"~ COMCAST. Testimony Of. James M. D'Innocenzo Comcast. VP State Government, Legislative and Regulatory Affairs, PA/OH

Transcription

1 "~ COMCAST Testimony Of James M. D'Innocenzo Comcast. VP State Government, Legislative and Regulatory Affairs, PA/OH Beth Choroser Comcast, Executive Director, Regulatory Affairs - Legal Regulatory Department Elizabeth Murray Comcast, Senior Director Regulatory Affairs NED August 24, 2015 Before The Pennsylvania House Consumer Affairs Committee RE: House Bill 1417

2 Chainnan Godshall, Chairman Daley and members of the House Consumer Affairs Committee, thank you for the opportunity to comment on HB My name is Jim D'lnnocenzo and I am the VP for State Government, Legislative and Regulatory Affairs in Pennsylvania and Ohio. With me today is Beth Choroser from our corporate office. She is the Executive Director; of Regulatory Affairs in our Legal Regulatory Department and many of you know Liz Murray, Senior Director Regulatory Affairs for the Northeast Division of Comcast. Today, 97 percent of U.S. households have a mobile phone and 44 percent of homes have only wireless phone service. According to a study by Cisco the number of mobile-connected devices exceeds the world's population. By 2020, 90 percent of the world's population over six years old will have a mobile phone. The success of both the wireless phone market and the broadband market has come, of course in large part, at the expense of the landline phone market as people change the way they communicate. In 1999, Pennsylvania had 8.5 million landlines and today more than half of those landlines are lost. This wasn't a magic trick; they didn't simply disappear, consumers voted with their feet and began to use competitive products more to their liking. They replaced landlines with mobile phones and dial-up landlines with broadband connections - it is an impressive example of how free markets work. Act 183 of 2004 provided significant regulatory relief and pncmg flexibility to the Commonwealth's local telephone companies and in exchange, these companies promised to deploy what was at that time considered high-speed broadband to 100% of their service territories by a date certain. Since the enactment of Act 183 of 2004, these companies have used their increased pricing flexibility to invest in cutting edge networks and advance services platfonns while maintaining basic local telephone service. Let's take for instance the 1999 Bell Atlantic Wireless Annual report that showed 75 percent of the company's total revenue was attributable to core telecommunications business and 11 percent was derived from their 7.7 million US wireless customers. Today, according to the investor relations section of the Verizon web site, they serve over 108 million wireless customers in the US. Since 2008, revenue from Verizon's wireless business has exceeded revenue from the landline business; the revenue disparity between the two lines of business continues to grow. One could reasonably assume that Verizon didn't lose market share; consumers simply chose to use more technologically advanced communications tools such as a smartphone instead of POTS (plain old telephone service). Chainnan Powelson and Vice Chairman Coleman wrote in their Joint Motion in February of this year that... "As the record in this case shows, the communications options for today's consumers ll Page Comcast Testimony - HB August 24, 2015

3 have expanded beyond traditional voice-only service offered by incumbent carriers to include a variety of new service options and providers. With the proliferation of service bundles and the rising popularity of both wireline and wireless providers offering competing products and services, consumers now have an array of options to meet their communications needs. We believe the Commission's regulation of basic local exchange service should renect these market developments." We present this information to demonstrate what you already know, the telecommunications landscape in the Commonwealth and the nation has changed dramatically since the Legislature last weighed in on major telecommunications reform. Competition in PA and around the nation is flourishing. Comcast and our cable brethren are the reason there is a viable facilities-based competitive voice market in the Commonwealth. In fact, economists from Miera, an economic research and consulting firm, estimated that the entrance of Comcast as a competitor in the landline business would produce a savings of 4.8 billion dollars for Pennsylvania consumers in a ten-year period. One of the reasons for our great success here in the Commonwealth is that early in the roll-out of our competitive, Internet Protocol-based voice service, the General Assembly determined that a light regulatory touch would most effectively spur investment and job creation. As you likely know, in 2008 the legislature exempted IP-based services from regulation with the passage of Act 52, commonly referred to as the Voice-Over-Internet Protocol Freedom Act. Such regulatory treatment has incented Comcast to add more and more innovative features and functions to our voice service. This includes our Voice2go service, which allows you to make calls using your Xfinity Voice calling plan from an app downloaded on mobile devices (including long distance calls that are included in your unlimited plan at no extra charge), and our over-the-top text messaging service (which as of June 30th provides the ability to text to 911 ). Comcast is now the 4th largest residential fixed voice service provider and the largest wireline competitor in the voice market in the United States. Since the passage of Act 52, to support our growth in the Commonwealth, Comcast has added thousands of customer-facing jobs that allow my fellow Comcasters to support their families. Comcast directly employs approximately 13,000 Pennsylvanians in nearly 300 facilities across the Commonwealth, including our corporate headquarters in Philadelphia, 7 call centers, and an owned and operated NBC and Telemundo stations. Additionally, during the last 2 years, we added hundreds of additional jobs at our latest state-of-the-art call center a few miles from here in Susquehanna Township. In over a decade of Comcast testimony before this committee, Comcast has always supported a level-playing field for all competitors - not once in that time did we ever ask the legislature to burden our competitors with more regulation or higher costs. We have consistently asked for a light regulatory touch that would spur investment and competition. And, during that decade - the time since Comcast first launched its voice over Internet protocol service - we have been contributing to both federal and state universal service funds. This was before the FCC or any state commission required contributions from VoIP providers. And Comcast does not receive 2 1Page Comcast Testimony - HB August 24, 2015

4 any USF subsidies. While we do participate in the E-rate program, E-rate subsidies are a dollarfor-dollar pass through to schools and libraries. Therefore, it should not come as a surprise that Comcast supports the concept of a state USF for truly rural companies serving predominantly low-density areas. However, HB 1417, as currently drafted, would continue to provide, until at least 2022 at the levels provided in 2014, a subsidy without the necessary proof of need to larger providers who have significant resources. Furthermore, these subsidies can be used in areas where unsubsidized competitors have invested private capital to bring innovative services to Pennsylvania consumers. This hardly provides the right economic signals for competitors to continue to invest and innovate in Pennsylvania. The so-called investigation in HB 1417 to determine whether to perpetuate the fund after January 2022 continues to ignore carrier size and alternate revenue streams such as profitable broadband services. And this would be even more egregious if the fund were used to support broadband as is possible under HB Even the relatively recent changes in Chapter 30, continue to treat rural carriers as if their service offerings were limited to traditional telephone service over copper wires. Laws and regulations don't consider the totality of the revenue generated by the unregulated and advanced services, like DSL, that are offered on their networks. And it doesn't acknowledge the new market reality that most consumers choose service bundles, not stand alone telephone service. As a result, the subsidies enjoyed by many rural ILECs - supposedly to support traditional telephone service -- are distorting the market. HB 1417 would make public the names of contributors to the fund and the amounts contributed, which would essentially make their in-state revenues public information. This is the wrong focus. as it is recipients' need for and use of funds that should be most carefully scrutinized. Simply stated, Comcast's customers are absorbing the direct subsidies provided to Comcast's competitors, without regard for the actual need of those competitors. Under HB 1417, the definition of a basic calling service would include businesses with up to three lines, which would mean that Pennsylvania consumers across the state would be subsidizing build-outs to businesses in areas that have competition. Moreover, subsidies received from state USF would not be subject to the PA gross receipts tax, which could potentially put a greater burden on competitors. Finally, any changes to the fund must support a level playing field and cannot be imposed solely on a shrinking consumer base. That is neither technology neutral, nor equitable. Any change in telecommunications law should create a deregulated environment where each company would compete for customers on a level playing field. They should not perpetuate a practice whereby competitors like Comcast continue to subsidize their competitors via the state Universal Service Fund (USF). High-cost funds should consider their impact on all consumers - both those who benefit from the subsidies and those who support the fund financially. They should not provide corporate welfare to large diversified companies. That is why at this juncture we do not support the legislation. It may also be worth noting that Comcast nor to the best of my knowledge any of the telecom providers who are net payers into the USF, have been a party to the negotiations regarding this bill. 3I Page Comcast Testimony- HB 1417 August 24, 2015

5 In a world marked by robust compeht1on, prudent public policy dictates the removal of regulatory obstacles for all instead of creating marketplace disparities that would provide largess for some national companies that have multiple profitable revenue streams, and who have been increasing in size through significant acquisitions. CenturyLink is now the third largest provider of telecommunications services in the nation. In 2000 while describing the State USF in the PA Bulletin the PUC said: "Altho11gh ii is referred to as a fund, it is actually a pass-through mecltanism to facilitate the transition from a monopoly environment to a competitive environmel1l... " That was 15 years ago! Fifteen years ago the wireless market was nascent and cable companies, including Comcast, did not offer voice services across the state. Today, Comcast subsidizes our competitors. What is even more galling than subsidizing our competitors is that the only thing that has changed since the fund's inception in 1999 is the size of the per-line subsidy. In 1999 the fund collected $29 million to support the Commonwealth's 8.5 million landlines. Today although there are less than half as many landlines in the Commonwealth, the fund is now $34 million dollars. So basically in 1999 the fund provided $3.41 per landline; today it provides more than $8 per landline. And HB 1417 would provide even more money from your constituents. In the PUC's proposed order entered on April 18, 2000, the Commission ordered that The size of the Fund will increase each year at the rate at which the number of access lines owned by the 31 recipient carriers increases. So if the size of the state USF is based on lines and landlines have decrease exponentially over the last 15 years, then why does the fund size continue to grow? In short, the number of landlines dropped by half; the subsidy per line more than doubled. At the same time, the recipients of the subsidies have dramatically increased their non-telephone revenue and reduced the costs of their networks by offering unregulated services over their subsidized telephone networks. As I have mentioned, the Commonwealth was in the forefront of creating a regulatory environment in which Voice over Internet Protocol providers could grow and thrive. In the same vein, we ask you to consider that the telephone market of the past no longer exists in most of the Commonwealth. Both cable and telephone companies - whether rural or urban -- not only provide traditional telephone service, but many advanced services like VoIP, broadband and video service. Traditional telephony-related items such as universal service compensation must be viewed against this changing backdrop. In short, the state Universal Service Fund is harmful to competition, outdated, and in desperate need of significant reform during the phase out period established by the FCC. 41 Pagc Comcast Testimony - HB August 24, 2015

6 There is no question there are rural telephone companies where there are no competitors that may require a subsidy because their density results in high costs. In addition, there are rural customers who need support based on income. But these are limited circumstances and due to the confidential treatment accorded to USF records, not only don't we know which companies are receiving funds but we don't have metrics in place to determine whether they are justified. As members of PA House of Representatives Consumer Affairs Committee, you are charged with promoting competition and protecting consumers from inequities in the telecommunications marketplace through advocacy, mediation, enforcement, education and remedial legislation. To truly evaluate competition in the Commonwealth's telecommunications industry, we again urge the committee to request that the PUC provide the Committee with a listing of those entities that receive disbursements including the amount thereof from the State USF from years 2007 through We believe the public dissemination of these records are necessary for the Committee to make decisions and put forth legislative proposals that are based on the facts about how and to whom subsidies are distributed, whether they are at all related to density, and whether there are competitors in their footprints. Considering state USF information from 1999 was publicly disseminated in the Formal Investigation to Examine and Establish Updated Universal Service Principles and Policies for Telecommunications Services in the Commonwealth, Docket No ; Rulemaking to Establish a Universal Service Funding Mechanism; 52 Pa Code 63,141, et seq.,docket No. L I 05; Investigation into Intralata Interconnection Arrangements (Presubscription), Docket No ; Generic Investigation of Intrastate Access Charge Reform, Docket No , one would reasonably assume that the PUC would provide this committee with the same information so we can avoid additional hyperbole on this subject. Comcast's customers are paying direct subsidies for universal service that merely enhances the revenue streams of rural carriers. It's absurd that working class residents of Harrisburg or Scranton are forced to subsidize phone and broadband service at the lake vacation homes of executives from New York and New Jersey. And there should never be subsidies for companies operating in areas where there are multiple competitors offering services over a variety of platforms. This wealth transfer is a hidden tax on your constituents, adding cost to our products, and discouraging receiving companies from being efficient and containing costs. Early this week FCC Commissioners Clyburn and O'Rielly offered bipartisan support for ensuring that universal service "high-cost" support does not subsidize service to multi-million dollar vacation homes or other locations inhabited by wealthy Americans. Commissioner O'Rielly called for "means-testing for the USF." And commissioner Clyburn said the FCC is currently working on a list of exclusions that can't be paid for with USF monies and concluded by saying there is significant fraud and abuse in the current system. The PUC will distribute $34 million in universal service funds next year, but at the same time Chapter 30 denies it the legal authority to investigate whether those funds are, in fact, needed. SI Par,e Comcast Testimony - HB August 24, 2015

7 Further, the PUC may not assess whether companies' costs justify continued subsidization and whether USF funds are being used for the purpose of reducing the cost of telephone service for customers. And because rural carriers have come to rely on these subsidies to support acqu1s1tlons, investment in non-telephone services, and to satisfy shareholders, they continue to resist making changes that would allow their competitors to compete fairly within their footprint. Using a crude extrapolation of data from the 1999 USF disbursements (attached), one could assimilate the 1999 companies to the current companies providing land-line telephone service in the Commonwealth today. It would appear that the lion's share of the state USF is provided to three companies; CenturyLink, Windstream and Frontier. Government affairs professionals generally, while talking to policy makers, paint a much dire financial picture than the investor pages of the companies they represent. In that light I want to point out a few facts taken from the investor relations pages of the following companies then consider if these companies sound like they are in desperate need of subsidies to continue operations? CenturyLink (NYSE: CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses and their lives through innovative technology solutions. CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network. FY 2014 CenturyLink reported operating revenues of $18.03 Billion and net earnings of $5.19 Billion. We made strategic investments in 2011 that expanded the scale and scope of our business and multiplied growth opportunities. We completed the Embarq integration and closed the Qwest acquisition, creating the third largest telecommunications company in the country. We enhanced our broadband network capabilities, expanded our CenturyLink Prism TV service, built fiber to thousands of cell tower sites to gain wireless data transport opportunities, and transformed ourselves into a global leader in managed hosting and cloud computing services through our acquisition of Sawis, Inc. August 18, Seattle Times CenturyLink takes on Comcast in Seattle with rival Prism TV "... Century Link announced Tuesday that its Prism TV service, delivered over its high-speed fiber broadband network, is available in more than 22 Seattle neighborhoods where the company has rolled out its gigabit broadband service." 6I Page Comcast Testimony - HB August 24, 2015

8 Above: CenturyLink network as shown in 2011 annual report Windstream combines decades of dedication to our customers with a strong commitment to innovation in communications services. Headquartered in Little Rock, Ark., Windstream is a FORTUNE 500 company and has approximately $6 billion in annual revenues. Windstream is a leading provider of advanced network communications, including cloud computing and managed services, to businesses nationwide. The company also offers broadband, phone and digital TV services to consumers primarily in rural areas. On August 5th Windstream issued a media release touting that they accepted 1.26 Billion dollars in taxpayer subsidy from the Connect America Fund to expand and support broadband service to approximately 400,000 rural locations in 17 states. The following day Windstream announced they have sufficient cash on hand to implement a $75 million share repurchase program through In addition, the board of directors declared the regular quarterly dividend of 15-cents per share to shareholders ofrecord as of Sept 30, "We again continue to see positive momentum in our consumer channel and we are making targeted investments to generate revenue growth in these attractive high margin businesses," Thomas said. Frontier Communications Corporation (NASDAQ: FTR) offers voice, broadband, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications for medium and large businesses in 27 states and with approximately 13,900 employees based entirely in the United States. 7~ Page Comcast Testimony HB 1417 August 24, 2015

9 February 5, Frontier Communications announced they will "Acquire Verizon's Wireline Operations in California, Florida and Texas, Doubling Frontier's Size and Driving Shareholder Value" for $10.54 billion in cash June 16, Frontier Communications Accepts $283 Million in Annual Connect America Funding to Expand Broadband Service to 650,000 unserved Locations Frontier 2014 highlights in Pennsylvania included: Expansion of Premium High-Speed Internet services (12-24 Mbps) to more than 100 communities, including parts of the Back Mountain (Dallas), Bangor, Breezewood, Clarks Summit, Lewisberry, Montrose, Shickshinny, Towanda and Wellsboro areas; Investment in high-capacity 10 Gbps transport systems to expand connectivity in Bradford, Tioga, and Sullivan counties as well as the network connecting Wyoming, Luzerne and Lackawanna counties; Strategic investments in next-generation equipment strengthened backhaul capabilities, allowing higher-speed products throughout Frontier's service areas; and Expansion of Frontier's Multiprotocol Label Switching (MPLS) network core increased customer access to the latest technology, boosted the reach of Ethernet services for commercial customers, provided speeds up to l 0 Gbps, and services such as Wide Area Network, Point-to-Point configuration and Dedicated Internet Access over Ethernet circuits. "These are all critical for businesses today," said Kilpatrick. In 2015, Frontier is positioned to receive funding from the Federal Communications Commission's (FCC) Connect America Fund (CAF) Phase 2. "CAF funds plus Frontier's capital will increase deployment of higher-speed services to even the most rural parts of Frontier's territories," said Kilpatrick. The FCC program is poised to open in the latter half of 2015 and will provide funds over a six-year period. This program will target download speeds of l 0 Mbps to all areas receiving funds. Kilpatrick noted, "We're proud our commitment to the Commonwealth makes great technology available to our customers. Every day, our more than 500 Pennsylvania employees live Our Value, "Put the Customer First." Frontier 2014 Accomplishments from annual report Delivered 52% total shareholder return in 2014 Announced 5% dividend increase for 2015 Maintained industry-leading, sustainable dividend payout ratio 8 I P a g e Comcast Testimony - HB August 24, 2015

10 Integrated Connecticut and exceeded synergy target with $165 million annual synergies to date Strong, consistent quarterly broadband growth for two full years Gained Residential broadband market share in approximately 80% of local markets Improved revenue mix and delivered another year of improving revenue trends Positioned Frontier to deliver substantial shareholder value into 2016, and beyond Consolidated Communications 2104 annual report excerpts: Description of Our Business We are an integrated communications services company that operates as both an Incumbent Local Exchange Carrier ("llec") and a Competitive Local Exchange Carrier ("CLEC") dependent upon the territory served. We provide an array of services in consumer, commercial, and carrier channels in 11 states, including local and long-distance service, high-speed broadband Internet access, video services, VoIP, custom calling features, private line services, carrier grade access services, network capacity services over our regional fiber optic networks, data center and managed services, directory publishing, equipment sales and cloud services. We generate the majority of our consolidated operating revenues primarily from subscriptions to our video, data and Internet services (collectively "broadband services") to residential and business customers. Revenues increased $34. I million during 2014 compared to 2013, primarily from growth in data, video and Internet connections and the acquisition of Enventis. We expect our broadband services revenue to continue to grow as consumer and commercial demands for data based services increase. Consolidated Communications is a Delaware holding company with operating subsidiaries (collectively "Consolidated") providing a wide range of communications services in consumer, commercial, and carrier channels in California, Illinois, Iowa, Kansas, Minnesota, Missouri, North Dakota, Pennsylvania, South Dakota, Texas, and Wisconsin. In addition to our focus on organic growth on commercial and carrier channels, our acquisitions over the last decade have achieved business growth, diversification of revenue and cash flow streams, and created a strong platform for future growth. Our strategic approach in evaluating potential transactions include analysis of the market opportunity, the quality of the network, our ability to integrate the acquired company efficiently, and the potential for creating significant operating synergies and a positive cash flow at the inception of each acquisition... The acquisition of our Pennsylvania properties in 2007 achieved synergies in excess of $12.0 million in annualized savings, which at the time, represented about 20% of their operating expense. 9I Page Comcast Testimony - HB 1417 August 24, 2015

11 As you can see these are not small rural companies provided POTS lines to their customers. Comcast competes for voice service only in the footprints of Verizon, CenturyLink, Windstream, Consolidated and Frontier. We do not compete for telecom services in the other Rural Local Exchange (RLEC) areas in the Commonwealth even if we offer other services there. Comcast pays into the state USF, as do all land-line telecommunications companies operating in the Commonwealth; however wireless does not pay into the fund. The payment is based on a formula that uses revenue not number of subscribers to determine the amount one owes. As competition flourishes and our success grows - we are rewarded by paying more money to our competitors. You will hear from others that Comcast, for the most part, pays into the USF on a voluntary basis. This is true. When Comcast launched its voice service in the Commonwealth, we voluntarily contributed to the fund because it was unclear at the time that we would not or could not be required to pay. While it may be true that Comcast could end its participation today, the $34 million annual subsidy to our competitors would remain in the market, distorting the competitive landscape and creating a competitive disadvantage. In a competitive, deregulated, free market environment there is no reason to continue to provide subsidies without demonstration of need. Competition and investment will provide consumers with more choices, lower prices, and the necessary incentives to companies to offer innovative and cutting edge services and products. In order for unsubsidized competitors to continue to seek and invest risk capital, the law must catch up to the reality of the marketplace in the Commonwealth. Comcast is the industry leader in technology, broadband speeds and network quality. Our prices are competitive, and our customers continue to demand that everything we offer be state-of-theart. We are meeting the challenges of the market in every way that is within our control. All we ask is that the Commonwealth takes its thumb off the scale and allow us to compete. We look forward to working with the Committee and all stakeholders to fashion a law that creates a level playing field for all. lo I Page 2015 Comcast Testimony- HB 1417-August 24,