BEFORE THE HOUSE CONSUMER AFFAIRS COMMITTEE SUBCOMMITTEE ON TELECOMMUNICATIONS

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1 BEFORE THE HOUSE CONSUMER AFFAIRS COMMITTEE SUBCOMMITTEE ON TELECOMMUNICATIONS Representative William F. Adolph, Jr., Subcommittee Chairman Testimony of SONNY POPOWSKY CONSUMER ADVOCATE Regarding Chapter 30 of the Public Utility Code Reading, PA August 15, 2002 Office of Consumer Advocate 555 Walnut Street Forum Place, 5th Floor Harrisburg, PA (717) Office (717) Fax

2 CHAIRMAN ADOLPH AND MEMBERS OF THE HOUSE CONSUMER AFFAIRS COMMITTEE, SUBCOMMITTEE ON TELECOMMUNICATIONS My name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania and I have served in that position since my confirmation by the Senate in Perhaps most importantly for purposes of this hearing, I was also the Consumer Advocate during the debates leading up to the enactment of Chapter 30 of the Public Utility Code in 1993, and I testified on several occasions before the House and Senate Committees that considered that legislation. I am pleased to appear before this Committee as you begin your examination into what I think is the most important consumer issue that will be addressed by the General Assembly over the next year and a half. That is, the expiration, and possible re-enactment or modification of Chapter 30 of the Public Utility Code by December 31, This first hearing, dealing with the history, objectives, and goals of Chapter 30 represents a necessary building block toward an understanding of whether that legislation has worked for the benefit of this Commonwealth and its consumers, and, most importantly, what actions the General Assembly should take for the future. As the statutory representative of Pennsylvania utility consumers, I hope to be of service to this Committee in this endeavor. Chapter 30 was in essence a "quid pro quo." Pennsylvania s incumbent local exchange telephone companies, and particularly Bell Atlantic-Pennsylvania, attained their long-held goal of freedom from profit-based rate regulation. In exchange, they were required to commit to the accelerated deployment of a state-of-the art broadband telecommunications network throughout Pennsylvania by the year Importantly and intentionally, the telephone companies were not permitted under Chapter 30 1

3 to deploy a modern network only in those areas where it was most profitable to do so, but were required to deploy that network on a balanced basis in urban, suburban, and rural areas of their service territories. In other words, to the extent that a company such as Bell Atlantic deployed modern facilities in Philadelphia and Pittsburgh, it was expected that the company would make similar improvements in places like Warren and Renovo. Chapter 30 also made it clear, however, that telephone rates had to remain affordable. In 1993, Pennsylvania held an enviable position of ranking at or very near the top of the list of states with respect to the percentage of customers who had telephone service in their homes. The General Assembly, I believe, did not want to jeopardize that position and indeed declared, in the very first words of Chapter 30 that: 66 Pa.C.S The General Assembly finds and declares that it is the policy of this Commonwealth to: (1) Maintain universal telecommunications service at affordable rates... Chapter 30 also contains several provisions about competition, but I do not believe that it envisioned the type of full-blown local telephone competition that was subsequently proposed in the federal Telecommunications Act of The focus of Chapter 30 was on competitive service offerings by the incumbent local exchange companies and the virtual deregulation of long distance service for interexchange carriers, such as AT&T, MCI, and Sprint. There is a provision in the last section of Chapter 30, at Section 3009 (Additional powers and duties), which states that "The commission may certify more than one local exchange telecommunications company to provide local telecommunications service." But 2

4 this provision was a late-filed amendment to the statute that received little attention or debate. Unlike the dozens of pages of statutory language and hundreds of pages of subsequent regulations resulting from the federal act of 1996, there is little in Chapter 30 that says how such local competition could actually come about. As noted above, there is a great deal of discussion in Chapter 30 about competitive services, but that was primarily concerned with non-basic voice, data and video services that could be provided by both the incumbent local exchange company and what was hoped to be a wide variety of competitive service providers. I do think Chapter 30 was intended to promote competition in a vast array of services, but at that time I do not believe that the prospect of competition for basic local exchange service was a dominant factor in the minds of most members of the General Assembly who supported that legislation. Indeed, it can be argued -- and was argued by many at the time -- that the basic structure of Chapter 30 was in some ways antithetical to the possibility of full-blown local telecommunications competition. After all, the General Assembly was effectively anointing Bell Atlantic and the rest of the Commonwealth s 40 or so incumbent monopoly local exchange telephone companies as the entities that would build a universal high-speed communications network. Many people argued at that time that it was inappropriate to "pick a winner" in the technological race among various local, long distance, cable television, wireless, satellite and other providers who, even then, were trying to gain a foothold in at least some segments of the telecommunications market. But ultimately, the General Assembly chose to assign this duty to the one group of entities that already owned a wire running into the homes, schools, and businesses of virtually all Pennsylvanians -- Bell Atlantic and the rest of the incumbent local exchange companies. 3

5 I would add that, in my opinion, neither competition nor regulation should be considered an end in itself. Our goal, I believe, should be to achieve universal, high quality telecommunications services for all Pennsylvanians at prices that they can afford. The question in my mind is what combination of competitive and regulatory policies are best suited to achieve that goal. With regard to technology, it is interesting to note that while the Chapter 30 legislation was often referred to by legislators and the press as the "fiber optics bill", and while a catch phrase of the time was "fiber to the home", Chapter 30 did not in fact mandate a fiber optic distribution network. The only reference in Chapter 30 to fiber is in Section 3003(b)(1) regarding "fiber optic trunk line capability between central offices," not in the distribution network that connects people s homes, schools and businesses to the central office. Instead, broadband was defined in Chapter 30 as a technology with "a bandwidth equal to or greater than megabits per second." The significance of the mbps figure was that this was generally considered to be within the capability of the copper wires that were and still are at the heart of the telephone companies existing local distribution networks. To put this number in perspective, the typical home modems now in use generally operate at speeds of up to 56 kilobits per second. That is 56,000 bits of information per second, as compared to more than 1.5 million bits of information per second that is possible with a mbps technology. We estimated in 1993 that at mbps, it is possible to transmit a 1,500 page dictionary in 14 seconds or an X-ray image suitable for diagnostic purposes in 2.1 seconds. In the period both before and after the enactment of Chapter 30, however, Bell Atlantic was promoting the development of a super fast 45 megabit per second distribution network. Bell Atlantic pointed to independent studies suggesting that accelerated deployment of such a broadband network could 4

6 result in the potential creation of nearly 200,000 jobs in Pennsylvania. It was my position at the time that a 45 mbps fiber optic distribution network would be extraordinarily expensive and was not needed for the great majority of educational, medical, personal, and business services that the General Assembly wished to see developed throughout urban, suburban, and rural areas of Pennsylvania. In my view, Bell Atlantic sought to develop a 45 mbps fiber distribution network primarily so that it could offer potentially lucrative video entertainment services over the telephone line. (In a subsequent magazine interview in February 1995, Bell Atlantic CEO Ray Smith stated that "by 2000, we ll have 50 percent of the cable TV business -- no doubt about it.") As I said, however, the fiber distribution system that was discussed by Bell at the time was not required in Chapter 30 and, in fact, is no longer endorsed even by Bell Atlantic s successor, Verizon. Verizon s most recent deployment plan update switched from a 45 megabit per second commitment to a megabit per second commitment. The permissibility of that change is currently at issue before the PUC. My own concerns at the time of the legislative debates leading up to Chapter 30 revolved around my skepticism over any suggestion that the General Assembly could somehow legislate a technology plan to the year 2015, and my strenuous opposition to any proposal that would have mandated significant rate increases, particularly for basic local telephone service, that would have been required to pay for such a plan. As I said at the time, I certainly did not oppose the development of new technologies, particularly in areas of the Commonwealth that would not be served under a "business-as-usual" approach. But I strongly opposed any effort to impose substantial mandatory rate increases on basic service telephone customers in order to give incentives to local telephone companies, and in particular Bell Atlantic, to build a network that they wanted to build anyway for their own commercial purposes. 5

7 While I did not support the legislation that led up to Chapter 30, I was pleased that the final legislation that was passed by the General Assembly did not include the elements that I had thought would be the most potentially harmful for Pennsylvania consumers. Specifically, the final legislation did not include any mandatory rate increases or formulas, but instead gave discretion to the PUC to determine within fairly wide parameters what a just and reasonable alternative ratemaking plan should contain. Also, the final legislation s decision to define broadband to include any technology able to support speeds that were equal to or greater than megabits per second made it possible to meet the requirements of the Act using the existing copper-based distribution network. Unfortunately, however, the overall deployment requirements of the legislation were so far out in the future that it is still not clear whether Chapter 30 will have a substantial impact on the service actually received by most Pennsylvanians. The statute contained no specific mandates for near term improvements in service quality or access to modern services. It is not clear to me, therefore, that the companies have provided much more in the way of service to Pennsylvania consumers than they would have done under normal business conditions even if Chapter 30 had not been enacted. That issue, however, will be the subject of future hearings, and the members of the General Assembly will have to answer that question for themselves in determining whether to re-enact or modify the deployment provisions of Chapter 30. The final legislation also contained, in my opinion, one extremely bad provision, in Section 3004(b), which stated with regard to companies proposed Chapter 30 plans that "If the commission approves the petition and plan with modifications, the local exchange telecommunications company may, at its option, withdraw its petition and plan and continue to be regulated under its existing form of regulation or a streamlined form of regulation for which it qualifies." The effect of this provision was to give telephone companies a veto power over any plan approved by the Commission that the company didn t like. Chapter 6

8 30 became a game of "heads-i-win, tails-i -tie" for the companies, because they did not have to accept a plan that they did not believe was in their own best interest. In my view, it is the Public Utility Commission, subject to the right of appeal to the courts, that should be the final arbiter of whether a utility s ratemaking and deployment plan is in the public interest. You will note that there were no similar veto provisions for electric and natural gas utilities in the competitive electricity and natural gas laws, Chapters 28 and 22, that were passed by the General Assembly in 1996 and Finally, I think it is interesting that Chapter 30 did not mention the Internet. Indeed, there was very little discussion of Internet access throughout the Chapter 30 debate. The reason I mention the Internet now is that while we were discussing technology plans in 1993 that we believed would be critical to Pennsylvania s future in the year 2015, the forces of innovation were operating just over the horizon and were not waiting for legislative initiatives. In June, 1993, there were 130 sites on the World Wide Web; by March, 2002, there were over 38 million. I don t think anyone questions that the Internet and the World Wide Web have had an enormous impact on our lives in ways that very few of us anticipated in That experience, I believe, is relevant to today s debate as the General Assembly begins to consider where to go from here in telecommunications policy. There is no question that advances in telecommunications technology have enriched the lives of millions of Pennsylvanians since There is a question, however, as to whether the passage and implementation of Chapter 30 played a significant role in bringing those advances about. In future hearings, I hope to discuss how Chapter 30 has been implemented in Pennsylvania; its successes and failures; and where I think the General Assembly can make improvements in our current statutory framework. My primary goal, however, will certainly be to reinforce the policy of 7

9 universal service so that all Pennsylvanians can expect to receive high quality telecommunications service at just, reasonable and affordable rates. Thank you again for the opportunity to appear before this Committee. I would be happy to answer any questions you may have at this time

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