FORBEARANCE

1
Deregulation and Price Increases The
Hallmarks of a Competitive Market?
Presentation for the National Association of
State Utility Consumer Advocates Annual Meeting,
New Orleans, LA November 18, 2008
Susan M. Baldwin
2
ECONOMICS OF DEREGULATION

• Rates
• Logic -
• In competitive markets, rates move toward cost
• Perfect competition marginal revenue marginal
  cost
• Reality -
• After deregulation, rates for basic service and
  for discretionary features are increasing

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
3
ECONOMICS OF DEREGULATION

• Rates
• Analysis -
• Have services been priced below cost? Are rates
  rising to market levels? (Verizons argument
  in DC price cap case)
• Flaw -
• No reasonably comparable market substitutes for
  stand-alone basic service exist so it is
  difficult to determine market rate.

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
4
ECONOMICS OF DEREGULATION

• Rates
• Flaw
• Net cost to ILECs of offering basic services
  should be declining if ILECs properly assign and
  allocate costs to new lines of business
• Using their common local loop platform,
  carriers are now generating billions of dollars
  in digital subscriber line (DSL) revenues that
  they did not generate five or ten years ago.
• Source FCC, Order on Remand and Report and
  Order and Further Notice of Proposed Rulemaking
  in Docket 05-337/96-45 et al., November 5, 2008,
  Appendix A Chairmans Draft Proposal, at A-139,
  quoting NASUCAs refresh-the-record comments,
  filed July 7, 2008

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
5
ECONOMICS OF DEREGULATION
ECONOMICS OF DEREGULATION

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

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
6
ECONOMICS OF DEREGULATION
ECONOMICS OF DEREGULATION

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

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
7
ECONOMICS OF DEREGULATION
ECONOMICS OF DEREGULATION

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

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
8
ECONOMICS OF DEREGULATION

• Service Quality
• Conclusion
• Any competition that exists is for the ILECs
  resources, which are being diverted away from
  basic service to new lines of business.
• No penalty in the market which suggests one or
  more of the following
• - Consumers are locked into bundles
• - There is no substitute for POTS
• - There is competition but the market
  level for
• service quality is low.

Susan M. Baldwin
November 18, 2008
NASUCA Annual Meeting
9
AFTERMATH OF DEREGULATION

• Prices charged to consumers
• Rates are higher
• Service quality is deteriorating
• Lower value of service is an effective price
  increase
• Infrastructure
• Broadband is deployed selectively

10
RISING ILEC RATES - WHY?

• ILECs retain market power
• No substitute for stand-alone BLES
• Duopoly for broadband platforms and bundles
• What is to gain?
• Encourage consumers to move to bundles
• Profit (low price elasticity of demand because
  no substitutes)

11
BROADBAND MARKET IMPERFECTIONS

• Unprofitable areas lack broadband access
• Unlike dial tone model of 20th century, no 21st
  century obligation to provide broadband
• Carriers deploy only where profitable
• At best a duopoly

12
National Residential High-Speed Lines by
Technology as of June 30, 2007

• Source FCC, Wireline Competition Bureau,
  Industry Analysis and Technology Division,
  High-Speed Services For Internet Access Status
  as of June 30, 2007, rel. March 2008, Chart 6
  Residential High-Speed Lines by Technology as of
  June 30, 2007.

13
National Residential Advanced Services Lines by
Technology as of June 30, 2007

• Source FCC, Wireline Competition Bureau,
  Industry Analysis and Technology Division,
  High-Speed Services For Internet Access Status
  as of June 30, 2007, rel. March 2008, Chart 8
  Residential Advanced Services Lines by Technology
  as of June 30, 2007.

14
(No Transcript)
15
SERVICE QUALITY ON THE DECLINE

• Longer waits for repair
• Longer waits for installation
• Fewer lines repaired within 24 hours
• Longer wait times at call centers

16
Service Quality Is DeterioratingCustomers are
waiting longer for repairs
ATT Repair Intervals
Source FCC ARMIS Report 43-05 Service Quality
report.
November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
17
Service Quality Is DeterioratingCustomers are
waiting longer for repairs
Qwest Repair Intervals
Source FCC ARMIS Report 43-05 Service Quality
report.
18
Service Quality Is DeterioratingCustomers are
waiting longer for repairs
Verizon Repair Intervals
Source FCC ARMIS Report 43-05 Service Quality
report.
19
Recent Performance Shows Serious DeclineRepairs
Cleared within 24 Hours
ATT in Connecticut 2007-2008 vs. 7-year Average
Source Connecticut DPUC Docket No. 99-07-28,
ATT Semi-Annual Performance Report, (For July
2007 - December 2007), January 29, 2008 ATT
Semi-Annual Performance Report, (For January 2008
- June 2008), July 30, 2008 ATT Compliance
Filing of 10/30/2008.
20
DECLINING SERVICE QUALITY - WHY?

• Lack of Accountability
• Insufficient accountability to regulators lack
  of enforcement and financial incentives
• Insufficient accountability to consumers lack
  of market consequence for poor quality (i.e.,
  lack of competition)

21
DECLINING SERVICE QUALITY - WHY?

• What is to gain?
• Redeployment of resources to Verizon FiOS, ATT
  U-Verse, and Qwest Connect
• Cost-cutting helps bottom line

November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
22
NO ILEC ACCOUNTABILITY

• Service quality regimes not working
• e.g., Verizon MA consistently misses the DTC
  repair standard and so receives zero points for
  this service quality metric, but nonetheless its
  overall SQI is sufficiently high that it avoids
  paying an SQI penalty

23
STATE BATTLES

• Iowa legislative mandate for deregulation
• Default was deregulation so became uphill battle
  for consumer advocates
• Statute deregulated basic local with option for
  2-year extension
• As a result of statute burden was on consumer
  advocate to justify regulation rather than on
  ILECs to justify deregulation

24
STATE BATTLES

• New Jersey and DC
• Regulators compromise/contradiction
• PUCs conclude that theres plenty of competition
  but protect basic local for a few years to make
  deregulation palatable

November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
25
DISTRICT OF COLUMBIA VERIZON

• Because ILECs possess market power, unless
  consumer advocates and regulators intervene,
  consumer rates will increase and service quality
  will decline
• In price cap case, PSC acknowledged need to
  regulate stand-alone, based on difference in
  competitive landscape between bundles and POTS
• Classifying all basic business services in the
  competitive services basket does not protect
  small businesses that desire only basic
  individual line and additional line business
  services, not bundles of business services or
  high-volume usage services, from unreasonable
  rate increases.
• Freezes basic rates for two year and then caps
  increases thereafter Because of Verizon DCs
  traditional and continuing dominant position in
  the District of Columbia telecommunications
  marketplace
• Source Verizon DC Price Cap Order, Case No.
  1057, September 8, 2008, at 10-11, 19.

26
DISTRICT OF COLUMBIA VERIZON

• DC PSC retains oversight of possible withdrawal
  of basic services

The withdrawal of basic services on 30 days
notice is more problematic for the Commission.
While many consumers may seek advanced
telecommunications services, there will always be
some consumers who choose only basic services.
The Commission needs to ensure that these
consumers will always have access to basic
services. Thus, before the Commission can find
this provision to be in the public interest, a
provision stating that the Commission must
approve any withdrawal of basic services prior to
the withdrawal must be added to section5 (b) of
Modified Price Cap Plan 2007. Source Verizon
DC Price Cap Order, Case No. 1057, September 8,
2008, at 16.
27
WHAT CAN BE DONE?
Protect customers at both ends of purchasing
spectrum Basic POTS customers lack reasonably
comparable substitutes Triple play customers
vulnerable to duopolistic pricing Monitor
returns on equity Consider revenues flowing from
discretionary services, DSL and video
28
WHAT CAN BE DONE?
Acknowledge limitations of a duopoly in yielding
competitive rates Seek re-regulation where so
warranted Expand scope/eligibility for Lifeline
November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
29
WHAT CAN BE DONE?
Critically view requests for universal service
funds Are urban rates indeed going down, and
are rural rates going up? Are ILECs unable to
earn a reasonable return on investment without
an USF infusion? Critically view requests to be
made whole when access rates go down Access
volume declining Lower rates stimulate new
demand Lower rates decrease all carriers costs
for intercarrier compensation
30
New Hampshire FairPoint/Verizon

• Not a deregulation case, but major transaction
  although no explicit PUC analysis of competitive
  landscape, PUC recognizes need for rate and
  service quality protection
• Settlement reflects some consumer advocate
  concerns
• Consumer Advocate advocated for service quality
  improvements and rate protection
• FairPoint agreed to some basic service rate
  protection
• To maintain a stand-alone basic service offering
• Freeze rates for five years

31
New Hampshire FairPoint/Verizon

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

November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
32
New Hampshire FairPoint/Verizon

• NH PUC agrees with Consumer Advocate, stating
• The statement in OCAs brief that Verizon
  demonstrates no intention of achieving
  PUC-established service quality standards before
  selling its landline assets to FairPoint, OCA
  Brief at 59 is a fair one.
• FairPoint has agreed to achieve all of the
  standards established in 1997, some of which
  Verizon has argued in past proceedings are too
  strict and should be reduced. FairPoint not only
  agreed to achieve the standards, but also agreed
  to financial consequences in the form of customer
  refunds, if it does not meet them. FairPoint also
  agreed to limitations on future acquisitions if
  it does not improve service quality to acceptable
  levels. We find that the self-enforcing penalties
  and the limits on business acquisitions FairPoint
  has agreed to in the settlement agreement
  particularly meaningful incentives to insure
  FairPoint will improve service quality and
  achieve the relevant benchmarks. The commitments
  FairPoint has made to improve overall service
  quality and to eliminate the long-standing and
  increasing inventory of double poles are
  significant public benefits.

33
New Hampshire FairPoint/Verizon

• NH PUC agrees with Consumer Advocate, continued
• Consumer Advocate was able to gain a commitment
  on the part of FairPoint (and adopted in the
  settlement agreement) to maintain a stand-alone
  basic service offering (NH Order, at 70. The
  settlement agreement also freezes rates for five
  years).
• Source Verizon New England, Inc., Bell Atlantic
  Communications, Inc., NYNEX Long Distance Co.,
  Verizon Select Services, Inc. and FairPoint
  Communications, Inc. Petition for Authority to
  Transfer Assets and Franchise Order Approving
  Settlement Agreement with Conditions, New
  Hampshire Public Utilities Commission DT 07-011,
  Order Approving Settlement Agreement with
  Conditions, Order No. 24,823, February 25, 2008,
  at 71.

November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin
34

• Susan M. Baldwin
• 17 Arlington Street ? Newburyport, MA 01950
• [phone] (v) ? [phone] (f)
• smbaldwin_at_comcast.net

November 18, 2008
NASUCA Annual Meeting
Susan M. Baldwin