Assessing Pricing Behavior Under Deregulation

1
Assessing Pricing Behavior Under Deregulation

• David Brevitz
• June 14, 2006
• NASUCA Mid-Year Meeting

2
Current Environment

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

3
Rate Deregulation

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

4
Legislative Rate Deregulation

• Between October 2004 and September 2005, 22
  states deregulated servicesNRRI State Rate
  Report, April 2006
  
• A growing list of states face deregulation of
  basic service rates for residential consumers,
  now or in the next few years
  
• Many states have already deregulated bundled
  servicesNRRI State Rate Report, April 2006

5
Legislative Rate Deregulation

• Flood of legislative deregulation embraces policy
  of reliance on competitive market forces
  
• Policy is ill-conceived and ill-considered
• Deregulating into likely cable/ILEC duopoly
• Independent operating status of VoIP providers
  not assured
  
• Continuing industry consolidation
• Policy change cannot be immediately reversed, but
  consumer advocates must gather and maintain
  information to address abuse of market position
  and prices

6
Verizon Fios Program

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

7
ATT Internet TV Service

• New internet technology is to be used to deliver
  TV signals, avoids cost of fiber optics to home
  
• Planned spending of 4.6 billion to make IPTV
  available to 19 million homes in 41 markets by
  the end of 2008
  
• 800 million being spent in Texas, 247 million
  in Kansas based on recent legislation
  
• Plan has a number of financial community
  skeptics, as does Verizons plan

8
Verizon and ATT Pricing

• Fairfax County, Va
• Cox Cable 102.04 per mo. for telephone, cable
  TV and high speed internet
  
• Verizon 104.85 is the least expensive package
  including unlimited calling
  
• San Antonio, Tx
• controlled launch to hundreds of subscribers,
  pricing not yet available
  
• SBC statement that bundle price will move toward
  90
  

9
Verizon and ATT Business Focus

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

10
Basic Local Exchange Rate Increases

• Increasingly permitted by legislation and
  Commissions
  
• ILECs real reason for increases is to increase
  revenues and cash
  
• Cost arguments are used for PR purposes
• Migration Strategyservice bundles are excepted
  from price increases

11
BLES Rate Increases

• Basic service rate increases going in
• Idaho, up to 10 rate increase, then deregulation
  in 2-4 years
  
• Iowa, 1 per month up to 19 cap, deregulation
  procedure is available (10 Qwest exchanges
  deregulated)
  
• Indiana, 1 per year to 2009, then BLES is
  deregulated
  
• Oklahoma, deregulation and 1.90 increase a/o
  April/07
  
• Wisconsin, 2.50 annual limit 1st two years, then
  BLES is deregulated
  

12
BLES Rate Increases

• Missouri, basic telephone rates up 10-13, .93
  to 1.26 per month
  
• Increase will not apply to bundles
• ATT states we need the revenue to continue
  providing good service and to invest in new
  technology

13
Reliance on Market Forces

• Competition is assumed, not demonstrated,
  policymakers are deregulating into a two-wire,
  duopoly market structure
  
• Markets are very highly concentrated, not even
  close to many buyers, many sellers competitive
  market construct

14
Reliance on Market Forces

• Primary competition will be between cable company
  and ILEC
  
• Some locations have only one choiceILEC only or
  cable only
  
• Rivalrous behavior now between cable and ILECs,
  as each are expanding into the others markets
  
• But, when duopoly equilibrium is reached, deals
  will end and prices will rise

15
Reliance on Market Forces

• ILEC incentive to move customers from lower
  revenue basic services to higher revenue bundles
  
• Lack of comparably priced functionally equivalent
  BLES alternatives
  
• BLES prices increase, subject only to cap of
  the bundle price
  
• SBC (ATT) has stated BLES prices are protected
  by the cap of the bundle price

16
Monitor Prices Under Deregulation

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

17
Prices to Monitor

• For all 50 states
• Basic local exchange service
• Urban
• Rural
• Lifeline service
• Bundle prices
• basic bundle
• Complete bundle package

18
Collection of Price Data

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

19
FCC Reference Book

• Contains limited price information
• Rates for cities in 40 states as included in BLS
  Urban CPI survey, beginning in 1986
  
• Omitted states are Delaware, Idaho, Kansas,
  Nevada, New Hampshire, North Dakota, Oklahoma,
  South Dakota, Vermont and Wyoming
  
• Not all states are complete for monitoring
  needsNebraska Grand Island included, but not
  Omaha

20
FCC Reference Book
21
2 States Not Included in BLS CPI Urban
22
Model legislative language

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

23
BLES Deregulation

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