loops for the provision of Digital Subscriber Line (DSL) services for high speed Internet access; operation of federal universal service programs; and the FCC’s recent investigation into the increasingly widespread practice of long distance carriers imposing monthly minimum charges on residential subscribers. When devising federal policies that affect New Jersey, federal regulators will benefit from hearing the concerns of New Jersey’s policy makers on these issues. The Ratepayer Advocate urges elected officials at all levels as well as consumers to become informed about developments at the FCC and to actively participate in the resolution of such matters. Information about federal activities can be readily obtained from the FCC’s website at www.fcc.gov. State policy makers are urged to: (1) contact the FCC and submit comments either individually or as part of a trade group or other interest group, in proceedings having significance for New Jersey; contact federal officials and our Congressional delegation to express concerns on issues of interest at the federal level; (2) I-4 (3) contact the Board of Public Utilities and express your interest in having the BPU participate in matters before the FCC; and contact the Ratepayer Advocate and inform us of your concerns. (4) The Ratepayer Advocate regularly files comments with the FCC on its various rulemakings and would welcome the perspective of lawmakers of New Jersey for inclusion in our submissions. The greater the participation by New Jersey officials of all kinds, the greater the likelihood that New Jersey’s interests will receive the proper attention before the FCC. The New Jersey regulatory, legislative, consumer, and telecommunications communities must provide their views to the FCC proceedings at which policy determinations are being made that control the telecommunications marketplace. I-5 NEW JERSEY MUST DEVELOP AND FOLLOW A PLAN TO AVOID FURTHER AREA CODE SPLITS: LET’S SEEK FCC AUTHORITY TO DO SO Area code relief will remain of constant concern to consumers until the Board implements and enforces a thorough number conservation plan. In order to do so, the Board must submit a request for a waiver of the FCC’s rules to implement number conservation methods on an interim basis. This waiver would extend until the FCC releases permanent rules addressing individual state authority to implement number conservation rules. The Board’s waiver should specifically request authority to implement many of the number conservation methods noted in this paper which are being employed by other states, including code splitting, returning unused blocks of 1,000 numbers, and requiring more efficient use of currently held blocks of numbers. The Board is not required to seek a federal waiver to implement rate center consolidation, therefore, it should, at the very least, investigate the suitability of rate center consolidation as a partial remedy for the pressing problem of number exhaustion. The implementation of meaningful number conservation programs by the Board along with other industry-wide measures such as number pooling may halt the need for additional area codes. Without a comprehensive plan to conserve telephone numbers, New Jersey will be forced to implement a minimum of four additional area codes by the year 2005. New Jersey must develop and follow a comprehensive plan on number conservation if we are to avoid the disruption and expense of repeated area code splits or overlays. I-6 CONSUMERS NEED AVAILABLE AND AFFORDABLE PAYPHONES At all proceedings before the FCC, the Office of Administrative Law (OAL) and the Board of Public Utilities, the Ratepayer Advocate has actively supported policies which would ensure the availability of public payphones as a lifeline service for consumers who do not have immediate access to telephones and for consumers who cannot afford to subscribe to residential telephone service. Policies which ensure cost-based rates and equal treatment of all competitors will help to provide the competitive conditions necessary for this industry to find New Jersey an attractive market. One of our major concerns regarding payphones stems from the high prices some payphone operators charge for consumers to place certain types of calls. Though regulations intended to protect consumers exist, these rules are meaningful only if policy makers ensure that these standards are enforced. Consumer interests are best protected and advanced by policies promoting full disclosure of rates, terms and conditions applicable to payphone usage, mandating free access to 911 services, and providing for prompt resolution of consumer complaints for overcharges and inadequate service. Pay phones are an important lifeline services for many consumers and, as such, New Jersey must provide a competitive pay phone marketplace with protections for all consumers. I-7 CONSUMERS MUST UNDERSTAND THEIR CHOICES AND BE PROTECTED FROM UNSCRUPULOUS MARKETERS The Ratepayer Advocate supports comprehensive consumer protection in a deregulated telecommunications marketplace to guard against deceptive business practices in the new competitive environment and to ensure the availability of basic phone service for all New Jersey residents. Customer expectations of privacy of their personal information must also be protected, while credit and collection policies must be fair and applied in an even-handed manner. Consumer frauds such as slamming and cramming must be dealt with swiftly and decisively so that unscrupulous competitors will not be tempted to enrich themselves at the expense of an unwary public. As the telephone network opens to new competitive carriers the Ratepayer Advocate has insisted on stringent standards of service quality and network integrity, to ensure that the reliability of this lifeline facility is ensured. Service providers and consumers must have clear guidelines within which the transition to a competitive telecommunications marketplace can occur. The opportunity for New Jersey consumers to make intelligent choices from many clearly identified and verifiable service options will lead to increased savings and enhanced service options in the competitive telecommunications marketplace. Consumers must be aware of all of their rights in dealing with deceptive business practices that may emerge in the new marketplace. The most important initiative in achieving the vision of a competitive marketplace is the education of the public of their rights, choices and alternatives, which the Ratepayer Advocate considers one of the highest priorities for policy makers of the state. I-8 THE BENEFITS OF COMPETITION AND ADVANCED TECHNOLOGIES MUST BE AFFORDABLE FOR LOW INCOME CONSUMERS AND THOSE WHO LIVE IN HIGH COST AREAS The Ratepayer Advocate supports the Federal Act’s affirmation of the importance of universal service by creating adequate funding mechanisms for the achievement of these goals. Universal service policy must ensure that all of New Jersey’s consumers, including low-income households and those residing in high cost areas, are not excluded from the benefits of the competitive telecommunications marketplace. Though the Board of Public Utilities conducted extensive hearings on these issues in 1997, no action has yet been taken on these important matters. We urge policy makers to take the following course of action to advance universal service policy in New Jersey: LOW INCOME CONSUMERS: In hearings conducted by the Board in 1997, the Ratepayer Advocate proposed Lifeline assistance which would require a fund of some $11.5 million to be funded by all telecommunications carriers that provide services in New Jersey. While the Board at its meeting of December 22, 1999 broadened the scope of the Interim Lifeline program currently offered in New Jersey, it is not yet clear whether that program will qualify for maximum federal matching funds, and whether it will meet the needs of low income subscribers. Moreover, the current Interim Lifeline plan is not available to low income consumers served by local exchange carriers other than Bell Atlantic-New Jersey. I-9 Lifeline programs for low income citizens must be expanded to include automatic enrollment, matching funds from federal programs, consumer outreach and education, and a Universal Service Fund to provide discounted service to eligible subscribers. HIGH COST AREAS: The Ratepayer Advocate has estimated that universal service fund support for high cost areas of New Jersey would require annual funding of $16,494,000, to be generated by proportionate assessment of all telecommunications carriers operating in New Jersey. New Jersey needs to create a fund that provides needed support as an incentive for carriers to serve high cost areas of the state, to ensure consumer choice in the selection of carriers and affordability of service for all ratepayers. I-10 A STATE UNIVERSAL SERVICE FUND MUST ENSURE THAT OUR SCHOOLS AND LIBRARIES ARE CONNECTED TO THE INFORMATION SUPERHIGHWAY In 1998, the Ratepayer Advocate proposed for the Board’s consideration, a state universal service fund of $40 million to establish a safety net to provide funding for those schools that do not receive benefits from the federal universal service fund, as well as for costly inside wiring costs for schools plagued with ancient infrastructure. While the federal program has proven beneficial for many of the state’s schools and libraries, the Legislature and Board should implement a state universal service fund to provide funding where federal allocations fail to meet the needs of our schools and libraries. Any remaining portion of the fund that is not distributed in the first calendar year would be carried over for use in the following year, with a corresponding decrease in the assessments of the telecommunications providers for contribution to the fund. Only a state universal service fund can guarantee that educational technology will be available to schools and libraries throughout the state on an affordable -- and equitable -- basis. This conclusion was particularly evident in the Spring of 1998, when the federal e-rate program began the job of determining how to allocate $625 million among schools and libraries all over the nation that had requested over two billion dollars in telecommunications discounts. In keeping with Governor Whitman’s year 2000 priorities, the Ratepayer Advocate urges the Board to render a favorable decision on the Ratepayer Advocate’s proposal for a state universal service fund in support of schools and libraries. Alternatively, the Ratepayer Advocate urges the New Jersey Legislature to consider legislation authorizing such a fund generated by proportionate assessment of the I-11 intrastate revenues of all telecommunications companies doing business in New Jersey, ensuring the provision of modern telecommunications services to the state’s schools and libraries at affordable rates. Such action would advance the public interest by providing all New Jersey residents access to the benefits of evolving technologies and telecommunications services. I-12 CABLE TV CUSTOMERS MUST BE AFFORDED FAIR RATES AND PROPER SERVICES IN A MARKET OPEN FOR COMPETITION In the limited number of areas throughout the country where meaningful competition from a second cable television provider exists, real savings and consumer benefits have been realized. However, New Jersey consumers have not benefitted from competition for their cable service. Furthermore, federal deregulation of cable television service has restricted the authority of the Board and the Ratepayer Advocate to properly protect consumers in cable filings seeking rate increases for basic cable service, and has completely discontinued price regulation of second-tier cable services. Though the Federal government has recently eliminated many of the legal barriers which constrained satellite operators from fairly competing for cable customers, it is not yet clear that this change in the law will be enough to make satellite service directly competitive with cable television. The promise of the federal Telecommunications Act of 1996, that utilities of all kinds will be encouraged to enter markets for telephone, cable television and Internet access, has yet to materialize in New Jersey to any great extent. Until real competition in the cable television industry emerges from whatever source or sources, the Ratepayer Advocate will participate in regulatory proceedings and processes at every level, both state and federal, to protect the interests of consumers who are captive customers of what is today, a monopoly enterprise in New Jersey. I-13 Cable customers must be ensured fair rates and proper services; competition must be encouraged in this marketplace as presenting the best hope for direct consumer benefits. It is only when a competitive market is realized that all providers will have to compete for subscribers on the basis of offering the best services at the lowest rates, thereby providing those consumer benefits envisioned in the Federal Act. I-14 POLICIES IN NEW JERSEY SHOULD PROMOTE OPEN ACCESS TO CABLE BROADBAND INFORMATION SERVICES OF ALL KINDS, INCLUDING INTERNET ACCESS A new focus and urgency with regard to competition in services provided over cable systems has arisen with the emergence of convergence activity in the telecommunications marketplace. For years, cable television companies have provided television service to customers with wires directly into their homes. Recent technological advancements, alongside recent mergers of telecommunications carriers, such as AT&T, with cable systems for the provision of competitive telephony and high speed Internet access, present new issues relating to access. Cable operators providing broadband Internet access have proposed to offer the service exclusively through their own Internet Service Provider (ISP), without permitting competing ISPs access to their networks. Recently it appears that cable systems may be willing to reconsider this position, with AT&T, for example, having indicated its willingness to permit certain competing ISPs to also provide Internet access service to AT&T’s cable customers. Though the precise terms, conditions and limits of AT&T’s offer are not yet known, this is a welcome development. The January 2000 proposed merger of America Online and Time Warner has refocused regulatory attention on this issue. Thus far the FCC has refused to take a position on the issue of broadband access, deferring to the marketplace to define competition. Also, this issue is currently being litigated in the federal court which is hearing the appeal of AT&T from the decision of Portland, Oregon to require open access for all ISPs to TCI cable lines, a company recently merged with AT&T. I-15 The Ratepayer Advocate has always championed open access to all technologies connecting consumers to the information superhighway. While issues related to open access to interactive broadband cable pose some unique and currently unanswered legal questions, we believe that society is benefitted by policies promoting maximum competitive access to all entry ramps to the information superhighway. Accordingly, policymakers at all levels, including legislators, the Board, and local officials, should consider the issue, especially its implication for constitutionally protected freedom of speech and the impact on consumers, of cable operators providing open access to all service providers in their provision of interactive broadband. When and if the unresolved legal questions currently clouding the marketplace are definitively answered, legislators can again revisit policies supporting open access to information services provided over cable broadband technology. Since the introduction of broadband Internet access over cable appears to stimulate telephone companies in their deployment of DSL, policies which encourage vigorous competition in cable broadband are also likely to spur telecommunications carriers of all types to speed market deployment of broadband over the telephone network. Though broadband may not be an essential service at the end of the 20th century, the day may not be far away when society’s need for high speed information services of all kinds is so universal as to require ubiquitous broadband service for all consumers. reconsidered. At that time, the paradigm for “universal service” may have to be I-16 UNIFORM STATE LEGISLATION IS NECESSARY TO INSURE FAIR REGULATIONS FOR CONSTRUCTION OF CELL TOWERS IN SUPPORT OF WIRELESS TELECOMMUNICATIONS TRANSMISSION The impact of federal law on municipal authority to determine how and where wireless telecommunications providers may construct cell towers is of considerable concern to the Ratepayer Advocate. The impact of cell tower construction on the quality of life in New Jersey’s communities must be balanced with the encouragement of competition for all telecommunications services, as well as the introduction of new services such as those which result from wireless transmission which are of great economic importance to the State of New Jersey. The Ratepayer Advocate supports state legislation which would adopt the requirements of 47 U.S.C. §332(c)(7) and set predictable, enforceable parameters on the manner in which cell towers can be sited. This legislation should also protect wireless telecommunications providers from restrictions that are inconsistent with the federal law. These guidelines, consistent with the principles discussed in this paper, will ensure a thorough review of cell tower siting in keeping with legal requirements and their interpretation by the courts. The Ratepayer Advocate believes that all stakeholders will benefit from new and better wireless telecommunications services when municipalities adopt guidelines which encourage cooperation between the residents and the telecommunications industry on cell tower siting. I-17 A STUDY OF MUNICIPAL TELECOMMUNICATIONS NETWORKS SHOULD BE ENCOURAGED TO ANALYZE ACCESS TO ADVANCED TECHNOLOGIES FOR ALL RESIDENTS AND BUSINESSES THROUGHOUT THE STATE The Ratepayer Advocate supports a study to be undertaken by legislators and various agencies of the State of New Jersey, to examine the feasibility for development and installation of municipal telecommunications networks in New Jersey including low income urban areas. Such networks could promote competition and provide all subscribers with advanced telecommunications services, thus furthering both federal and state objectives. INDUSTRY MERGERS AND CONVERGENCE WILL BENEFIT CONSUMERS ONLY IF A FRAMEWORK IS IN PLACE FOR INSURING CONSUMER CHOICE AND OPEN ACCESS Mergers and convergence are radically changing the shape of the telecommunications industry. Whereas traditional telecommunications and utility providers once operated in separate and distinct markets, they are now able to eliminate market distinctions and offer multiple services. Consumers can benefit through the lower prices and increased services competition brings. However, mergers and convergence are not necessarily synonymous with competition. Proposed mergers must be reviewed by state and federal regulators to ensure that the merger will not result in the creation of a de facto monopoly or prevent open access to the telecommunications network. Consumers also should share in the savings created as a result of mergers. The Ratepayer Advocate supports mergers and convergence activities that open the telecommunications marketplace to new or greater competition and/or the introduction of new services that do not inhibit or prevent competition or stifle innovation. I-18 While the Ratepayer Advocate supports the merger of companies and convergence of industries when the effects will increase competition, bring advanced technologies to market, and broaden consumer choice, careful attention must be paid during the regulatory review process, to insure continued open access on the network systems and continued affordability of services for all classes of ratepayers. A LAST WORD: NEW JERSEY MUST PREPARE FOR THE TIME WHEN NO ONE WILL EVER TRULY BE OFFLINE, AND CONSUMER CHOICE WILL BE INFINITE With the explosive emergence of the Internet as the leading interactive source of data, information, and electronic commerce, with near limitless capabilities of advanced technologies for providing voice and video transmission, the Ratepayer Advocate will be following the nationwide debate on the issue of broadband open access. The opportunities for consumers to seamlessly access the world via telephone, cable, wireless, and satellite transmission, must be ubiquitously available to all classes of customers regardless of the chosen technology. Consumers of New Jersey must be guaranteed nondiscriminatory access to diverse sources of commerce, communication, and information. The Ratepayer Advocate cannot support a marketplace where the consumer cannot choose the Internet provider of choice. A vigorous competitive marketplace with choice will benefit consumers in two ways. Firstly, true competitive markets bring lower prices, higher quality of service, and increased technology innovation. And secondly, competition supports basic first amendment rights which guarantee the unimpeded flow of free speech and the I-19 exchange of ideas and opinions, through worldwide and local communication and discourse, which is the very bedrock of democracy. There is more than one way to reach the Internet from the home or office. Consumers must have the right to choose their provider and to expect quality access irrespective of any affiliation between the carrier and the selected content provider. Consumers need and deserve open access. By “open access,” I quote a definition provided by the openNet Coalition contained in the FCC’s Staff Report “Broadband Today” issued October 1999: “Open access refers to the ability of consumers to choose the Internet Service Provider [ISP] of their choice. Enabling consumers and their chosen ISP to reach each other requires that ISPs not chosen by the cable company have the ability to purchase, on a nondiscriminatory basis, the last mile of communications facilities to reach consumers who are requesting their service.” The cable industry and the incumbent local exchange carriers have both entered the broadband Internet marketplace - the local exchange carriers are deploying DSL technology and the cable industry the cable modem. Wireless and satellite operators have also announced their plans to provide broadband for voice, video, and data. The important concept however is “open access” for consumers whether through cable lines or telephone lines, wireless or satellite. Making these broadband services available and affordable through open access to cable systems is currently being debated on the federal level, in the courts and at the FCC; at the local level in the municipal approvals of franchises throughout the country; and, on the state level in legislative proposals being considered in Pennsylvania and New Mexico. New Jersey is currently not part of this debate. One must, however, recognize I-20 that in order for all consumers to achieve the connection to the information superhighway we must investigate, study, and reach consensus on the open access policy in determining the best interests of all New Jersey residents. “The world is all gates, all opportunities, strings of tension waiting to be struck.” -Ralph Waldo Emerson (1803-1873) I-21 GLOSSARY OF TELECOMMUNICATIONS TERMS “It was not so long ago that people thought that semiconductors were thought part-time orchestra leaders and and microchips were very, very small small snack foods.” – Geraldine Ferraro J NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE TELECOMMUNICATIONS GLOSSARY Abbreviated Dialing A feature that permits a caller to dial the destination telephone number by entering fewer digits than usually required. Also know as speed dialing. Electronic connection to a telecommunications network. The ability of a user to enter the network. Charge imposed by a carrier for accepting traffic onto its network. Local telephone companies, also known as Local Exchange Carriers (LECs), collect access charges from both customers and long distance companies for the use of the LEC local network in originating and terminating long distance calls. The design, ordering, installation, pre-service testing, turnup and maintenance on local access services. The circuit that connects the calling party’s location with a switching center. Also known as the local loop. A discount applied to multiple services based on the total dollar value of those services. An independent entity that brings several subscribers together to form a group that can obtain services at a reduced rate. Subscribers are billed by the original telecommunications carrier. Advanced Intelligent Network. A database that supports advanced features by processing throughout the call handling process. Advanced features include Call Forwarding, Caller ID, Call Trace, Return Call, ThreeWay Calling, Distinctive Ringing, Speed Calling, and other services. Access Access Charge Access Coordination Access Line Aggregate Discount Aggregator AIN J-1 Alternate Access A form of local access where the provider is not the incumbent local exchange carrier, but is authorized or permitted to provide such service directly to subscribers. Operator services provided by a company other than a carrier such as the Regional Bell Operating Companies (see RBOCs) or AT&T that is authorized to provide such service. A transmission method employing a continuous (rather than pulsed or digital) electrical signal that varies in amplitude or frequency in response to changes in sound, light, or position, impressed on a component in the sending device. A pathway capable of transmitting an analog signal. The typical analog telecommunications channel transmits voice. Charges for supplementary or optional services, which may consist of both non-recurring (i.e., one-time) and monthly charges. Subordinate, supplementary, subcomponent characteristics and capabilities. Marketing options of Products and Services. Automatic Number Identification. Technology that permits the local exchange carrier to provide a long distance carrier with the caller’s telephone number as a means of identification. The same technology also provides Caller ID service to telephone subscribers. American National Standards Institute. A United Statesbased organization that develops standards and defines interfaces for telecommunications. The overall design and/or arrangement governing the interaction of the various elements of a communications or computer system. Alternative Operator Services (AOS) Analog Analog Channel Ancillary Charges Ancillary Features ANI ANSI Architecture J-2 Asynchronous Transfer Mode (ATM) An international high-speed, high volume, packetswitching transmission protocol standard. ATM uses short, uniform 53-byte cells to divide data into “packets” for ultra fast switching through a high-performance communications network. The 53-byte cells contain 5byte destination address headers and 48 data bytes (that contain information). ATM is the first packet-switched technology designed to support integrated voice, video and data communication applications. It is well-suited to highspeed Wide Area Network (WAN) transmission bursts. ATM currently accommodates transmission speeds from 64 Kbps to 622 Mbps. See Asynchronous Transfer Mode A loss of signal strength in a lightwave, electrical, or radio signal usually related to the distance the signal must travel (e.g., fiber optic transmission must be regenerated approx. every 30 miles). Fiber optic attenuation is caused by transparency of the fiber, bending the fiber at too small of a radius, nicks in the fiber, splices, or poor fiber terminals. Electrical attenuation can be caused by the resistance of the conductor, poor (corroded) connections, poor shielding, radio-frequency interference, or other factors. Radio signal attenuation may be due to atmospheric conditions, sun spots, antenna design/positioning, obstacles, other factors. See RBOC Network of broadband connections between switches. ATM Attenuation Baby Bells Backbone Basic Service Tier (BST) Standard level of cable television service. Bell Operating Company The local (or regional) telephone company that owns and BOC operates telephone lines that connect to local network Central Office Switches. BOC may refer to the 22 local telephone companies providing local service to a large portion of the U.S. Each BOC is owned by one of the seven original RHCs (Regional Holding Companies) (not including Cincinnati Bell or Southern New England Telephone), which were created as a result of the 1982 divestiture of AT&T: Ameritech, Bell Atlantic, BellSouth, J-3 NYNEX, Pacific Telesis, Southwestern Bell (SBC), and US West. Billing Account Number Used by telephone companies to designate a customer or BAN customer location that will be billed. A single customer can have multiple billing accounts. Bit The smallest unit of information that can be transmitted. Bit is short for binary digit, which may have one of two values ( 0 or 1). These digits correspond to the “off” and “on” states of a digital computer logic system. A process that prevents certain types of calls to or from customer premise equipment, precluding users from accessing long-distance services or 1-900-type services. See Bell Operating Company A system capacity constraint that may reduce traffic during peak load conditions. Bits Per Second. A bit is a piece of information represented by a “0" or a “1". This binary language is the basis for all computer communications. A string of eight bits is called a byte. For purposes of denoting these measurements, the use of upper or lower case is significant. See immediately below. Bytes Per Second. See bps, above. 3 digital signals carried over a single pair of copper wires: 2 voice (B) channels of 64 kilobits each, and 1 signaling (D) channel of 16 kilobits permitting simultaneous transmission of voice and data on a single pair of wires. A high-capacity transmission technique for data or video that contemplates a speed greater than 1.544Mbps (contrast with Wideband and Narrowband). Blocking BOC Bottleneck bps BPS BRI - Basic Rate Interface (ISDN) Broadband J-4 Cable Modem Modem using coaxial cable for data transfer, provides higher speed transmission than standard telephone line modern. A modem is a device that transmits and accepts data over telephone wires or coaxial cables between computers. See modem. Cable programming level that provides service beyond that which is provided on Basic Service Tier. A completed switched communication (at a specified bandwidth) between two end points over a network. A call is originated by a “calling party”, “calling station” or “caller”. The destination or termination of a call is the “called party,” “called station(s),” or “destination node” on the network. An accounting record produced by switches to track call type, time, duration, facilities used, originator, and destination, CDRs are used for customer billing, rate determination, network monitoring, and facility capacity planning. The period of time that begins with Answer Supervision (i.e., when the called station goes off-hook) and ends when the call is terminated. Also known as Called Party or Destination Node on the Network. The telephone number to which a call is directed or terminated. A telecommunication credit card with an authorization code for using a long distance carrier when the customer is away from her home or office. Also known as Calling Party or Origination Node On The Network. The telephone number or ANI that initiates a call. A higher lever circuit (DS-1, DS-3 Transmission System, etc.) that has been designed to carry several lower-level circuits (DS-0, DS-1). Use of 800 service call routing features to divide 800 calls J-5 Cable Programming Service Tier (CPST) Call Call Detail Record (CDR) Call Duration Called Station Calling Card Calling Station Carrier Circuit Carrier Split between two or more interexchange carriers (IXCs). Methods of Splitting include percentage allocation, origination NPA, time of day, etc. Carrier Common Line Charge (CCLC) A per minute charge paid by long distance carriers to local exchange carriers for use of customers’ access lines (local loops) in originating and termination long distance communications, for the maintenance of local poles and wires needed to connect a customer to the network. CATV - Community Now called a Cable Television System. Antenna Television System. CBUD Call Before U Dig Operational management system for protection of fiber facilities. May have electronic geographic maps of states, counties, land, city, or streets where the carrier has buried facilities, and upon which reported construction activities are automatically mapped. Technicians verify that the activities do not pose a danger to the facilities, or dispatch on-site technicians when facilities may be at risk. (1) Packet switching information grouped in units of uniform size. Cells are fixed-length packets (e.g. ATM 53-byte cells) (2) A small group acting as a unit in a larger organization. In wireless telecommunications, one of the separate geographical areas covered by a single radio transceiver antenna in a multi-antenna cellular phone system. When referring to telephones, a mobile communications system that involves a combination of radio transmission and the wireline telephone network, permitting users to communicate with both other cellular and wireline telephone users in a geographic area. See competitive local exchange carrier A facility of a telecommunications common carrier where calls are switched. Cell Cellular CLEC Central Office - CO J-6 Centrex A telephone company service that uses central office switching to route internal calls from one extension to another, to route incoming phone calls directly to the appropriate extension, to handle direct dialing of outbound calls, and to provide many PBX-like service features. Centrex uses a separate dedicated line between each telephone at the customer premises and the switch at the central office. A telecommunications path (pipe) for the transmission of information between two locations in a network. A piece of transmission equipment (a multiplexor) that converts analog voice grade signals into digital form and combines 24 of these digitalized voice channels into a high-frequency 1.544 Mbps digital stream. A switched or dedicated communications path with a specified bandwidth (transmission speed/capacity). A switching method where a dedicated path is set up between the transmitter and receiver. The connection is “transparent,” which means that the switches do not try to interpret the data. The installation, either on site or via communications technologies (“virtual collocation”) of communications equipment at the network site of another carrier. Channel Channel Bank Circuit Circuit Switching Collocation Computer Conferencing An interactive teleconferencing system that allows specific groups of users to enter papers, texts, or comments. Participants can reach the conferencing system with microcomputers or terminals at any time, read the materials that have been submitted by other participants since the last session, and submit their own comments. Continuous Audio The audio connection for a switched video network which allows all connected endpoints to speak at the same time in the same manner as an audio bridge. J-7 Contract Tariffs Services and rates based on contracts negotiated with individual customers, but theoretically available to all customers. In New Jersey, also called Customer Specific Pricing Arrangements. A multiplexer to convert 24 voice grade analog or data channels into a DS-1. Dedicated Access Line. A non-switched circuit from the customer to a carrier. Fiber optic cable that is not connected to the requisite electronic and optronic equipment needed to use the fiber for a transmission. Fiber optic cable in the network without the hardware capability to transmit data is called “dark fiber.” Analog transmission media is specified in bandwidth (usually in Hertz) and signal to noise (usually in dB). Since the principles behind digital transmission are so different, media are specified in different parameters. Rather than how much analog information is passed, a digital user is concerned with how many bits per second can be sent down the channel. Direct Broadcast Satellite Service. Transmission of television broadcast signals from Earth orbiting satellite to the home of the subscriber. Digital Distance Dialing. Any switched telecommunications service that allows customers to place long distance calls without operator assistance. Direct Digital System. A network whose component parts and signals (representing information of various types) are all transmitted via standardized digital signaling methods. In a DDS network, no analog-to-digital converters are necessary. Channels that are reserved for specific uses. Public Access, Education and Government, (PEG) cable channels are examples of dedicated channels. D-4 Channel Bank DAL Dark Fiber Data Rate DBS DDD DDS Dedicated Channels J-8 Dedicated Lines A leased or purchased line that connects two or more data communication sites used exclusively by one vendor or user; may also be known as private line. Demarcation. A line either side of which determines the carrier’s and owner's responsibilities. The location(s) where customer provided equipment is connected to carrier-provided equipment. Example: the splice block where a telephone line enters most homes is a demarc; everything on the “line side” of the demarc is the responsibility of the telephone company, while everything on the home side (i.e. the house wiring and the telephones themselves) is the responsibility of the homeowner. A method of storing, processing, and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits 0 and 1. Digital transmission/switching technologies employ a sequence of discrete, distinct pulses to represent information, as opposed to the continuously variable analog signal. Telecommunications networks built today are constructed using digital technology. Demarc Digital Distance Education Instruction that takes place in a setting where the teacher Distance Learning is in contact with the student by means of telecommunication technologies. These technologies are often used to link student and teachers within or between districts and states, as well as internationally. These technologies include broadcast and narrowcast radio and television (e.g., cable, fiber optics, microwave, satellite, etc.) telephone, video disk, video tape, and computer applications. The most advanced technologies permit full-motion interactive television connections between students and teachers. DSL Digital Subscriber Line. A broadband technology that provides fast Internet connections to homes and businesses over ordinary telephone lines, competing with cable, wireless and satellite systems. The data stream travels over the same copper line that is used for voice transmissions, which means that the customer can make and receive telephone calls simultaneously with Internet connections. A device that combines transmit and receive signals on J-9 Duplexer one antenna E911 Enhanced 911 services that provide emergency service operators with caller location capability and automatic call-back. An instructional area characterized by the presence of twoway distance learning facilities such as interactive video, 2-way audio, and possibly such advanced features as computer image reception/transmission, ability for sending/receiving data from a central site, etc. Sometimes also referred to as in-house educational video equipment such as VCR's. A computer local area network (LAN) and baseband protocol based on a packet frame that operates at 10 Mbps over coaxial cable, unshielded twisted pairs, or fiber optics. Telecommunications service provided via the service provider’s equipment and network facilities; see Resale. A means for transmitting digital information (voice, video, data) over high purity, hair-thin fibers of glass in the form of digital signals. Bandwidth capacity of fiber optic cable is much greater than that of conventional cable or copper wire. The number of cycles per second of a electromagnetic transmission, usually described in hertz. Generally, high frequency transmissions can carry more information at greater speeds than low frequency transmissions. The ability to transmit in both directions simultaneously. A transmission system, with its associated equipment, capable of simultaneously transmitting and receiving signals, as opposed to simplex (unidirectional) or halfduplex (one direction at a time) systems. Electronic Classroom Ethernet Facilities-Based Fiber-Optics Frequency Full Duplex J-10 Full-Motion Video Not compressed. A standard video signal of 30 frames per second and 525 horizontal lines per frame, which is capable of complete action. Level 3 Video utilizing 2 audio channels suitable for use in Distance Education credit courses employing rapid motion in real time. Additional fee charged by ILEC for “connection” of unbundled network elements (“UNEs”) . A circuit that permits communications in both directions, but not simultaneously A method of transmitting two TV signals through a single transponder, by reducing the deviation and power allocated to each. Half-transponder TV carriers each operate typically 4 dB to 7 dB below single-carrier saturation power. High Definition Television. An emerging TV technology which gives better picture quality, a wider screen, and better sound than a standard TV. Most HDTV technologies are digital encoding. A unit of frequency equal to one cycle per second (cps). One kilohertz equals 1000 cps; one megahertz equals 1 million cps; one gigahertz equals 1 billion cps. A point or piece of equipment where a branch of a multipoint network is connected. A network may have a number of geographically distributed hubs or bridging points. Signaling made up of tones of defined bits which pass within the data transmission stream. Tones sent over digital circuits are encoded into digital PCM bursts and sent as digital data within the data channel. Incumbent Local Exchange Carrier. The historical monopoly provider of local telephone service. The connection of telecommunications network or equipment of two or more telecommunications service providers. A company providing long-distance phone service. J-11 Glue Charge Half Duplex Half-Transponder HDTV Hertz Hub In-Band Signaling ILEC Interconnection Interexchange Carrier (IXC) InterLATA Call Communication between Local Access Transport Areas (“LATAs”) (see LATA). New Jersey is currently divided into three LATAs. Phone calls between LATAs are long distance phone calls that must be carried by an IXC across the LATA boundary. Internet Service Provider An entity through which individual business or residential (ISP) customers can obtain access to the Internet. IntraLATA Call Communication within a LATA. Phone calls within a LATA but beyond a party’s local calling area are defined as local or regional toll calls. IntraLATA toll calls may be carried by both Local Exchange Carriers (LECs) and Interexchange Carriers (IXCs). Integrated Services Digital Network. A technology that digitally enhances regular telephone lines to provide users much faster data connections and simultaneous transmission of both voice and data. Internet Service Provider. A company that provides access to the Internet. Interexchange Carrier. A company that provides longdistance service. Kilobits per Second. A rate at which data information may be transferred across a communications line. 1 Kbs equals 1,000 bits per second, or approximately 125 bytes or characters per second (assuming 8 bits per character). Kilohertz - Refers to a unit of frequency equal to 1,000 Hertz. Local Area Network. A user-owned, user-operated, highvolume data transmission facility connecting servers within a confined area, i.e., in an office. ISDN ISP IXC Kbs Khz LAN J-12 LATA Local Access Transport Area. Geographic region set up to differentiate local and long distance calls. The area in which a local exchange carrier provides local and regional toll call service, and access to long distance carriers for InterLATA traffic. A dedicated private line (circuit) rented for exclusive use twenty-four hours a day, seven days a week from a telephone company to link two remote local area networks together. Unlike frame relay, this line transmits data at only one speed depending on the purchased bandwidth. Customers pay a flat monthly rate for this service. Local Exchange Carrier. The local or regional telephone company that owns and operates lines to customer locations and local network Central Office Switches. Federal assistance program that reduces monthly telephone service fees for low-income subscribers. Federal law provides that states may also provide Lifeline assistance. Federal assistance program that reduces telephone service activation fees for low-income subscribers. Leased Lines LEC Lifeline Link-Up Local Exchange Service Regular, non-long-distance or non-toll telephone service provided to subscribers for a monthly charge. Local Loop The telephone network between the local telephone switching office and the subscriber’s premises. The local loop is composed of feeder cables, distribution wires, and the drop wire to the customer’s premises. See, also, access line. The ability to retain one’s telephone number when switching service providers. Megahertz. Refers to a frequency equal to one million Hertz, or cycles per second Local Number Portability Mhz J-13 Mbs Megabits per second. A rate at which data/information may be transmitted. 1 Mbs equals 1 million bits per second or approximately 125,000 bytes, or characters, per second (assuming 8 bits per character) Multipoint Distribution Service. one channel broadcast from one location to various points. MDS is one the technologies that Competitive Local Exchange Carriers (CLECs) are developing as possible to the local loop of Incumbent Local Exchange Carriers (ILECs). Short electrical wavelengths used to transport audio, video, and data signals point to point. A single transmit and receive link can cover up to 40 miles and requires clear line of sight. Modulator/Demodulator. An electronic device used to allow a computer to send and receive data, typically over a phone line or coaxial cable. A communications system which allows three or more sites to participate in the transmission. A low-capacity voice grade, communications circuit/path. It usually implies a speed of 56Kbps or less (Contrast with Wideband and Broadband) The tying together of multiple sites for the reception and possible transmission of information. Networks can be composed of various transmission media, including copper wire, terrestrial microwave, or coaxial cable. A transmission protocol where digital transmissions are broken into small blocks or data "packets" that are addressed to their destination and sent by a central switching computer along diverse routes through the network. MDS Microwave Modem Multipoint Narrowband Networking Packet Switching J-14 PBX Private Branch Exchange. A piece of equipment that companies, when they reach a certain size, may install, and that acts as the company’s own internal telephone switch. The PBX handles internal company calls and all the connections to and from the Public Switched Telephone Network. PCS - Personal A digital wireless telecommunications service, popularly Communication Services used for cellular-telephone like applications. POP Point of Presence. Locations at which a competitive carrier or interexchange carrier is able to connect to the local exchange carrier's network. Plain Old Telephone Service. Basic voice phone service. The long distance or intraLATA carrier selected by an enduser to carry normally dialed 1 + calls. When an end-user selects a carrier, she is said to have presubscribed to a service. The PIC will receive all long distance or intraLATA calls dialed on a 1+ basis. In New Jersey, the network is able to program customer selections for two designated interexchange carriers, one for IntraLATA calls and one for interLATA toll calls, if the subscriber so chooses. Charge paid by subscribers of interexchange carriers that is intended to reimburse local exchange carriers for use of the local loop for interstate service. A network, usually operated by a single corporate entity, made up of dedicated lines leased from the carriers, and switching equipment located on the corporate premises. Geographic area identified by a LEC that is associated with a particular NPA.NXX code (i.e., 973-248-XXXX), and used, i.e. by the local exchange carrier for purposes of routing and pricing calls made by the subscriber. POTS Primary Interexchange Carrier (PIC) Primary Interexchange Carrier Charge (PICC) Private Network Rate Center J-15 Rates and Tariffs Standards published by telecommunications companies that define service availability, cost, and provisioning procedures, and serves as the contract between the carrier and the customer. Regional Bell Operating Company . The seven "Baby Bell" companies created by the 1982 Modified Final Judgment that specified the terms of the AT&T Divestiture: NYNEX, Bell Atlantic, BellSouth, Southwestern Bell, U.S. West, Pacific Telesis, and Ameritech. Of the original seven, only four remain, due to mergers and consolidations: Bell Atlantic, BellSouth, SBC (formerly Southwestern Bell), and US WEST. Method whereby each of multiple telephone companies whose network is involved in a single call receives compensation for the use of its network. Provision of competitive service whereby no facilities of the competitor are used; rather, the original provider’s service is simply “resold” under the brand name of another provider. Since the competitor purchases wholesale capacity, it obtains a discount off of tariffed rates for the service being resold. Sending and receiving of messages occurs simultaneously without delay, "live." A transaction which occurs without significant delay from start to finish, i.e., taking a class from a "live" instructor and getting immediate feedback as opposed to watching a videotape of the class sometime after the actual event. RBOC Reciprocal Compensation Resale Real Time Subscriber Line Charge Monthly charge paid by subscribers to reimburse local exchange carriers for use by other carriers of the local loop for interstate service. Switch A device that routes a call by selecting the paths or circuits to be used for transmission of information and establishing a connection. J-16 Switched Access Nondedicated local access between the customer's premise and the serving wire center which is interconnected to the company's point-of-presence for origination or termination of service. Process of routing communications traffic from a sender to the correct receiver (e.g. telephone switchboard, local network end office circuit switch, packet switching performed by a data router, etc.) A form of communication transmission with a direct timing relationship between input and output signals. The transmitter and receiver are in sync and signals are sent at a fixed rate. Information is sent in multibyte packets. It is faster than asynchronous character transmission, since start and stop bits are not required. It is used for mainframe-to-mainframe and faster workstation transmission. Telephone term given to a digital transmission circuit whose bandwidth is equal to 24 multiplexed voice grade channels (DS-0) or 1536 Kbs (actually, 1544 Kbs with 8 Kbs bits used for overhead). Transmits digital signal at 1.544 Mbps (1544 Kbps) (vs. ISDN which transfers digital signals at 144 kilobits per second). The equivalent of 4 multiplexed T-1 channels. 6.312 million bits per second (6.3 Mbps). Carrier facility that is not three times the capacity of T-1, (as the name suggests) but 30 times the capacity, handling 44.736 Mbps. One T-3 channel can deliver twenty-eight multiplexed T-] channels, or 672 voice circuits used for digital video transmission or for major PBX-PBX telephone interconnection. The equivalent of 6 multiplexed T-3 channels. 274.176 million bits per second (274 Mbps). A published rate for services provided by a common or specialized carrier that outlines services and rates. Switching Synchronous T-1/DS-1 T-2/DS-2 T-3/DS-3 T-4/DS-4 Tariff J-17 TIIAP Telecommunications and Information Infrastructure Assistance program. A grant program from the National Telecommunications and Information Administration of the United States Department of Commerce, established by Congress in fiscal year 1994 to assist non-profit organizations and units of state and local government to undertake projects which contribute to the building of a national information infrastructure. The ability to block the capability to make toll calls from a telephone line. Classification based on: (a) data flow (simplex, half duplex, full duplex), (b) physical connection (parallel, serial), and (c) timing (asynchronous, synchronous). The foundation of communication capacity between two points. It is governed by the equipment type generating the (optical) signals. The capacity of a single fiber can be increased by installing higher-speed (higher-cost) transmission systems (end-to-end). A high-capacity connection between two switches. The provision of complete working system provided by a single supplier who takes responsibility for integrating all video facilities, providing transmission, servicing and, in some cases, managing the complete project. Two copper wires wrapped around each other to minimize crosstalk with other electrical sources. Historically, twisted pair has served as the main transmission medium for telephone communications between the telephone subscriber and the local switching office and is still the primary medium for the local loop (see local loop and access line). Various components of a telephone network offered for sale by a telephone company that can be combined with another carriers facilities in order to offer telecommunications service. Very High Frequency. Refers to Electromagnetic waves between approximately 54 MHz and 300 MHz J-18 Toll Block(ing) Transmission Mode Transmission System Trunk Turn-key Twisted Pair Unbundled Network Elements (UNEs) VHF Videoconferencing Conference between two or more remote locations with video and audio links to hold a meeting at different locations. A low-capacity communications circuit/path used primarily for speech transmission usually with an audio frequency range of 300-3300 hertz. Generally implies a speed of 56 Kbps or less. Also used for transmission of analog and digital data. Up to 10,000 bits per second can be transmitted on a voice grade channel. A data network typically extending a LAN outside a building or beyond a campus, over IXC or LEC lines to link to other LANs at remote sites. Typically created by using bridges or routers to connect geographically separated LANs. A medium-capacity communications circuit/path. It usually implies a speed from 64Kbps to 1.544 Mbps. (Contrast with Broadband and Narrowband) Voice-Grade Channel WAN - Wide Area Network Wideband Sources Sources used in compiling this Glossary include: http://www.commworldnca.com The Basics Book of Information Networking, Motorola Codex, Addison-Wesley Publishing 1991 IEEE Standard Dictionary of Electrical and Electronics Terms, Centennial Edition. New York: Institute of Electrical and Electronics Engineers, Inc. 1984. Telecommunication & FCC Cable TV Technical Standards: A local government guide, William F. Pohts, 1996. J-19