Alternative Forms of Regulation A Rural ILEC

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Alternative Forms of RegulationA Rural ILECs
Views and Experiences
October 9, 2007 NARUC Staff Subcommittee on
Accounting and Finance Conference Timothy W.
Ulrich TDS Telecom 608-664-4114

• Disclaimer The viewpoints expressed within this
  presentation are those solely of the presenter,
  which may not represent the position and/or
  viewpoints of TDS Telecom

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Agenda

• Regulation and Competition
• Competitive Nature of the Rural Market
• Alternative Forms of Regulation
• Experiences with Alternative Forms of Regulation

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Regulation and Competition

• Goal of Regulation Simulate the operations of a
  competitive market to protect the public interest
• Task Strike a reasonable balance between the
  extent of regulation and the level of competition
  in a market, i.e. adapt regulation to market
  conditions
• Rate of Return Regulationmarket exhibits
  monopolistic characteristics
• ILECs allowed to recover reasonable expenses and
  return on investmentlinks cost and price
• Protect consumer and public interest
• Limited incentives for innovation and cost
  reduction
• High regulatory costs

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Regulation and Competition (cont)

• Alternative Forms of Regulation (AFOR)
• Appropriate when market exhibits competitive
  characteristics or to achieve other social goals,
  e.g. transition to competition, investment
  commitments
• Emphasis on regulating price, not earnings
• Competitive pressures will aid in regulating
  prices
• Introduction of innovative and advanced services
• Provide pricing flexibility and attractive
  packages (bundling) for regulatory parity
• Alt reg is not dereg it is just another way to
  regulate
• Again, adapt regulation to market conditions

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Competitive Nature of the Rural Market

• Over the last 5 years, increased competition from
  wireless, cable, VoIPi.e., services that provide
  the same functional capabilities as POTS
• Access lines declining
• Cutting the cord, dropping second line, and/or
  not selecting ILEC for new service (only 50 have
  been selecting)
• Switched access MOUs and revenues declining
• Barriers to competitionregulatory parity
• Pricing flexibility--bundling
• Streamlined tariffing
• Symmetry
• Cross-subsidization allowed for cableaffiliate
  safeguards
• Similar Quality of Service and customer
  protection standards

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Measuring Competition

• Determining the level of competitioncontinuum
  between natural monopoly and effective
  competition
• Telecom market reflects the trend towards full
  technological and functional convergence, with
  wireless, cable and Internet service options now
  being direct substitutes for traditional landline
  services provided by both ILECs and CLECs
• Structural and behavioral measures Measures to
  determine a firms ability to raise prices above a
  competitive level without losing sales for a
  sustained period of time
• Structural Quantifiable--market shares and
  concentration factors (e.g., Hirschman-Herfindahl
  Index, 4-Firm Ratios) elasticity of
  demand/supply relationships between price and
  cost
• Behavioral Dynamics of a competitive market to
  assess whether there is sufficient pressure on a
  company to set prices at competitive levels,
  i.e., determining the actions of the firms within
  and outside of the market

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Retail rate regulation of ILECs (December 2006)
Qwest AFOR Pending
NRRI 07-04, State Retail Rate Regulation of Local
Exchange Providers as of December 2006 April 2007
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Retail rate regulation of CLECs (December 2006)
NRRI 07-04, State Retail Rate Regulation of Local
Exchange Providers as of December 2006 April 2007
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TDS Telecom AFOR States

• For those states still under ROR, options do
  exist (except for AZs constitutional limits) and
  we have determined to either continue to monitor
  the regulatory environment and/or pursue an AFOR

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Types of AFORs

• Various Types of Plansdeveloped over time
• Rate Case Moratoriaagree to no earnings
  review/rate case for a set period
• Earnings/Revenue Sharingearnings above a certain
  level shared with customers
• Incentive Regulation
• Price Capmainly RBOCs (may include productivity
  offset)
• Pricing flexibility
• Full or Partial Deregulation (service-by-service
  deregulation)
• Statutorily Defined vs. Negotiated Plans
• Administrative Rules Help or Hindrance?
• Generic (off the shelf) AFOR plans
• Ability to pull plan, i.e., if file stipulated
  plan it cannot be changed without the ability for
  the company to withdraw it

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Potential Benefits of AFOR

• Benefits to Customers
• Limit on rate changes
• New services
• Increased choices
• Benefits to Industry
• Regulatory Stability
• Pricing Flexibility
• Lower regulatory costs
• Benefits to Government
• Lower regulatory costs
• Allow for more focus on consumer protection

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General Elements of Rural AFORs

• Price flexibility for basic services
• X per yearcustomer petition process
• Rate freeze for a period than flexibility
• GDP-PI less productivity factor (generally 1-2
  offset)
• Capped by RBOC rates or state-wide average
• Limited price constraints on non-basic
• Bundlingdiscounts allowed (reg and dereg)
• Rate rebalancinglower intrastate access on a
  revenue neutral basis
• Infrastructure and quality of service measures
• Streamlined tariffone day effective subject to
  suspension
• Competitive Commitmentsremoval exclusive
  franchise, rural exemption
• Suspension of statutes--e.g., depreciation
• Exogenous adjustments

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Experience under AFOR

• Success of an AFOR depends on its goalsindustry,
  government and consumer goals
• Promote competition
• Lowering of access rates
• Regulatory parity
• Infrastructure investment and modernization
• Regulatory stability
• Lower regulatory costs
• Rate stability for customers
• Consumer protection

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Observed Effects of AFOR

• More likely to deploy new services in companies
  under AFOR
• Small companies that have incentives/penalties
  built into their pricing mechanism for service
  quality/infrastructure investment appear to
  maintain better service and invest more, but it
  is not conclusive
• Small companies that offer wholesale tariffs and
  waive their state franchise protection have seen
  more entry into their territory by resellers and
  CLECs
• TDS Telecom companies under AFOR have not raised
  basic rates except for mandated revenue-neutral
  adjustments
• TDS Telecom non-basic (optional services) rates
  have been raised in several companies under AFOR
  but the generation of revenue from such increases
  has been minimal
• Stated state commission public policy goals of
  lowering access rates and lowering the barriers
  to entry for competitors have been achieved under
  most AFORs

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Favorite Components of an AFOR

• Favorite Elements of an AFOR (besides dereg) that
  TDS Telecom has elected/negotiated
• No earnings review prior to and during plan
• Basic service X amount or percentage per year
• Non-basic Service No pricing limitations
• Access rates Ability to rebalance on revenue
  neutral basis
• Tariff 1-30 day notice for basic 1 day for
  non-basic
• QoS Standardsparity with competitors
• Misc Ability to opt back into ROR or modify plan

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Least Favorite Components of an AFOR

• Least Favorite Elements of AFORs that TDS Telecom
  has elected/negotiated
• Initial earnings review
• GDP-PI minus productivity offset for basic
• Limitations on non-basic rates
• Incentives/Penalties for achieving set investment
  amounts per access lines and/or QoS measures tied
  to pricing mechanism
• Waiving of rural exemption

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Pertinent Resources from NRRI

• NRRI 07-06 Assessing Wireless and Broadband
  Substitution in Local Telephone Markets (June
  2007)
• NRRI 07-04 State Retail Rate Regulation of Local
  exchange Providers as of December 2006 (April
  2007)
• NRRI 96-19 Determining When Competition is
  Workable A Handbook for State Commissions
  Making Assessments Required by the
  Telecommunications Act of 1996 (July 1996)
• NRRI 94-30 Measuring the Impact of Alternative
  Regulatory Pricing Reforms in Telecommunications
  (December 1994)
• NRRI 88-1 Evaluating Competitiveness of
  Telecommunications Markets A Guide for
  Regulators (January 1988)