BEFORE THE PENNSYLVANIA SENATE CONSUMER PROTECTION AND PROFESSIONAL LICENSURE AND COMMUNICATIONS AND HIGH TECHNOLOGY COMMITTEES

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1 BEFORE THE PENNSYLVANIA SENATE CONSUMER PROTECTION AND PROFESSIONAL LICENSURE AND COMMUNICATIONS AND HIGH TECHNOLOGY COMMITTEES Testimony of SONNY POPOWSKY CONSUMER ADVOCATE OF PENNSYLVANIA Regarding Local Telephone Competition Harrisburg, Pennsylvania October 2, 2002 Office of Consumer Advocate 555 Walnut Street Forum Place, 5 th Floor Harrisburg, PA (717) Office (717) Fax

2 My name is Sonny Popowsky. I have served as the Consumer Advocate of Pennsylvania since 1990, and I have worked at the Office of Consumer Advocate since The question posed to the witnesses at today s hearing is: "Do we have competition in local telephone service?" In my opinion, the short answer to that question is "No." The longer answer to that question is that while there are a number of competitive local exchange companies that have made inroads into the market shares of some of our incumbent local exchange companies, there is nowhere near enough competition to classify these markets as "competitive" or to justify the deregulation of the prices and services of our incumbent local exchange companies. This is particularly true for basic residential telephone service customers, who I believe continue to see very little competition in many parts of Pennsylvania. Based on statewide, publicly available data released by the Federal Communications Commission (FCC), as of December 31, 2001, there were approximately 1.2 million access lines served by Competitive Local Exchange Companies (CLECs) in Pennsylvania. This was about 14% of the total access lines reported by the FCC. The remaining 7.5 million lines were still being served by Incumbent Local Exchange Companies (ILECs) as of that date. As far as I can tell, the great majority of the CLEC customers are in the service territory of Verizon PA (the former Bell Atlantic of Pennsylvania), which was required to open its market to potential local competitors in order to win its long-coveted right to sell long distance service to customers in its own service territory. There is a big difference though between opening a market to competitors, as Verizon PA was required to do in order to sell long distance service, and facing the type of effective competition that would actually force an incumbent company like Verizon PA to keep its service quality 1

3 high and its prices in check throughout its service territory. As to companies other than Verizon PA, I do not know the market shares of Verizon North (the former GTE), Sprint, or any of the other nearly 40 incumbent local exchange companies operating in Pennsylvania. In preparation for this hearing, my office attempted to obtain that information on a company by company basis from the FCC, which collects that data from all telephone companies. We were told that we could not obtain this information, because the telephone companies declared it to be proprietary. Even when my Office does receive proprietary information from the companies, as we are receiving in the current PUC case involving Verizon PA s request to have all of its services to business customers declared competitive, that information has been claimed by the Company to be proprietary and is not available to the members of this Committee or the public. While the companies can come here and provide any statistical or anecdotal information they wish in order to prove the presence of competition, I am only free to discuss the information that the companies themselves or the PUC or FCC choose to make public. The same is true, by the way, for a great deal of network modernization and financial profit information about the companies. In my opinion, such a one-sided debate on the future of telecommunications policy in Pennsylvania cannot lead to a reasonable result. I would therefore urge your Committees to insist on complete and public disclosure -- on a company-by-company, and locality-bylocality basis -- regarding the competitive activity, network modernization plans, and profitability of all incumbent Pennsylvania local exchange companies. I believe this information is necessary in order for the General Assembly to engage in an informed public debate regarding the future of telecommunications policy in this Commonwealth. 2

4 Returning to your original question, based on my understanding of economic theory, a competitive market is a market that is free of substantial barriers to entry and in which no firm has enough market power to strongly influence market prices. I do not believe that we have such a market today for local telephone service in Pennsylvania, particularly for basic residential service customers. As members of the General Assembly, however, your answer to the question you ve posed is more important than mine, because you are the ones who must decide the type of telecommunications regulation -- if any -- that we will have in Pennsylvania after our current telecommunications legislation, Chapter 30, expires at the end of I am concerned that some people will urge you to scrap telephone regulation altogether in Pennsylvania and to "get out of the way," so that the prices and terms of telephone service throughout Pennsylvania can be determined by market forces. They will argue that Pennsylvania is awash in competition and that there is no need to protect consumers through continued regulation of basic residential telephone service. I would submit that if this General Assembly deregulates the price and terms of basic telephone service in Pennsylvania at the end of 2003, then you will be doing a terrible and potentially irreversible disservice to the people of Pennsylvania. Basic local telephone service is not a luxury; it is a necessity, and this General Assembly must not jeopardize the availability of this necessary service to all Pennsylvanians at affordable rates. One of my biggest concerns is that there are people who will tell you that the reason we don t have more local telephone competition for residential consumers in Pennsylvania is that current regulated rates are too low, and that the way to get competition is to free our near-monopoly incumbent local exchange companies from any regulation so that they can charge whatever the market will bear. According to this logic, if the incumbent local exchange companies are free to raise their rates to whatever 3

5 they wish, then new competitors will appear and offer service at lower prices. I, for one, don t believe that we should risk doubling or tripling some of your constituents basic retail telephone service rates simply in the hope that a competitor may someday offer to beat those rates with a 10% discount. Such a suggested course of action is not only misguided, in my opinion, but it confuses ends and means. In my view, competition among local telephone providers is not an end in itself; the goal that I believe we should seek is to ensure that all Pennsylvanians have access to high quality telecommunications service at reasonable and affordable prices. One way to meet that goal is through competition -- that is, where market forces can be brought into play to protect and benefit consumers, we should certainly try to make it possible for them to do so. The other means to achieve that end is through continued regulation of at least certain services that are essential to all Pennsylvanians and for which true competition remains a distant and elusive expectation. The key question for the foreseeable future is what combination of regulation and competition is the best means of reaching that goal. Even if we had perfect competition, however, that does not assure that we will meet the paramount goal of universal service. That is because in some high cost areas of the state, even competitively priced telephone service might be unaffordable. For that reason, some form of universal service protection would still be necessary even if markets were fully competitive, which they certainly are not. The General Assembly recognized this class of essential services when it enacted Chapter 30 in These services -- most importantly basic residential service -- were specially classified under the Act as "protected" services. While Chapter 30 purported to do many things -- like providing the necessary "incentive" for incumbent telephone companies to build a state of the art broadband network 4

6 throughout all rural, urban and suburban portions of Pennsylvania -- the first sentence of Chapter 30 declares that "it is the policy of this Commonwealth to: (1) Maintain universal telecommunications service at affordable rates." I believe it would be an enormous mistake if the current members of the General Assembly jeopardized that goal by eliminating the basic service protections of Chapter 30. I would urge you to reject the arguments that we must let our incumbent telephone companies charge anything they want and that market forces will protect basic service customers from massive price gouging. The result of such deregulation would be to increase the market power of the incumbent companies while reducing consumer protection against high rates and inadequate service. Before anyone seriously considers deregulating basic residential telephone service in Pennsylvania, I would urge you to think about your counterparts in the California legislature when they started to see the lights going out in parts of their state, retail rates soaring in others, and the state s economy as a whole suffering after their botched electric deregulation plan went into effect. In Pennsylvania, our 1996 electric restructuring law was far more successful, in part because we did not deregulate the prices charged by our incumbent electric utilities. On the contrary, their rates remained capped at pre-existing regulated levels, and competitors were permitted to compete and try to either beat those regulated rates or offer some new service, such as "green" renewable power, that customers were willing to pay more for. Similarly in telecommunications, I fully support opening up the local telephone market to as many competitors as possible. To the extent they can offer lower prices, better quality, or an attractive package of services, I think that is a tremendous benefit to consumers. But that is far different from letting the incumbent companies charge whatever they want, based on the hope that many new competitors will enter the market to keep their rates from rising to exorbitant levels. 5

7 I would ask you to recognize that there is a fundamental difference between competition and deregulation. It is easy to deregulate an industry all you have to do is to pass a law stripping consumers of all regulatory protections. It is much harder, however, to ensure that true competition develops in order to replace the protections of regulation with the virtues of a dynamic, efficient competitive market. As we have learned in the six years since the passage of the federal Telecommunications Act of 1996, the local telecommunications market is an extraordinarily difficult one to break into, and the number of viable competitors has decreased, with the mergers of potential competitors such as Bell Atlantic and GTE into Verizon on the one hand, and the well-publicized bankruptcies and financial failures of scores of independent CLECs on the other. Again, this is not to say that Pennsylvania has had no success in opening its markets to competition. But that competition is not spread evenly throughout the Commonwealth and, I believe, is much less prevalent for residential customers than for business customers. My point is simply that we have a long way to go before anyone can reasonably argue that residential telephone customers in Pennsylvania do not need the protection of some form of price and service regulation. We are also a long way from the point where it can be argued that competitive safeguards are no longer necessary to permit competition to gain a strong foothold in the Pennsylvania telecommunications market. The need for competitive safeguards, including non-discriminatory access to necessary network facilities at reasonable prices, is not intended to imply bad motives or misconduct on the part of the incumbent local exchange companies. Rather, it is a function of the sheer enormity of the competitive advantage that the incumbent retains as the owner of the "last mile" of the telephone line that runs into each customer s home or business. 6

8 While cable television lines offer a promising alternative means of providing local wireline telephone service without relying on the incumbents network, progress has been slow and, more importantly, a significant percentage of Pennsylvania residents and businesses are still not passed by -- let alone served by -- cable television lines. Growth in wireless telephone service has been much more dramatic, but wireless coverage is still incomplete in some areas and I believe that most people still see a wireless phone as a complement to, not a substitute for, their home and business wireline services. Indeed, according to FCC data, Verizon Wireless is the most successful wireless company in the Nation, with more than 29 million subscribers at the end of 2001, and Verizon now offers several packages combining both wireless and wireline services to its Pennsylvania customers. My guess is that many of the people attending today s hearings are carrying wireless phones, but when they return to their homes and offices, they will find wireline phones there as well. In sum, I continue to believe that while basic telephone service is legally open to competition throughout Pennsylvania, it retains many monopoly elements that make it premature, if not impossible, to rely on the potential for competition alone to protect consumers. We should do what we can to bring the benefits of competition to the Pennsylvania telecommunications market, but we must continue to acknowledge the overriding goal of ensuring the provision of universal, high quality telecommunications service for all Pennsylvanians at just, reasonable, and affordable prices. Again, the key question for the foreseeable future is what combination of regulation and competition is the best means of reaching that goal. Thank you for allowing me to testify at this hearing. I would be happy to answer any questions you may have at this time. 7

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