The Status of Competition and Regulation in the Telecommunications Industry. Public Utility Commission of Oregon

Transcription

1 The Status of Competition and Regulation in the Telecommunications Industry Public Utility Commission of Oregon January 2007

2 The Status of Competition and Regulation in the Telecommunications Industry Oregon Public Utility Commission January Executive Summary - State law directs the Public Utility Commission to prepare a bi-annual report on competition in Oregon's telecommunications industry. The first report was provided in To gather information for the report, the Commission surveyed all local exchange carriers. We also surveyed Oregon cities, counties, school districts, community colleges, universities, and people's utility district's that own coaxial, digital subscriber lines, fiber optics cable and other advanced telecommunication infrastructure. Finally, we surveyed representatives from each city and county in Oregon on the availability, demand and use of broadband services. The major findings of the report are: Oregon's 34 incumbent carriers serve the lion share of Oregon's wireline customers. As of the end of 2005, incumbent carriers served about 84 percent of the wireline lines in Oregon, 67 percent of the private lines (dedicated circuits between two or more locations), and 90 percent of DSL service. Oregon's four largest incumbent carriers, Verizon, Century Tel, and United/Sprint served about 78 percent of the wireline lines in Oregon. The other 30 incumbent carriers served about 6 percent of the wireline lines in Oregon. From December 2004 to December 2005, Oregon's competitive carriers share of the wireline market in Oregon went from 12.2 percent to 16.1 percent. Competitive carriers served a small share of the residential market 7.4 percent but 37 percent of the business market. Eighty-three percent of competitive carriers' customers are in the Portland Metropolitan and Willamette Valley areas. From December 2004 through December 2005, the number of competitive carriers operating in Oregon went from 107 carriers to 134 carriers. Fifty-eight of those companies offered switched (dial tone) service. More than half of the competitive exchange carriers provided switched service by reselling wholesale services offered by incumbents. However, the largest competitive carriers serving business customers are facility-based (own much of the necessary network equipment).

3 About a third of the public bodies responding to the survey (122 out of 363) own some type of advanced telecommunications equipment such as fiber optic lines, cable, and DSL. About five percent of the public bodies responding to the survey offer high-speed telecommunication services to homes and businesses. Seven percent of the respondents reported that they are willing to sell high-speed service to homes and businesses. As of December 2005, 685,000 high-speed lines served Oregon households, businesses, governments, and schools and universities. For comparison, there were 77,000 high-speed lines in Oregon in December Cable systems accounted for 55 percent of the high-speed lines in the state and DSL accounted for 40 percent. As of December 2005, only 2 percent of the zip code areas in Oregon had no broadband service provider as compared to 22 percent in December Other major events and developments affecting competition in Oregon include the following: Cable TV companies are increasingly offering services, often in packages, that include Internet connectivity, telephone service that tie into the traditional telephone network, and cable TV service, all over the cable TV coaxial cable. Use of this technology is expanding, and new services and packages are now available outside the Portland metropolitan area. Cable companies offering these services must make substantial investments in a two-way transmission technology to replace the original one-way transmission design used for TV service. Certain carriers are increasingly using the Internet to provide voice services. Eventually, a dedicated network will handle this traffic using the Internet Protocol. The FCC has classified VoIP as an interstate service, not subject to state regulation. VoIP providers do not pay traditional carriers for use of their networks, nor do they contribute to state or federal universal service funds. The FCC is still considering the regulatory future of VoIP. Nationally, three major mergers have occurred recently. In 2005, Verizon merged with MCI, and SBC merged with AT&T (the merged company is now called AT&T). On December 29, 2006, the FCC approved the $86 billion merger of AT&T and BellSouth. A major event during 2006 was the development of the Missoula Plan for intercarrier compensation reform. In general terms, the Missoula plan significantly reduces intercarrier compensation charges, clarifies interconnection responsibilities and Executive Summary Page 2

4 allows incumbent carriers to recover their lost revenues by raising the subscriber line charge on consumer telephone bills to a maximum of $10. The remainder of lost revenues would be recouped from the federal Universal Service Fund administered by the FCC. The Missoula Plan would have large direct and indirect impacts on federal universal service policy. If reform occurs, intercarrier compensation and universal service will have to be reformed simultaneously. Substantial Congressional activities affecting telecommunications occurred during The House of Representatives passed H.R. 5252, The Communications Opportunity, Promotion and Enhancement Act of 2006 in June. The Senate later considered, but did not approve the legislation. There were three main issues at the center of the legislative debate: video franchising, universal service reform, and Internet neutrality. Executive Summary Page 3

5 FOREWORD The 1999 Oregon Legislature passed House Bill 2577 (HB 2577), which, "[d]irects the Public Utility Commission to report annually to Governor and Legislative Assembly or Emergency Board on status of competition and regulation in telecommunications industry" (emphasis in original). The purpose of this report, which is due on or before January 31 of each reporting year, is to ensure consistency with the Federal Telecommunications Act of 1996, to enhance fair competition and to promote deregulation of the telecommunications industry. The 2003 Oregon Legislature amended HB 2577, requiring this report to include information on one more topic (number 8 below) and changing the frequency of reporting to bi -annual. The 2005 Oregon Legislature passed Senate Bill 13 (SB 13), which includes all the topics from the 2003 amended HB 2577 as well as information on one additional topic (number 9 below). This report satisfies the requirements of SB 13 by providing information on the nine topics listed in the Bill. The numbered tabs (1-9) in this report relate to the nine topics listed in SB 13. The topics are: (1) The status of competition in the telecommunications industry. (2) Significant changes that have occurred in the telecommunications industry during the preceding 12 months. (3) Statutes that inhibit or discourage competition in and deregulation of the telecommunications industry. (4) Specific actions taken by the commission to reduce the regulatory burden imposed on the telecommunications industry, including telecommunications utilities and competitive telecommunications providers. (5) Specific actions taken by the commission to maximize the opportunities for telecommunications utilities and competitive telecommunications providers to achieve pricing flexibility, including rate rebalancing, exemption from regulation and streamlined regulations. (6) Specific actions taken by the commission to: (a) Minimize implicit sources of support; and (b) Maximize explicit sources of support that are specific, sufficient, competitively neutral and technologically neutral and that support telecommunications services for customers of telecommunications providers in high-cost locations. (7) Statutes that should be enacted, amended or repealed to enhance and respond to the competitive telecommunications environment or promote the orderly deregulation of the telecommunications industry. (8) The number of public bodies, as defined by ORS , providing basic telecommunications infrastructure so that private entities may use that infrastructure to provide advanced information and communications services.

6 (9) The availability of broadband services, the rates charged for broadband services, the demand for broadband services and the usage of broadband services. The commission may not impose reporting requirements on telecommunications utilities for the purpose of implementing this subsection. In addition, ORS (9) requires the Commission to report to the Legislative Assembly regarding competition in the telecommunications industry in Oregon. A copy of that report is attached behind tab A-1. Foreword Page 2

7 TABLE OF CONTENTS (1) The status of competition in the telecommunications industry A. Commission Survey of the Status of Telecommunications Competition in Oregon 1-1 B. Commission Actions and Policies to Promote Competition 1-3 C. The Current Telecommunications Regulatory Landscape 1-5 (2) Significant changes that have occurred in the telecommunications industry during the preceding 12 months A. Legislative Changes 2-1 B. Competitive Activity 2-1 C. Technological Advances 2-1 D. Mergers and Acquisitions 2-4 E. Rates 2-5 F. Local Number Portability 2-5 G. Federal Activities 2-6 (3) Statutes that inhibit or discourage competition in and deregulation of the telecommunications industry 3-1 (4) Specific actions taken by the Commission to reduce the regulatory burden imposed on the telecommunications industry, including telecommunications utilities and competitive telecommunications providers A. Electronic Filings 4-1 B. Regulatory Relief for Incumbent Carriers 4-2 C. HB 3241 of Revised Affiliated Interest Reporting Requirements 4-3 D. SB 931 of Revised Dollar Thresholds for Commission Approval of Property Sales 4-4 E. Expedited Complaint Procedure 4-4 F. Simplified Extended Area Service (EAS) Approval Process 4-4

8 The Status of Competition and Regulation In the Telecommunications Industry (5) Specific actions taken by the Commission to maximize the opportunities for telecommunications utilities and competitive telecommunications providers to achieve pricing flexibility, including rate rebalancing, exemption from regulation and streamlined regulations A. Competitive Zones (ORS ) 5-1 B. Price Listing (ORS and ) 5-2 C. Service Deregulation (ORS (3)) 5-3 (6) Specific actions taken by the Commission to: a) Minimize implicit sources of support; and b) Maximize explicit sources of support that are specific, sufficient, competitively neutral and technologically neutral and that support telecommunications services for customers of telecommunications providers in high-cost locations A. The Oregon Customer Access Plan 6-1 B. The Oregon Universal Service Fund 6-2 (7) Statutes that should be enacted, amended or repealed to enhance and respond to the competitive telecommunications environment or promote the orderly deregulation of the telecommunications industry 7-1 (8) The number of public bodies, as defined by ORS , providing basic telecommunications infrastructure so that private entities may use that infrastructure to provide advanced information and communications services 8-1 (9) The availability of broadband services, the rates charged for broadband services, the demand for broadband services and the usage of broadband services. The commission may not impose reporting requirements on telecommunications utilities for the purpose of implementing this subsection. 9-1 Attachments Competitive Providers Report to Legislature A-1 SB 622. Price Cap Regulation A-2 Contents Page 2

9 The Status of Competition and Regulation In the Telecommunications Industry Local Telecommunications Competition Survey Results and Analysis A-3 Advanced Telecommunications Capability in Public Bodies A-4 Broadband Services A-5 Contents Page 3

10 The Status of Competition and Regulation In the Telecommunications Industry (1) The status of competition in the telecommunications industry A. Commission Survey of the Status of Telecommunications Competition in Oregon Has the Commission conducted surveys to assess the level of competition in Oregon? Yes. In January 2006, the staff of the Public Utility Commission of Oregon sent a survey to 269 local exchange carriers (LEC) for the purpose of assessing the status of local telephone competition in Oregon. The survey asked all of the local exchange carriers, both incumbent (ILEC) and competitor (CLEC), to provide information about their local services during December The staff received responses from all 34 ILECs and 189 out of 235 CLECs, for a total response rate of 83 percent. This was the eighth annual survey conducted by the Commission. In addition to the primary survey referenced above, another survey was sent to 535 public bodies in early November This second survey is needed since the 2003 Legislature made changes to the existing legislation that requires this report. The new survey asks about the existence and use of telecommunications facilities by public bodies. Reports, including detailed analysis of results from the two surve ys, "Local Telecommunications Competition Survey" and "Availability of Advanced Telecommunications Capability in Public Bodies 2006," are attached as A-3 and A-4. What were the results of the surveys? There were 134 CLECs operating in Oregon in Decembe r 2005, or 27 more than the previous year. The total number of CLECs was 235 at the end of 2005, which is up from 214 at the end of While the number of CLECs increased by 21 in 2005, the number of CLECs actually conducting business in Oregon increased by 27. Fifty-eight of the 134 operating CLECs were competing in the local exchange switched services market. As of November 2006 however, the number of authorized competitive local service providers has declined to 195 from 235 at the end of During 2006, more certificates of authority were cancelled than granted. See Attachment A-1. Competitive entry in Oregon's local telecommunications market, based on market share, is still small, especially in the residential sector. Total CLEC market share was 16.1 percent (up from 12.2 percent) of local switched telephone lines. However, CLECs had only 7.4 percent of the residential market. More competitive entry is occurring in the business sector where CLECs were supplying 37.0 percent of business customers' switched local exchange lines in 2005, up from 32.6 percent the in

11 The Status of Competition and Regulation In the Telecommunications Industry CLEC penetration of the local private line market was 33.5 percent measured by share of private line circuits. The predominant form of CLEC competitive entry was resale. Thirty-nine of the 58 CLECs providing local exchange service were ILEC -service-resellers. The degree of competitive entry into Oregon's telecommunications market varies across different regions of the state. In Portland and the Willamette Valley, CLECs were providing 40.3 percent and 42.4 percent of business customers' switched local exchange lines, respectively. In the other four regions of the state, CLECs were providing between 19.8 percent and 26.4 percent of the business market. The following chart illustrates CLEC penetration into Oregon regional business and residential markets. CLECs had 12.0 percent of the residential market in Portland, and 7.3 percent or less in the others areas of the state. What is the CLECs' share of the market by region? CLEC Market Shares By Switched Lines & Regions 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Portland Willamette S.W. Coast Central East Statewide Residential 12.0% 2.9% 3.0% 2.3% 4.8% 7.3% 7.4% Business 40.3% 42.4% 26.4% 19.8% 28.2% 25.9% 37.0% While CLECs provide service to increasing shares of business customers' switched local exchange lines across the state, the bulk of the CLEC entry has been in the Portland metropolitan region. The following chart shows that of all business switched service lines provided by CLECs, 57.9 percent were in the Portland area. 1-2

12 The Status of Competition and Regulation In the Telecommunications Industry Where are the CLECs focusing their business sector activities? CLEC Switched Business Line Distribution By Region 60% 40% 20% 0% Portland Willamett S.W. Coast Central East CLEC Bus 57.9% 25.0% 5.3% 3.0% 5.7% 3.0% The figure below shows CLEC market share growth for revenues, lines served, and customers. By 2005, CLEC revenues had more than tripled compared to 1998, increasing from $45.3 million to $136.8 million. Annual increases for CLEC switched access lines in the last seven years have ranged from five percent to 43 percent. The average annual increase was 22 percent. How has CLEC market share changed over the last several years? Market Share for Switched Access Services, CLECs/Total, %, % 15% 10% 5% Revenues Lines Customers 0% B. Commission Actions and Policies to Promote Competition What state and federal laws encourage competition in the telecommunications industry? In 1985, the Legislative Assembly adopted a goal for the State of Oregon "to secure and maintain high-quality universal telecommunications service at just and reasonable rates for all classes of customers and to encourage innovation 1-3

13 The Status of Competition and Regulation In the Telecommunications Industry within the industry by a balanced program of regulation and competition" (ORS ). The federal Telecommunications Act of 1996 (Federal Act) is pro-competition as well. It gives the Federal Communications Commission (FCC) and each state utility Commission important roles in opening telecommunications markets to competition. What is the Commission doing to promote greater telephone competition in Oregon? Key actions by the Commission to promote competition are: 1. Granting certificates of authority to competitive carriers in an efficient manner. See Section (4) A for details. 2. Providing new pricing flexibility for incumbent carriers as competition develops in "competitive zones". See Section (5) A for details. 3. Requiring dialing parity so that long distance carriers gain equal access to all local telephone customers. 4. Arbitrating disputes between competitive and incumbent carriers regarding terms and conditions of interconnection. 5. Resolving complaints by competitive carriers against the incumbents. 6. Ensuring non-discriminatory access by competitive carriers to the incumbent carriers' networks (e.g. access to unbundled network elements such as local loops). 7. Setting reasonable rates for unbundled network elements based on long-run incremental cost. 8. Exempting services from rate regulation if the Commission finds that competition exists. See Section (5) C for details. 9. Exempting services from prior approval when the incumbent shows that the services are subject to competition or are non-essential. See Section (5) B for details. 10. Responding to Corporation's desire to provide long distance services in Oregon according to the market-opening requirements of the Federal Act (section 271). 11. Implementing the Oregon Universal Service Fund for areas of the state served by Corporation and Verizon Northwest in 2000, with 1-4

14 The Status of Competition and Regulation In the Telecommunications Industry implementation in the balance of the state occurring in See Section (6) B for details. C. The Current Telecommunications Regulatory Landscape What Commission regulations apply to incumbent carriers? Oregon has 34 incumbent carriers. Eleven of these are telecommunications cooperatives. The remainder are telecommunications utilities. The law requires telecommunications utilities to provide adequate service at just and reasonable rates. Telecommunications utilities are subject to varying degrees of rate, profit, consumer protection, service quality, and price cap regulation. Further discussion of price cap regulation can be found after Tab A-2. Telecommunications cooperatives are subject to utility-like rate regulation only with respect to the rates that they charge the long distance carriers for exchange access. Does the Commission have different regulations for different types of carriers? Yes. Oregon and federal laws recognize two types of telecommunications carrier: (1) incumbent carriers, and (2) competitive carriers. The incumbent carriers were providing telecommunications services as regulated monopolies at the onset of competition. Competitive carriers are entering the telecommunications market. In Oregon, incumbent carriers, operating as telecommunications utilities or cooperatives, are regulated, due to their near total dominance in local telephone markets. Cooperatives, which are also classified as incumbent carriers, are subject to limited regulation, as described in the previous answer. Different forms of regulation are available to telecommunications utilities. (See Section (2)). New entrants are classified as competitive carriers since they compete with the incumbents and each other. What flexibility is afforded to utilities and the Commission under current statutes? While some aspects of the telecommunications industry are still regulated, the Commission allows regulation to be flexible so that utilities may respond to increased competition. Flexibility occurs in the following ways: Competitive Zones If a service in a particular geographic area is subject to competition, the incumbent utility will be granted downward pricing flexibility for that service. Price Listing If a service is non-essential or subject to competition, an incumbent utility may receive pricing flexibility but the revenues and costs from that service are still reviewed in a rate case. 1-5

15 The Status of Competition and Regulation In the Telecommunications Industry Service Deregulation If competition exists, or certain other conditions are met, an incumbent utility may ask that a service be deregulated. If service deregulation is granted, the revenues and costs from that service are treated "below the line" and are not reviewed in a rate case. Price Cap regulation An incumbent utility may ask for pricing and earnings flexibility under ORS Corporation (), formerly known as US West Communications, Inc., was granted an alternative form of regulation (AFOR) under this statue from Since December 30, 1999, has operated under a different form of price cap and floor regulation pursuant to ORS To date Verizon Northwest, Inc. (Verizon), formerly known as GTE Northwest Incorporated, has not filed for price cap regulation under ORS , ORS , or ORS , another AFOR statute. The chart on the following page displays the level and type of regulation for the incumbent local exchange telecommunications carriers, as well as, competitive carriers. It is important to note that while a service may be listed as "regulated," there may be many options for pricing flexibility available to both the utility and the Commission. 1-6

16 The Status of Competition and Regulation In the Telecommunications Industry Chart 1: Telecommunications Regulatory Landscape Today (January 1, 2006) PUC Certification to Provide Telecom Service in Oregon Contribute to Universal Service Programs 1 Required to Serve All Customers Form of Regulation/Oversight Price Regulated on Access Charges Capital Recovery Set by PUC 2 Service Quality Rules Apply 3 Subject to PUC Consumer Protection Rules Price Regulated on Basic Service 4 Service 5 Price Review on Non-basic Regulate Earnings of Company Approval of Affiliated Interest Contracts Required to Offer Wholesale Discounts to Competitors Required to Sell any Network Element to Competitors Incumbent Carriers Competitive Carriers Verizon CenturyT el Sprint (Loc al Service) Small Independent Telecommunications Utilities Cooperatives Long Distanc e Carriers Local Facilities Based Carriers Resellers Cable Companies as Telecommunications Providers Gov ernment / Municipalities as Telecommunications Providers Wireless Carriers 6 Under the Telecommunications Act of 1996, certain carriers have an exemption from these requirements. However, the PUC has the authority to revoke this exemption. Small Independent Telecommunications Utilities are allowed to operate under a modified regulatory approach that can be revoked by the PUC. Some form of regulation/oversight applies. 1 Carriers contribute to the PUC's programs for low income & hearing impaired consumers and to federal programs for schools, libraries, and rural health care. Long Distance Carriers do not contribute to the PUC's low income or hearing impaired program. 2 Regulation of a coo perative's capital recovery applies only to access charges. 3 ORS (9) exempts telecommunications utilities with less than 50,000 access lines from minimum service quality standards related to the length of time it takes the utility to respond to questions from customers. 4 In a competitive zone, where calls are exchange d between an incumbent carrier and a competitive carrier, an incumbent carrier gains pricing flexibility for the types of services offered by the competitive provider. 5 Incumbent carriers can apply to the Commission for pricing flexibility, or elect pricing flexibility under ORS elected the latter effective 12/30/99. 6 Wireless carriers do not contribute to the USF unless they elect to; they do contribute to OTAP and TDAP. 1-7

17 The Status of Competition and Regulation In the Telecommunications Industry (2) Significant changes that have occurred in the telecommunications industry during the preceding 12 months A. Legislative Changes What recent legislation has had an impact on the telecommunications industry? No bills were passed by the regular session during 2005 that have a significant impact on the telecommunications industry. The 2005 Oregon Legislature did pass Senate Bill 17 creating the Oregon Telecommunications Law Revision Task Force. The task force consist ing of ten members from government and the industry appointed by the Governor was charged with identifying and correcting inconsistent terminology, revising the statutory provisions to reflect changing technology, and making Oregon laws on telecommunications consistent with the requirements of federal law. The task force met throughout 2006, concluding work in December by agreeing to send to the legislature new definitions to add to ORS for the terms telecommunications and telecommunications services, and an amendment to ORS relating to allowing the OPUC discretion to change the Oregon universal service fund consistent with changes to the federal universal service fund. B. Competitive Activity How many competitive local service providers are there in Oregon? The number of providers authorized by the Commission to provide competitive local service grew slightly in At the end of 2004, there were 214 authorized competitive local service providers in Oregon. By the end of 2005, there were 235. See Attachment A-3. As of November 2006 however, the number of authorized competitive local service providers has declined to 195. See Attachment A-1. The Commission is currently granting annually about new applications for local service authority. During 2006, more certificates of authority were cancelled than granted. C. Technological Advances What new technologies are being deployed in the telecommunications industry? Digital Subscriber Line Digital Subscriber Line service (DSL) combines traditional voice telephone service with high speed Internet (broadband) service on one telephone line. DSL allows data transmission at high speeds (greater bandwidth) over ordinary telephone lines between a telephone customer's premises and a telephone 2-1

18 The Status of Competition and Regulation In the Telecommunications Industry company s central office. These transmissions are then routed through a specialized data network. Voice calls are routed in the traditional way. DSL has some technical limitations and mileage limits (customers must be no more than three miles from a central office). DSL services can work over a mixture of copper and fiber lines. Additionally, the DSL footprint can easily be extended to those pockets outside of the three-mile limit with a Digital Subscriber Line Access Multiplexer (DSLAM). The DSLAM serves as the point of interface between a number of subscriber premises and the carrier network. The price of these devices continues to drop and DSLAMs are being deployed in more locations, as customer demands are identified. The FCC, in its August 21, 2003 Triennial Review Order, required incumbent carriers to allow and facilitate "line splitting." Under a line splitting arrangement, one competitive carrier provides voice service using the low frequency portion of a line, while another competitive carrier uses the high frequency portion to offer the DSL broadband component. Telephone Service over Cable Cable TV companies are increasingly offering services, often in packages, that include Internet connectivity, telephone service that tie in to the traditional telephone network, and cable TV service, all over the cable TV coaxial cable. Use of this technology is expanding, and new services and packages are now available outside the Portland metropolitan area. Cable companies offering these services must make substantial investments in a two-way transmission technology to replace the original one-way transmission design used for TV service. Fiber Optics Use of fiber and optical transmission technology is increasing rapidly. Because of the increased bandwidth this technology offers, the industry is moving toward providing every home the capability of voice, high-speed data, and video services (known as the "triple play"). All services will become data services and differ only in the priority of their delivery. Verizon has built its business plan on the ability to provide "triple play" service. In 2005 Verizon began extending its fiber optic network to homes and offering broadband services under the name FiOS. Broadband Internet service provided over the fiber optic network is faster than either DSL or cable. Verizon has a goal of, by 2010, reaching half of the 33 million homes in the areas served by its local phone network with FiOS. In Oregon, FiOS is currently available in parts of Washington and Multnomah counties and Internet service is being offered at a variety of speed/price options. Verizon is also offering TV service over its FiOS network in some areas now, plans to make it available to other areas in the near 2-2

19 The Status of Competition and Regulation In the Telecommunications Industry future, and is expected to become a major competitor to local cable television companies over the next 10 years. Verizon will compete with current Triple Play offers, where the local cable company offers broadband Internet access, digital cable, and VoIP telephone service. Technological improvements have boosted the capacity of a single fiber strand 18,000 fold over the past 20 years. One laser on one strand of fiber can provide capacity equivalent to 516,096 voice lines. Each strand can current ly support 80 lasers. This capability continues to grow. Voice over Internet Protocol (VoIP) Certain carriers are increasingly using the Internet to provide voice services. Eventually, a dedicated network will handle this traffic using the Internet Protocol. This protocol is basically software that tracks Internet addresses, routes outgoing messages, and recognizes incoming messages. The FCC has classified VoIP as an interstate service, not subject to state regulation. VoIP providers do not pay traditional carriers for use of their networks, nor do they contribute to state or federal universal service funds. The FCC is still considering the regulatory future of VoIP. Broadband over Power Line Broadband over Power Line (BPL) technology offers another way to access broadband services. BPL works through local neighborhood power distribution lines in both aerial and buried environments. Though the basic technology has been around for some years, the current technology has made BPL more economical. BPL can provide both fixed and mobile end-users broadband access of up to 25 Mbps bandwidth, which has the capability to provide the "triple play." The main technical concern over BPL is the potential radio frequency interference to other private, commercial, and military radio licensed services. Testing has shown that BPL stray transmissions can be reduced to acceptable levels, but interference is still a concern. Although BPL is a very promising technology, most of the electric industry seems to be backing off of their initial interest. Cost estimates are still too high for wide spread deployment of this technology, especially in rural areas. BPL offers a viable way to provide "triple play" services to customers, but the future of the technology is unknown. VoIP vs. POTS (Plain Old Telephone Service) Currently, all voice calls, either for POTS or VoIP are digitized. 2-3

20 The Status of Competition and Regulation In the Telecommunications Industry VoIP utilizes packet switching which uses all of the circuit bandwidth part of the time, using the Internet and a data network, to provide two way voice communications POTS utilizes circuit switching which uses part of the circuit bandwidth all of the time. This is the current way to provide two-way voice communications. Both circuit and packet switching equipment and facilities benefit fr om the enormous returns to scale of digital miniaturization and fiber optic increased bandwidth. Their incremental costs are very small due to the efficiencies inherent in the technology and declining unit costs. Wireless Internet One of the fastest growing technologies today is wireless Internet. There are currently at least 50 fee-based providers in various parts of Oregon. In addition, there are a number of community based wireless networks and free public WiFi hotspots Ashland, Corvallis and Portland. The city of Portland contracted MetroFi to build a wireless network in Portland. The free service became active in parts of downtown Portland in December 2006, and will become the largest free municipal network in the country. ENUM There is a desire to merge the packet and circuit switched networks to create a Next Generation Network (NGN) which optimizes the efficiencies of circuit and packet switching and fiber transport. Some carriers partially do this now in their own networks. A system called ENUM (Electronic Numbering) is an international effort to facilitate this merging. ENUM will give a person s telephone number, e- mail address, cell number and home page URL when queried. There is ongoing work on ENUM. D. Mergers and Acquisitions What recent mergers or acquisitions have had an effect on the telecommunications industry in Oregon? Oregon statutes provide the Commission the authority to review electric and natural gas mergers under ORS However, the Commission does not have this kind of authority with regard to telecommunications mergers. Nationally, three major mergers have occurred recently. In 2005, Verizon merged with MCI, and SBC merged with AT&T (the merged company is now called AT&T). On December 29, 2006, the $86 billion merger of AT&T and BellSouth was approved by the FCC. Of the seven regional telephone 2-4

21 The Status of Competition and Regulation In the Telecommunications Industry companies (Baby Bells) created by the court-ordered breakup of AT&T in 1982, the number has been reduced to three through mergers and acquisitions. E. Rates What major rate changes have occurred recently? No major rate changes have occurred recently. F. Local Number Portability What is the status of telephone number portability? If customers stay at the same location, local number portability allows them to keep their telephone numbers when they change from one local service provider to another. Local number portability, using the permanent database technology, was first deployed in the Portland area in September Since then, has installed number portability capability for almost all local telephone lines in its Oregon service territory. Only one exchange, with 300 lines, is not number portability capable. Verizon and United Telephone Company of the Northwest (dba Embarq) have deployed number portability throughout their Oregon service areas. Almost all small telephone utilities and cooperatives have also made number portability available. Number portability, including the charges for it, is under the jurisdiction of the FCC with limited authority delegated to the Commission. The FCC ordered wireless (cellular) carriers to implement number portability in the 100 largest MSAs effective November 24, 2003, so customers can keep their cell phone numbers when changing from one wireless carrier to another. The Portland metropolitan region was affected by this change. The number portability requirement for all other areas went into effect May 24, The FCC also ordered wireline (landline) telephone companies, including both incumbents and competitive providers, to implement wireline to wireless number portability so that customers can change service from wireline to cellular carriers and keep their wireline telephone numbers. This latter form of number portability became available in early The Commission granted five temporary waivers to small incumbents until they could upgrade their equipment. All but two of the waivers have expired. Reverse number portability, from wireless to wireline is not required and is not available. Location number portability, which allows customers to keep their numbers no matter where they move, will not be implemented for several more years. 2-5

22 The Status of Competition and Regulation In the Telecommunications Industry G. Federal Activities What federal activities have influenced Oregon markets? The industry continues to evolve rapidly in the face of substantial uncertainty regarding federal telecommunications policy. The Communications Act of 1934 and FCC decisions implementing its provisions are the subject of continued dispute, uncertainty and litigation. Congress updated the Communications Act ten years ago with passage of the Telecommunications Act of A decade after its passage the competitive marketplace continues to be affected by court decisions and changes in FCC rules pursuant to the Communications Act. Congress attempted to revise and extend the law during 2006, passing a bill in the House of Representatives and reporting a much different bill from the relevant Committee in the Senate, but the prospects for passage in the near future appear highly uncertain. Generally speaking, the trend is toward limiting the authority of States and localities to regulate telecommunications. In some cases, this is accompanied by deregulation and in others by FCC regulation. Intercarrier Compensation Telecommunications carriers have long paid compensation for the use of other carriers infrastructure. There is general agreement that the current system of intercarrier compensation for the exchange of telecommunications traffic is fundamentally flawed and eroding rapidly. There are two basic problems: 1) There is a wide range of different charges for intercarrier compensation to local exchange telephone networks. Charges vary depending on the type of carrier and the geographic origin and destination of the traffic. These arbitrary distinctions are almost impossible to enforce and result in gross competitive distortion. Exploitation of the inconsistencies in this rate structure by carriers seeking competitive advantage is rampant. 2) Since most of these charges are well above an appropriate economic cost of carrying the traffic, these charges also generate major incentives to bypass the local exchange networks in favor of more market priced alternatives, such as wireless phones and VoIP services. A primary goal of intercarrier compensation reform is to develop a unified system of intercarrier compensation in which charges do not arbitrarily differ across carriers and jurisdictions. A second primary goal is to set the unified charge at a level that makes economic and marketplace sense, generally much lower than many of the charges that are in effect today. The FCC has had an open docket on intercarrier compensation reform for years but has been unable to make a decision. If reform is to occur, it will likely happen during This decision could have a major impact on the competitive positions of the carriers and technologies in the Oregon marketplace. 2-6

23 The Status of Competition and Regulation In the Telecommunications Industry A major event during 2006 was the development of the Missoula Plan for intercarrier compensation reform. It was developed by a group of industry stakeholders under the auspices of a National Association of Regulatory Utility Commissioners ( NARUC ) task force. The task force was chaired by Oregon Commissioner Baum. The Missoula Plan is supported by AT&T, many rural incumbent local exchange carriers and some companies from other segments of the industry. It is opposed by Verizon, most mid-sized incumbent local exchange carriers, most wireless companies, cable companies and the National Association of State Utility Consumer Advocates. has not taken a position, but has expressed concerns about the plan. In general terms, the Missoula plan significantly reduces intercarrier compensation charges, clarifies interconnection responsibilities and allows incumbent carriers to recover their lost revenues by raising the subscriber line charge on consumer telephone bills to a maximum of $10. The remainder of lost revenues would be recouped from the federal Universal Service Fund administered by the FCC and currently funded by a surcharge of approximately 10% on the interstate portion on charges to consumers for interstate telecommunications services. If the Missoula Plan is adopted, this surcharge will have to be increased or replaced by a new fixed monthly charge to consumers for each telephone number or connection they have. The role of State regulatory systems in setting intrastate carrier access charges would be largely eliminated. As is clear from this description, the Missoula Plan would have large direct and indirect impacts on federal universal service policy. As a result, most experts anticipate that, if reform occurs, intercarrier compensation and universal service will have to be reformed simultaneously. Universal Service The federal universal service program has multi ple objectives: 1) provide financial support for networks in rural and other high cost areas in order to achieve statutory objectives for universal availability of services at reasonably comparable rates; 2) provide financial support to low income families so that they can afford to have basic telecommunications service; 3) provide financial support for the deployment of telecommunications services to rural health care providers; and 4) provide financial support for the deployment of telecommunications services to schools and libraries. 2-7

24 The Status of Competition and Regulation In the Telecommunications Industry The federal USF faces a number of serious financial challenges. Numerous examples of waste, fraud and abuse have been identified in the schools and libraries program. Many people argue that the high cost fund supporting networks in rural areas should be expanded in order to make broadband access to the Internet available in rural areas. This is a goal which political leaders at the highest levels have endorsed so that the United States will not continue to lag well behind many other countries in the deployment of broadband services. Finally, the FCC and many state public utility commissions have authorized additional eligible telecommunications networks for USF funding. For example, the Public Utility Commission of Oregon has authorized three wireless carriers-- RCC of Minnesota, United States Cellular, and Edge Wireless-- to receive federal universal service funding so that they can expand their networks in rural Oregon. These decisions by State commissions around the country have generated $1 billion in additional funding obligations for the USF. In addition to the increasing demands for USF just described, intercarrier compensation reform is expected to generate large additional demands on the USF in order to offset lost access charge revenues, particularly by ILECs that service rural and other high cost areas. A widely discussed estimate of this amount is $2 to $3 billion per year. At the same time that demands for USF are increasing, the mechanism for generating resources for the USF is failing. The USF is funded by a surcharge on interstate revenues that is approximately 10 percent. The FCC is aware that the federal USF may not be able to be supported by the current method much longer. It adopted interim changes increasing the contributions of wireless and VoIP carriers in 2006 and will consider a revised funding formula for USF contributions during The most likely candidate for a replacement funding mechanism is to impose a flat charge on telephone numbers. Either in conjunction with or as an adjunct to a numbers fee, a charge might be imposed for network connections, like traditional telephone lines, broadband service connections such as cable and DSL and wireless connections. Whether and how the related issues of intercarrier compensation and universal service reform are resolved during 2007 will have a profound impact on the competitive positions of carriers in the marketplace and on what services and rates will be available in rural areas. Federal Legislation Substantial Congressional activities affecting telecommunications occurred during The House of Representatives passed H.R. 5252, The Communications Opportunity, Promotion and Enhancement Act of 2006 in June. The Senate Committee on Commerce, Science and Transportation reported the bill with an amendment in the nature of a substitute in September but it was not 2-8

25 The Status of Competition and Regulation In the Telecommunications Industry considered on the Senate floor prior to adjournment for the election because a hold was placed on it and Chairman Stevens was not able to get the 60 votes required to overcome the hold. A number of Senators, led by Senator Ron Wyden of Oregon, object to the absence of Internet neutrality provisions that they consider adequate. There were three main issues that are at the center of the legislative debate: video franchising, universal service reform, and Internet neutrality. Video franchising relief was sought in particular by AT&T and Verizon because of their desire to rapidly upgrade their networks to carry video programming and offer it to their customers. An example of this is Verizon s network upgrade in Beaverton. The companies maintain that the requirement to obtain franchises in each local community impedes their ability to offer consumers an alternative to the video programming offered by cable and direct broadcast satellite companies. The federal legislation would effectively preempt the local franchising process throughout the country. Localities argue, among other things, that this would impair their ability to control their rights of way. Although a high priority for the companies, many believe that the need for this legislation is declining because many key states have adopted statewide video franchising laws or the companies have been able to obtain local franchises in major localities. To the best of our knowledge, there are no significant video franchising disputes of this kind in Oregon. The reasons to undertake universal service reform have been discussed above. Very different philosophies prevail in the House and Senate. Former House Committee Chairman Barton of Texas is an outspoken critic of the federal Universal Service Fund, apparently objecting to the size and growth of the fund as well as to the way in which the funds are distributed. Key concerns are waste, fraud and abuse in the schools and libraries program and inefficiencies in the cost-plus high cost funds that go to network operators in rural areas. Senate Committee member Stevens of Alaska is a strong supporter of the Universal Service Fund, whose aim is to give the FCC explicit authority to adopt a more sustainable funding mechanism as well as to expand the services that are supported to include broadband Internet access in rural areas. It is difficult to reconcile these positions. Internet neutrality proved to be the major stumbling block to passage in the Senate. The Internet has traditionally been transparent to content, that is anyone can put an application on a server and it is thereby accessible to anyone with Internet access on the same basis as anyone else s application. Some network operators, particularly AT&T, have indicated that they eventually plan to charge content providers for access to subscribers served by their networks or even to block content. A possible example of the latter is that a broadband network operator that offers a triple play of voice, video and broadband Internet access 2-9

26 The Status of Competition and Regulation In the Telecommunications Industry might block competing offerings from independent voice over Internet providers or companies distributing movies over the Internet. The aim of Internet neutrality provisions is to limit these kinds of actions by broadband network operators. The large former telephone companies and the cable television companies strenuously oppose these Internet neutrality restrictions arguing that the revenue streams are a critical source of funds for the network buildouts. Major Internet content providers vigorously support Internet neutrality. So far legislators have been unable to reconcile these positions. The bills as written do not contain strong Internet neutrality provisions and that is the reason that a hold was placed on the bill in the Senate. 2-10

27 The Status of Competition and Regulation In the Telecommunications Industry (3) Statutes that inhibit or discourage competition in and deregulation of the telecommunications industry None Identified. 3-1

28 The Status of Competition and Regulation In the Telecommunications Industry (4) Specific actions taken by the Commission to reduce the regulatory burden imposed on the telecommunications industry, including telecommunications utilities and competitive telecommunications providers A. Electronic Filings How has the Commission reduced regulatory burden? Beginning in 2001, the Commission has converted to electronic filing procedures in almost all agency proceedings. Electronic filing is advantageous for filers, for those seeking access to documents, and for the Commission. The conversion came in response to requests from industry and the public. It also implemented a Governor s directive to all state agencies to make services available electronically. The Commission introduced electronic filings in October 2001 when it adopted electronic filing rules for interconnection agreements between competitive and incumbent telecommunications carriers. As a result, filing of interconnection agreements is faster, more accurate, and agreements are now available for review on the Commission s web site. In December 2002, the Commission further modified its administrative rules to incorporate electronic filing of applications for certificate of authority. Then, in March 2003, the Commission supplemented electronically filed applications with an notice process. This change allowed the Commission to publish notices more frequently, every two weeks rather than monthly. Implementation of the electronic filing and notice process allowed applicants to file applications faster and more accurately, gave the public and industry ready access to applications and Commission actions, and enhanced accuracy and efficiency at the Commission. Time from application to approval has decreased by approximately five weeks. The Commission completed its conversion to electronic filing in December 2004, when it adopted electronic filing rules for nearly all Commission proceedings. The rules took effect in early As a result, parties and the public generally can now retrieve from the Commission s web site the non-confidential versions of testimony, legal briefs, and other similar documents. This change has made the Commission s activities more transparent, has reduced the volume of paper, and has facilitated participation in Commission proceedings. 4-1

29 The Status of Competition and Regulation In the Telecommunications Industry B. Regulatory Relief for Incumbent Carriers What actions can the Commission take to provide regulatory relief? The Commission has the following options for granting regulatory relief to incumbent telecommunications utilities: 1. The Commission may approve an incumbent's alternative regulation plan (e.g. price caps). Such a plan could include a provision that the Commission would no longer review the incumbent's profits. 2. When the Commission certifies new competitors and approves creating a competitive zone, the Commission provides the incumbent telecommunications utilities downward pricing flexibility. 3. Prior to Commission approval, incumbents may enter into customer-specific contracts for competitive reasons. 4. The Commission may exempt a service from regulation, including rate regulation, if the Commission finds that competition exists. 5. The Commission may exempt a service from prior approval procedures if the incumbent can show that the service is subject to competition or is non-essential. Can the Commission reclassify an incumbent telecommunications utility to a competitive carrier? Yes. Under Oregon law, if an incumbent telecommunications utility requests, the Commission can approve reclassification to a competitive carrier. For example, prior to 1990, the Commission regulated AT&T as an incumbent and exclusive long distance telecommunications utility. In 1990, AT&T petitioned to be reclassified as a competitive carrier by arguing it no longer dominated the long distance market. The Commission granted AT&T's request. An incumbent also may be classified as a telecommunications utility in one part of the state and as a competitive carrier in another part. For example, in 1998, the Commission granted Communication's application to be classified as a competitive carrier in territory served by another incumbent, Verizon. Does the Commission closely regulate competitive carriers? No. Competitive carriers are not subject to Commission rate or profit regulation. They may charge any rates they choose without any constraint on profits. Competitive carriers do not file tariffs. The Commission imposes consumer protection requirements on competitive carriers only as needed. For example, the Commission requires competitive local exchange carriers to provide their 4-2

30 The Status of Competition and Regulation In the Telecommunications Industry customers with access to emergency services through E-911. The Commission requires competitive carriers to meet certain service quality requirements in order to ensure that Oregon consumers have high quality services throughout the state. Can an incumbent choose to be regulated through a price cap form of regulation? Yes. ORS allows regulated telecommunications utilities to elect, without prior approval by the Commission, a price cap form of regulation in exchange for a commitment to meet specific infrastructure investment requirements. The price cap plan is described in ORS opted for price cap regulation effective December 30, On September 14, 2001, the Commission approved new rates for as the culmination of the company's final rate case proceeding. ORS allowed the Commission to order this one last rate revision. The new rates became effective January 1, The new rates established price caps for 's non-basic services for purposes of ORS The Commission retains authority to set rates for basic services. Standard dial-up residential and business local services are basic services. The Commission may not consider 's earnings when making future adjustments to the company's basic service rates. Are there any other laws that allow the Commission to grant regulated telecommunications utilities the ability to elect alternative forms of regulation? Yes. ORS and also allow for alternative forms of regulation. ORS allows for price listing (see Section (5) B) and opportunities to earn higher returns. ORS allows for prices to be set without regard to the return on investment of the utility. C. HB 3241 of Revised Affiliated Interest Reporting Requirements How does HB 3241 reduce regulatory burden? HB 3241 was enacted in 1999 and reduced regulatory burden in two ways. First, local exchange regulated utilities are no longer required, for transactions totaling $100,000 or less, to seek Commission approval of contracts between the regulated local exchange telecommunications utilities and companies in which they have a financial interest--termed an affiliated interest. Second, HB 3241 streamlined affiliated interest annual reporting requirements. The regulated local exchange utility must now provide only the list of names of affiliates doing business with the utility, the dollar amounts of the contracts and the date of the contract execution. As expected, since 1999 the Commission has received fewer requests to approve affiliated interest contracts than in prior years. 4-3

31 The Status of Competition and Regulation In the Telecommunications Industry Has the Commission taken additional action to reduce regulatory burden with regard to affiliated interests? Yes. In June 2000, the Commission adopted an agreement between its staff and regarding the suspension of the filing requirements for affiliated interest contracts and related reports. With 's election to be regulated under price cap regulation, allowed by ORS , many affiliated interest filings and related reports are no longer necessary. Staff reserves the right to request to file affiliated interest contracts when the contract impacts a proceeding concerning 's basic telephone service, for which the Commission retains authority. D. SB 931 of Revised Dollar Thresholds for Commission Approval of Property Sales What does this proposal do to reduce regulatory burden? SB 931 was enacted in 1999 and reduced regulatory burden for these utilities by eliminating the requirement that regulated electric, natural gas and telecommuni - cations utilities obtain Commission approval before property, valued at $100,000 or less, could be sold. The previous dollar threshold limit was $10,000. As expected, since 1999 the Commission has received fewer requests to approve property sales than in prior years. E. Expedited Complaint Procedure What does this proposal do to reduce regulatory burden? In April 2000, the Commission adopted rules that establish procedures for expediting complaints alleging that telecommunications utilities have engaged in prohibited acts under ORS This law was part of SB 622, passed in the 1999 legislature. Complaints under ORS often allege a breach of an interconnection agreement between a telecommunications utility and a competitive provider. The new rule establishes a more effective and efficient procedure for processing interconnection agreement complaints. F. Simplified Extended Area Service (EAS) Approval Process How has the Commission modified its EAS process? In October 2000, the Commission completed a review of its procedures for approving requests for expanded EAS. EAS is a service that allows customers the ability to call nearby telephone exchanges without incurring long distance charges. The Commission approves new EAS routes when it determines there is sufficient community of interest between exchanges. Customers may request 4-4

32 The Status of Competition and Regulation In the Telecommunications Industry new EAS by submitting a petition to the Commission. The Commission then determines whether there is a community of interest, and if so, conducts a review of EAS rate proposals from rate regulated local service providers. Creation of an EAS route can lead to significant local exchange rate increases depending on calling patterns. In the past, the time from the request to actual implementation of a new EAS route had been as long as 18 months. Telecommunications providers and consumers complained that this was too long. After review, the Commission found that it could reduce the time from request to implementation to about 15 months, while maintaining current policy stand ards to ensure that EAS expansions are in the public interest. 4-5

33 The Status of Competition and Regulation In the Telecommunications Industry (5) Specific actions taken by the Commission to maximize the opportunities for telecommunications utilities and competitive telecommunications providers to achieve pricing flexibility, including rate rebalancing, exemption from regulation and streamlined regulations What laws currently allow for pricing flexibility or exemption from regulation? The Commission has the authority to grant pricing flexibility or exempt services from regulation under ORS , , , and A. Competitive Zones (ORS ) When the Commission receives an application for authority to provide intraexchange (local exchange) service, the application is considered under the Competitive Zone law, ORS This applies to private line (dedicated point-to-point) services and to switched (dial-tone) services. When the Commission grants an application to provide intraexchange service under ORS , the affected telephone exchanges are designated competitive zones for the services that the new competitor is authorized to provide. The Commission may then grant the incumbent utility downward pricing flexibility for those services. How are competitive zones defined? There are two facets to defining a competitive zone. The first identifies the geographic boundaries of the competitive zone. The second identifies the services that are subject to competition. Creation of competitive zones is triggered when a competitive provider applies for Commission certification to offer telecommunications services in specified areas. For example, the Commission might grant to a competitive provider a certificate of authority to provide private line service in the Medford exchange. is the incumbent utility that serves Medford. In this case, the Medford exchange becomes a competitive zone for private line services. How many competitive zones has the Commission authorized? There are 264 local telephone exchanges in Oregon. All 264 exchanges are now designated as competitive zones for switched (dial-tone) and private line (point-to-point) telecommunications services. In how many of those competitive zones has the Commission granted the incumbent utility pricing flexibility? All incumbent local service providers in Oregon, including and Verizon, have been granted downward pricing flexibility for private line service in all of 5-1

34 The Status of Competition and Regulation In the Telecommunications Industry their exchanges. As for switched services, has pricing flexibility in all 64 of its Oregon exchanges. Verizon has pricing flexibility for switched service in 43 of its 44 Oregon exchanges. B. Price Listing (ORS and ) When has the Commission granted pricing flexibility through price listing? The Commission has granted pricing flexibility through price listing on twelve occasions. In the parenthesis below that reference the order, the first two numbers following "Order No." provide the year that the order was issued. For example, 98 refers to the year has received authority to price list services on six occasions. 1. UD 3 (see Order No ), the company was granted authority to price list billing and collection (B&C) services. B&C services provide basic billing and bill rendering functions for local and toll services. 2. UD 6 (see Order No ), the company was granted authority to price list Real Deal, Call Manager Connection, and Custom Choice services. These services combine various toll services and custom calling services in business packages. 3. UD 7 (see Order No ), the company was granted authority to price list feature packages of business Custom Calling services. Custom Calling services include call waiting, call forwarding, and other user-defined services. 4. UD 9 (see Order No ), the company was granted authority to price list additional line feature packages. Additional line feature packages include add-ons to additional line service such as various Custom Calling services. 5. UD 10 (see Order No ), the company was granted authority to price list business CustomChoice service. Business CustomChoice service includes 17 features typical to business service such as call waiting and call forwarding. 6. UD 11 (see Order No ), the company was granted authority to price list SmartSet service. SmartSet services include features such as Caller ID and Call Waiting ID. 5-2

35 The Status of Competition and Regulation In the Telecommunications Industry Sprint/United Telephone Company (dba Embarq) has received authority to price list services on four occasions. 7. UD 5 (see Order No ), the company was granted authority to price list IntraLATA toll services. IntraLATA toll service is interexchange long -distance offered either only within the Portland LATA or only within the Eugene LATA. 8. UD 12 (see Order No ), the company was granted authority to price list Advantage, Call Manager, Sprint Essentials, Touch with Call Forwarding, and Sprint Elite. These packages represent various combinations of Caller ID, Call Waiting ID, Call Waiting, Call Forwarding, etc. 9. UD 14 (see Order No ), the company was granted authority to price list Sprint Classic Calling Package and Sprint Priority Package. 10. UD 15 (see Order No ), the company was granted authority to price list seventeen residential and ten business service packages. Verizon has received authority to price list a service on two occasions. 11. UD 4 (see Order No ), the company was granted authority to price list CentraNet service. CentraNet service is a Centrex-type service with features such as direct inward dialing, direct outward dialing, intercom capabilities, and various Custom Calling enhancements. 12. UD 13 (see Order No ), the company was granted authority to price list intralata toll. In addition to the price listing cited above, the Commission granted authority to price list as part of an alternative form of regulation (AFOR) plan under ORS In exchange for a freeze on basic service access rates, the Commission granted a substantial degree of pricing flexibility on its non-basic services for a five-year period beginning in In return for this, the company agreed to share excess revenues above a certain benchmark that was adjusted on an annual basis. C. Service Deregulation (ORS (3)) How many petitions to deregulate a telecommunications service have been approved by the Commission? Thirty petitions to deregulate a service or services have been filed with the Commission. Eleven petitions were approved in their entirety. Three petitions were partially approved. Twelve petitions were dismissed or denied. Four petitions were withdrawn. 5-3

36 The Status of Competition and Regulation In the Telecommunications Industry What services has the Commission deregulated? Three petitions centered on the deregulation of Customer Premise Equipment (CPE). CPE consists of two-way, voice-grade communications devices installed at customers' premises. The FCC preemptively deregulated CPE for Bell Operating Companies in the mid-1980s. Non-Bell companies, however, actively sought deregulation of CPE from local jurisdictions. The principal result of this change is that most customers now own their own telephones. 1. UX 5 (see Order No ) allowed CP National to receive authority to deregulate CPE. 2. UX 6 (see Order No ) allowed Continental Telephone of the Northwest to receive authority to deregulate CPE. 3. UX 7 (see Order No ) allowed Continental of the West to receive authority to deregulate CPE. Three petitions dealt with the deregulation of Voice Messaging Service (VMS). VMS is a remote, central office-based call recording capability. 4. UX 15 (see Order No ), Sprint/United received authority to deregulate its MessageLine Service. 5. UX 17 (see Order No ), Verizon received authority to deregulate its Voice Messaging Service. 6. UX 18 (see Order No ), received authority to deregulate its Voice Message Service. One petition dealt with the deregulation of Automated Information Service (AIS). AIS is a service that augments Voice Messaging Service. It creates information bulletin boards that send pre-recorded massages to users and provides other enhancements. 7. UX 19 (see Order No ), Verizon received authority to deregulate its Automated Information Service. One petition dealt with the deregulation of Advanced Fax Services. Advanced Fax Services provide technical enhancements to fax services. 8. UX 20 (see Order No ), received authority to deregulate its Advanced Fax Services. 5-4

37 The Status of Competition and Regulation In the Telecommunications Industry One petition dealt with the deregulation of DS 3 services. DS 3 is a 44.5-megabit per second (mbps) high-speed transport service. 9. UX 21 (see Order No ), received authority to deregulate its DS 3 service. One petition dealt with the deregulation of Centrex service. Centrex is a multi-line communications service intended for large users. 10. UX 23 (see Order No ), received authority to deregulate its Centrex PRIME service. In 2002 and 2003, one petition dealt with the deregulation of directory assistance and related services. 11. UX 27 (see Order ), received authority to deregulate its Complete-a-Call service. Also in 2002 and 2003, one petition dealt with the deregulation of interlata toll, operator services and 800 ServiceLine Option. 12. UX 28 (see Order ), received authority to deregulate its 800 ServiceLine and intralata toll services. In 2004, one petition is dealt with the deregulation of switched business services. 13. UX 29 (see Order No ), received authority to deregulate its 800/OutWATS, Frame Relay, and Asynchronous Transfer Mode services statewide. The company also received authority to deregulate its Basic Business Service and associated features in the Portland and Clackamas rate centers for customers with four lines or more. In 2006, one petition dealt with the deregulation of Billing and Collection services. 14. UX 30 (see Order No ), received authority to deregulate its Billing and Collection services. 5-5

38 The Status of Competition and Regulation In the Telecommunications Industry (6) Specific actions taken by the Commission to: a) Minimize implicit sources of support; and b) Maximize explicit sources of support that are specific, sufficient, competitively neutral and technologically neutral and that support telecommunications services for customers of telecommunications providers in high-cost locations A. The Oregon Customer Access Plan What is it? The Oregon Customer Access Plan (OCAP) is an intrastate switched access pooling arrangement begun in the early 1990's to establish uniform statewide access rates to foster toll competition in all areas of the state. In addition, it is a means to provide financial support to telecommunications utilities providin g service in high-cost areas. How does OCAP help minimize implicit sources of support and keep rates low in high-cost locations? The Oregon telecommunications carriers developed and the Commission approved the Oregon Customer Access Plan (OCAP) in Under the plan, Incumbent Local Exchange Carriers (ILECs) may pool their costs and develop average access charge rates. ILECs receive access charge revenues from long distance carriers for originating and terminating toll calls to the ILECs' customers. What are the objectives of OCAP? The OCAP helps foster a telecommunications climate in the state that provides, to both urban and rural consumers, a choice among competitive interexchange carriers and toll services at affordable prices through a balanced program of regulation and competition. The OCAP maintains a reasonable level of common access rates throughout the state, provides cost control incentives for the participating ILECs and stimulates network usage through price reductions and innovations. These common access rates also help to alleviate pressure for geographic de-averaging of toll rates in the state. As a result, rural and urban toll customers, making in-state calls, pay the same rate per mileage band. Will OCAP eventually be phased out? The OCAP eventually will likely be phased out. The Commission began work in 1994 developing a new competitively neutral universal service program to ensure that consumers throughout Oregon will have adequate and affordable basic telephone service. As discussed below, the Commission created a new universal service program under ORS

39 The Status of Competition and Regulation In the Telecommunications Industry In September 2003, the Commission expanded the Universal Service program to include the rural ILECs. At that time, the Commission amended the OCAP to transfer the Universal Service portion of the Plan to the Oregon Universal Service Fund (OUSF). Those companies receiving disbursements from the OUSF offset their intrastate access costs by the amount of their OUSF support, thus removing implicit subsidies from intrastate access rates. The current OCAP will remain in place as long as access charges exist. The industry and the FCC are considering proposals to revamp intercarrier compensation and access charges into one rate structure. Whenever a plan is approved and implemented, it s likely the need for the OCAP and the pooling arrangement will no longer exist. B. The Oregon Universal Service Fund The 1999 Oregon Legislature passed SB 622, codified as ORS through ORS directed the Commission to set up and fund the Oregon Universal Service Fund (OUSF). The OUSF is designed to provide explicit support to telecommunications carriers for provision of basic telephone service in high-cost areas. The OUSF allows the carriers to provide high quality b asic telephone service at affordable rates. Explicit support provided by the OUSF replaces the implicit support that was for many years a part of traditional rate regulation. The traditional approach provided implicit support for services such as rural residential service by charging higher prices for other services such as custom calling features, long distance calls, business services, and urban telephone services. Implicit support is incompatible with a more competitive telecommunications industry. Competitive carriers tend to undercut implicit sources of support in the rate structure by targeting customers and services that have traditionally paid higher prices. The OUSF is funded by a surcharge on certified carrier s intrastate retail telecommunications revenues. Carriers may pass the surcharge on to their customers as a line item on consumer bills. The current customer surcharge is 7.12 percent. Carriers that provide service in high-cost areas receive support based on the cost of providing basic telephone service in such areas, less support the carrier receives from federal sources, less a Commission established benchmark of $21.00 per month. During the biennium July 2003 through June 2005, the OUSF distributed $103.7 million in support. The Commission implemented the OUSF in September At first, the program covered only high-cost areas served by and Verizon. In September 2003, the Commission expanded the OUSF to include rural ILECs. In March 2006, the Commission granted eligibility to the first Competitive LEC (CLEC). The CLEC s first distribution from the OUSF was in May

40 The Status of Competition and Regulation In the Telecommunications Industry At present, the OUSF disburses approximately $4.4 million per month to 26 eligible carriers. At the inception of the program, the Commission established a 10-member Oregon Universal Service Advisory Board. Board members represent incumbent and competitive carriers as well as consumer groups. The Board assists the Commission in overseeing the universal service program. In addition, the Commission has contracted with a third-party administrator that provides day-to-day management of the OUSF program. 6-3

41 The Status of Competition and Regulation In the Telecommunications Industry (7) Statutes that should be enacted, amended or repealed to enhance and respond to the competitive telecommunications environment or promote the orderly deregulation of the telecommunications industry None identified. 7-1

42 The Status of Competition and Regulation In the Telecommunications Industry (8) The number of public bodies, as defined by ORS , providing basic telecommunications infrastructure so that private entities may use that infrastructure to provide advanced information an d communications services What is the extent of telecommunications infrastructure in public bodies? The Commission conducted a survey during the fall of 2006 to gather information on the existence and use of advanced telecommunications facilities by public bodies. Of the 363 respondents, 66 percent (241) do not own advanced telecommunications facilities, while 34 percent (122) of the respondents own some types of facilities. Seven percent (27) of respondents are willing to offer some type of high-speed telecommunications services, and five percent (19) of respondents currently offer high-speed telecommunications services. Currently, the most widely used method for high-speed access on the market is Digital Subscriber Line (DSL) technology. However, of the public bodies, 71 respondents own fiber optics, and 48 own copper cable, while only nine respondents own DSL facilities. Eighteen respondents are willing to offer fiber optics, while two is willing to offer DSL. Eleven respondents currently offer fi ber optics. Refer to Appendix A-4 for the complete report on telecommunications infrastructure in public bodies. 8-1

43 The Status of Competition and Regulation In the Telecommunications Industry (9) The availability of broadband services, the rates charged for broadband services, the demand for broadband services and the usage of broadb and services. The commission may not impose reporting requirements on telecommunications utilities for the purpose of implementing this subsection. What is the status of broadband services in Oregon? Resulting from SB 13 enacted by the 2005 Oregon Legislature, the Commission surveyed representatives from each Oregon city and county, as well as members of the Oregon Telecommunications Coordinating Council (ORTCC), regarding the status of broadband services. As of the end of 2005, there were 685,000 end -user high-speed lines in Oregon, up from 77,000 at the end of Cable systems accounted for 55 percent of the high-speed lines and Asymmetric Digital Subscriber Lines accounted for 35 percent (ADSL transfer "uploaded" and "downloaded" information at differing speeds). Symmetric DSL, traditional wireline, fiber, satellite, mobile wireless and fixed wireless accounted for the rest of the high-speed lines. Only two percent of the zip code areas in Oregon had no broadband service provider at the end of 2005 as compared to 22 percent at the end of The trends in Oregon mirror those of the nation as a whole. Refer to Appendix A-5 for the complete report on the status of broadband services in Oregon. 9-1

44 PUBLIC UTILITY COMMISSION OF OREGON INTEROFFICE CORRESPONDENCE DATE: November 8, 2006 TO: FROM: Dave Booth Celeste Hari SUBJECT: Competitive Providers Report to Legislature ORS (9) requires the Public Utility Commission (PUC) to report annually to the Legislative Assembly regarding competition in the telecommunications industry in Oregon. This memo provides information that can be used for that report. As background, the following may be helpful. There are a total of 2,150,755 lines in the state of Oregon. Within that number there are 34 incumbent local exchange carriers (i.e. LECs or telephone utilities) serving 1,803,832 lines in 264 exchanges in Oregon. This number has continuously dropped over the past few years. The reduction is presumed to be a result of customers dropping a second line in favor of DSL and cable service for Internet access and for simple economics. Another factor in the drop is attributed to the rise in cellular telecommunications. The four largest ILEC's each serve more than 50,000 lines and are fully regulate d utilities. They serve 1,669,256 lines, which is 78% of the total market. The other 30 incumbent carriers serve 134,576 lines with 7% of the lines, in 70 exchanges. Competitive local exchange carriers continue to obtain more customers with 346,923 line s and 16% of the market. Competitive local exchange carriers are often called CLECs. Small investor owned utilities, telephone cooperatives, and CLECs are exempt from many aspects of telecommunications regulation. The PUC divides telecommunications services into two major groups. One group consists of private line services, also called non-switched or point-to-point or dedicated transmission services. These services may carry voice or data communications. They are offered in many bandwidths, or equivalent data speeds such as 56 kbps, mbps, 10 mbps, 45 mbps, and 100 mbps. (kbps means thousand bits per second, mbps means million bits per second). The other major group consists of switched services, also called dial-tone services. Switched services include the basic transmission of voice or data, vertical services like Call Waiting or Caller ID, enhanced services such as Voice Mail, and ancillary services such as operator assistance, directory assistance and directory listings. Basic residential service and basic business service reflect price differences for the same voice transmission service. A-1 Page 1

45 Dave Booth November 8, 2006 Page 2 Private line service and switched service can be either intraexchange or interexchange service. Intraexchange telecommunications services are within a local exchange, in that communication originates and terminates within the exchange. Local exchanges are geographic areas defined by maps filed with and approved by the Commission. Interexchange telecommunications se rvices are between local telephone exchanges. Interexchange voice service is also called long distance or toll service. Oregon law provides for different regulation of competition in the interexchange (long distance) market compared to regulatory procedures for competition in the intraexchange (local exchange) market. PUC procedures differ between interexchange and intraexchange applications for certificates of authority. Applications for authority to provide interexchange (long distance) telecommunications service, both private line and switched service, are considered under ORS Applications for authority to provide Shared Telecommunications Service (STS) to residential and business buildings or complexes of buildings are also considered under ORS Competitive zones are not involved. When the PUC receives an application for authority to provide intraexchange (local exchange) service, then those applications are considered under the Competitive Zone law, ORS This applies to private line service and to switched (dial-tone) service. When the Commission grants an application to provide intraexchange service under ORS , the affected telephone exchanges are designated competitive zones for services authorized for the new competitor. Also, the PUC may grant the incumbent LEC pricing flexibility for those services. There are two facets to a competitive zone. One is geographic, represented by local exchange boundaries. The other is the type of service, basically private line or switched. For example, suppose an applicant asks for a certificate of authority to provide private line service in the Medford exchange and the Commission grants the request. is the incumbent LEC that serves Medford. The PUC may grant pricing flexibility for private line services in the Medford exchange. The competitive zone is the Medford exchange for private line services. In this example, the Medford exchange is not a competitive zone for switched (dial -tone) services. Neither are other exchanges, such as Jacksonville, competitive zones for private line or switched services. Each exchange is a separate competitive zone. PUC Response to ORS (9) (a) - (d): ORS and Number of competitive providers: No competitive zones are created under ORS Competitive zones are created pursuant to ORS Many CLECs have authority to provide interexchange service and a few have authority to provide STS service to specific buildings. Therefore, the sum o f the three kinds of authorization, shown below, is greater than the total number of competitive providers. A-1 Page 2

46 Dave Booth November 8, 2006 Page 3 The numbers have gone down in the past few years because the PUC is actively canceling certificates of companies not paying PUC fees as required by OARs , , and , not paying Oregon Universal Service (OUS) assessments as required by ORS , or not filing annual reports as required by OAR Another factor contributing to the decline in competitive provider numbers is the fact that smaller companies are being purchased and merged into larger companies. The reasons behind this action are to gain economic efficiencies and be a stronger influence in the marketplace. 390: Total number of competitive telecommunications providers with certificates of authority to provide service in Oregon. 376: Authorized to provide interexchange toll, interexchange private line, alternate operator services (AOS), and inmate pay telephones. 10: Authorized to provide Shared Telecommunications Service (STS) to residential and business buildings and complexes of buildings. 195: CLECs authorized to provide intraexchange (local exchange) dial-tone service and private line service. Pursuant to ORS , competitive zones are created when these providers receive certificates of authority. ORS Number of Competitive zones: A competitive zone is created when a certificate of authority to provide telecommunications is issued for a particular exchange. It means that telecommunications competition is permitted in that area. In 2000, the first certificates were issued for statewide intraexchange competitive telecommunications service. There are now 267 competitive zones for switc hed telecommunications service (dial-tone) and private line service. These competitive zones are in all telephone exchanges of every incumbent telephone provider in Oregon. This includes the small utilities and the cooperative corporations, as well as the four large incumbent providers., Verizon, CenturyTel, and United/Embarq have pricing flexibility for private line service in all of their exchanges. Pricing flexibility for switched service occurs when there is an actual exchange of traffic between an incumbent telecommunications provider and a competitive local exchange telecommunications provider. The incumbent notifies the Commission when the exchange of traffic occurs and then the Commission grants pricing flexibility. has pricing flexibility for switched service in all of its 64 exchanges. Verizon has pricing flexibility for switched service in 43 of its 44 exchanges. The small utilities and cooperative corporations already have pricing flexibility because of their regulatory status. A-1 Page 3

47 Dave Booth November 8, 2006 Page (9) (c) Number of competitive services: The PUC divides telecommunications service into two major groupings, private line service and switched service. Applicants specify private line and/or switched service on their applications, without giving more specifics. The PUC uses general descriptions so competitors, both incumbent LECs and competitive providers (CLECs), can respond to market demands and innovate or add new services without having to amend t heir certificates of authority. Private line services include all bandwidths, or equivalent data speeds from very slow (16 kbps) to voice grade (56 kbps) to very high speeds (100 mbps). Private lines may be analog or digital service. The transmission medium may be copper wire, co -axial cable, microwave, or fiber optic. Switched service includes basic voice transmission service and a host of associated services (literally dozens of services). Switched service includes vertical services such as Call Forwarding, Call Waiting, Caller ID, Automatic Call Rejection, and Call Trace, and enhanced services such as Voice Mail, and ancillary services such as operator services, collect calling, directory assistance, and directory listings. The Commission requires a ll local exchange carriers to provide access to E9-1-1 as part of switched local exchange service (9) (d) Consumer Comments: Competitive interexchange (long distance) carriers and Shared Telecommunications Service (STS) providers have been authorized in Oregon for over sixteen years. Competitive local exchange carriers (CLECs) have been authorized to provide private line service for many years. CLECs that offer switched (dial-tone) service have been authorized since January The Public Utility Commission received a number of contacts in 2006, as indicated below. P rior years' figures are shown for comparison. Contacts include: (a) Inquiries which may or may not have an element of a complaint behind them, (b) Informal complaints, and (c) Registered complaints. Very few of the complaints progress to the formal, docketed complaint stage. Number of Contacts Received by OPUC by Type of Provider: Competitive telecommunications providers 2,938 2,978 3,331 1,547 Fully regulated telecommunication utilities 1,169 3,168 4,098 3,765 Partially regulated utilities Other telecom (cooperatives, radio common carriers, ,704 1,650 wireless) 1 Numbers are through July, The classification and tracking of incoming calls was changed in A-1 Page 4

48 Dave Booth November 8, 2006 Page 5 The 2006 calls have been led by technical service, billing and customer service. Calls have decreased significantly for wireless telecommunications carriers, over which the Commission has no jurisdiction. Calls regarding cramming and slamming have also decreased in the last year. Competitive providers include interexchange carriers, STS providers, competitive local exchange carriers (CLECs). The inquiries and complaints cover many issues, such as: (a) Rates (b) Customer service (c) Slamming (unauthorized change of carrier) (d) Cramming (unauthorized services provided and added to bill) (e) Quality of service (f) Disconnect (g) Competitive options (h) Payphones (including inmate payphones) With expanding competition in traditionally monopoly markets, the issues have become far more complex and solutions are less definite. Telecommunications complaints now oft en involve multiple providers instead of just one utility. The Federal Communications Commission deregulated pay telephone service, including payphone service provided by incumbent telephone utilities. The FCC preempted the states on the payphone issue, and the Oregon PUC has no jurisdiction over pay telephone rates. Also, pursuant to state law, the PUC does not have jurisdiction over radio common carriers, such as wireless companies. A-1 Page 5

49 SB 622. Price Cap Regulation (Since codified as ORS through ORS ) What were the key provisions of the Bill? i. An incumbent telecommunications utility may elect, without prior approval by the Public Utility Commission of Oregon (Commission), to adopt a price cap form of regulation in exchange for a commitment to meet specific infrastructure investment requirements. ii. An incumbent telecommunications utility, that elects to adopt price cap regulation, is subject to Commission determined maximum and minimum price constraints for non-basic services. New services are not subject to a price cap. An electing utility may offer packages of services. The Commission has the authority to define and establish prices for basic telephone service. The 2001 Legislative Assembly modified SB 622 by creating an exception to price caps. ORS (10) grants the Commission additional authority to approve increases to Extended Area Service (EAS) rates in order to recover the cost of new EAS routes. Under ORS , EAS is subject to a price cap as a non-basic service. EAS is non-basic as a matter of law. Under ORS (1), only a local exchange telecommunications service may be classified as basic. EAS is interexchange, not local exchange service. iii. An incumbent telecommunications utility, that elects price cap regulation, must establish a "Telecommunications Infrastructure Account." The utility must, over a four-year period, set aside in this "Telecommunications Infrastructure Account" monies equal to 20 percent of the utility's "gross regulated intrastate re venues" for the calendar year that immediately precedes the date when the utility elected price cap regulation. The utility must transfer to the Connecting Oregon Communities Fund a specific portion of funds in its infrastructure account. The Connecting Oregon Communities Fund is established in the State Treasury. ORS and ORS distribute money in the Fund to various agencies and programs. Money remaining in the electing utility's infrastructure account must be spent in accordance with plans approved by the Oregon Economic Development Commission. The 2001 Legislative Assembly added another source of revenue for the Connecting Oregon Communities Fund. ORS (1) designates the Connecting Oregon Communities Fund as the state account to which Corporation will make payments if required to do so under a performance assurance plan. The company voluntarily entered into a performance assurance plan as part of its effort to gain authority to provide interlata services. A-2 Page 1

50 iv. The Commission was directed to establish a universal service fund that is competitively neutral and nondiscriminatory. The purpose of the fund is to ensure that basic telephone service throughout Oregon is available at reasonable and affordable rates. The Commission established and implemented this fund in September 2000, 12 months after the effective date of SB 622. Revenue for the universal service fund is derived from a surcharge placed on customers' bills. The surcharge is a uniform percentage of the sale of retail telecommunications services. Money in the fund will be based on the difference between a Commission determined benchmark price of basic telephone service and the cost of providing such service. The 2001 Legislative Assembly introduced special consideration for pay telephone providers. ORS (8) allows pay telephone providers to apply to the Commission for a refund of universal service surcharge payments. v. In order to ensure safe and adequate service, the Commission is directed to establish minimum service quality standards for retail telecommunications services. These retail standards apply to all providers of retail telecommunications services, both incumbent utilities and competitive providers. However, the 2001 Legislative Assembly created an exemption for small telecommunications utilities. ORS (9) exempts telecommunications utilities with less than 50,000 access lines from minimum service quality standards related to the length of time it takes the utility to respond to questions from customers. The Commission also has the authority to establish minimum service quality standards for wholesale services. The Commission must pursue monetary penalties for violations of its service standards in the state courts. vi. Telecommunications utilities, unless exempt under federal law, are prohibited from engaging in a list of anti-competitive acts. Alleged violations are subject to an expedited complaint process before the Commission. The Commission must pursue penalties for violation in the state courts. vii. The Economic Development Department is directed to conduct an assessment of telecommunications infrastructure and community telecommunications needs. A-2 Page 2

51 LOCAL TELECOMMUNICATION COMPETITION SURVEY YEAR 2006 REPORT Economic Research and Financial Analysis Division Public Utility Commission of Oregon January 2007 A-3

52 Competition Survey Year 2006 Final Report TABLE OF CONTENTS Executive Summary... 2 I. Purpose of the Survey... 6 II. Survey Participants and Responses..6 III. Service Types ILEC Service Types CLEC Service Types... 8 IV. Switched Services Market Size and Share Analysis Market Size and Shares..9 A. Business Market Share B. Residential Market Share CLEC Provisioning Market Trends in Switched Access Services V. High Speed Access Services Market Size and Share A. Private Line Service 1 9 B. DSL Service CLEC Provisioning Market Trends in Local Private Line and DSL Services VI. Market Segments by Region and Type of Service Market Segments by Regions A. Switched Services by Region B. Private Line Service by Region C. DSL Service by Region Market Segments by Type of Service...27 A. Switched Services B. Private Line C. DSL...28 VII. Business Plans and Competition Capital Expenditures Competition for Residential Market VIII. Conclusion A-3

53 Competition Survey Year 2006 Final Report Executive Summary In January 2006, the staff of the Public Utility Commission of Oregon sent a survey to the 269 certified local exchange carriers (LEC) in Oregon for the purpose of assessing the status of local telephone competition in Oregon. The survey asked all carriers, both incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs), to provide information about the local services they provided in Survey responses were received from all 34 ILECs and 189 out of 235 CLECs, for a total response rate of 83 percent. HIGHLIGHTS Total Oregon Local Exchange Service Revenue $912 Million ILEC Revenue - $Millions / Share... $747 / 82% CLEC Revenue - $Millions / Share... $165 / 18% Total Switched Lines at Year-end ,150,755 ILEC Switched Lines / Market Share... 1,803,832 / 84% CLEC Switched Lines / Market Share ,923 / 16% Total Residential Switched Lines at Year-end ,321,427 ILEC Residential Switched Lines / Market Share... 1,223,853 / 93% CLEC Residential Switched Line / Market Share... 97,574 / 7% Total Business Switched Lines at Year-end ,827 ILEC Business Switched Lines / Market Share ,856 / 63% CLEC Business Switched Line / Market Share ,971 / 37% Total Wholesale Switched Lines at Year-end ,501 ILEC Wholesale Switched Lines / Market Share ,123 / 97% CLEC Wholesale Switched Lines / Market Share 5,378 / 3% Change from prior Year - Total Switched Lines / % Change ,048 / -4% Change from prior Year - ILEC Switched Lines / % Change ,627 / -8% Change from prior Year - CLEC Switched Lines / % Change... 75,579 / 28% Unbundled Network Elements Platform UNE-Ps, Lines ,868 CLECs Having Certificates CLECs Doing Business / % of Total CLECs / 57% A-3 Page 2

54 Competition Survey Year 2006 Final Report Total Number of Private Line Circuits ,594 Lower Capacity Circuits / % of Total... 33,850 / 74% Higher Capacity Circuits / % of Total..11,744 / 26% Total Number of DSL ,083 All LEC Capital Expenditures - $Millions / % of Revenue..$141 / 15% CLEC Capital Expenditures - $Millions / % of Revenue...$22 / 13% ILEC Capital Expenditures - $Millions / % of Revenue.....$119 / 16% Growth in the number of operating competitive local exchange providers has leveled off over the last several years. While over the last eight years, the number of certified CLECs increased from 101 to 235 and the number of CLECs actually providing services in Oregon has increased from 22 to 134. CLEC Certificate Trends 1998 to 2005 Ce rtifie d & Operating CLECs in Oregon Number Certifie d Ope rating As of December 2005, 134 out of the 235 certified CLECs reported that they were actually providing local exchange services ( 57%, up from 50% in 2004). By using a widely recognized measure of market share, percentage of local switched telephone lines, CLEC market share was 16.1 percent (up from 12.2 percent in 2004). According to the survey responses, competitive entry in Oregon's telecommunications market is still small in the residential sector. In 2005, CLECs had a 7.4 percent (up from 4.1 percent in 2004) share of the Oregon residential market. Most competitive entry is in the business sector. CLECs were supplying 37 percent (up from 32 percent in 2004) of business customers' switched local exchange lines statewide. A-3 Page 3

55 Competition Survey Year 2006 Final Report The number of total Oregon LEC switched local exchange lines dropped 3.6 percent, from 2.23 million (after data correction by CLECs) in 2004 to 2.15 million in The following table summarizes the switched lines serviced in Oregon. All LECs Switched Services: Lines (000s) and Shares (%) 2005 Total Residential Business ILECs 1,804 1, CLECs All-LECs 2,151 1, ILECs 83.9% 92.6% 63.0% CLECs 16.1% 7.4% 37.0% All-LECs 100.0% 100.0% 100.0% Competitive entry into the telecommunications market varies across different regions in Oregon. In Portland, and the Willamette Valley, CLECs were providing 40.4 percent and 42.5 percent of business customers' switched local exchange lines respectively. While on the Coast, Central, Southwest and in Eastern Oregon CLECs were providing between 19 percent and 28 percent of switched lines to business customers. Of the 2.15 million switched access lines served by all local exchange carriers, 61 percent were residential lines. Out of 1.32 million residential lines, CLECs served 7.4 percent, somewhat higher than the prior year s 4 percent. Forty-six percent of all residential lines were in the Portland area. CLECs served 12 percent of residential lines in the Portland area, 7.3 percent in East Oregon, 4.8 percent in Central Oregon, and 2.9 percent elsewhere in the state. Distribution of Switched Access Lines Provided by CLEC Distribution of CLEC Provided Sw itched Lines in Oregon 80.0% 60.0% 40.0% 20.0% 0.0% Portland Willamette SW Coast Central East Residential 73.9% 9.5% 4.0% 2.4% 5.3% 5.0% Business 57.9% 25.0% 5.3% 3.0% 5.7% 3.0% A-3 Page 4

56 Competition Survey Year 2006 Final Report Fifty-eight percent of CLEC's business lines and 74 percent of residential lines were in the Portland Metropolitan area. CLEC switched service revenues were $ million in 2005, up from $119 million in Growth of Competition in Oregon CLEC Shares in Sw itched Access Lines % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% CLEC Shares 3.9% 5.5% 6.4% 8.9% The share of switched access lines served by CLECs at the end of 2005 represented 16.1 percent of total access lines in Oregon, compared to a CLEC share of 18.0 percent across the entire country. CLECs have 7.4 percent of the residential market in Oregon compared to 12.8 percent nationally. In the business market CLECs have 37.0 percent in Oregon compared to 26.4 percent across the country. 1 The number of CLEC lines in Oregon increased by 27.6 percent in 2005, from 271,344 to 346,923. By comparison, total ILEC lines decreased by 7.9 percent during the preceding year, from 1,959,459 to 1,803, Source of national data is July 26, 2006 FCC Data Release on Local Tel ephone Competition A-3 Page 5

57 Competition Survey Year 2006 Final Report I. Purpose of the Survey The purpose of the survey is to collect information from incumbent and competitive local exchange carriers to determine the status of competition for local exchange services in Oregon. This study is a key component of the 1999 Oregon legislation requiring the OPUC to report on telecommunications issues. II. Survey Participants and Responses In January 2006, the Commission staff sent a survey to all 269 carriers currently holding a certificate issued by the Commission to provide local services in Oregon. Of the 269 certified local exchange carriers (LECs), 34 are incumbent local exchange carriers (ILECs), and 235 are competitive local exchange carriers (CLECs). The ILECs consist of 23 telecommunications utilities and 11 cooperatives. These are the tradi tional local telephone service providers in the state. CLECs compete with the traditional carriers. The survey asked all LECs to provide information regarding their operations in All 34 ILECs responded to the survey. One-hundred eighty-nine out of the 235 (80.4 percent) competitive providers responded. The overall response rate for LECs was 82.9 percent (Table 1). Sixty-two percent (57 percent last year) of all certified carriers were actually providing services in 2005, 100 percent of ILECs and 57 percent (50 percent last year) of CLECs (134 out of 235). For purposes of this analysis, we assume that all non-responding CLECs were not providing local service in Oregon. Table 1. Survey Response Rates and Service Operation Rates 2005 Surveys Sent # Responded Response Rate % Total LECs % ILECs % CLECs % Surveys Sent Service Provided Operation Rate % Total LECs % ILECs % CLECs % A-3 Page 6

58 Competition Survey Year 2006 Final Report III. Service Types 1. ILEC Service Types All 34 ILECs provided local exchange switched service to retail customers. Local switched services include dial tone, local (toll-free) calling, directory listings, and various features such as call waiting and caller ID. Local exchange private line (i.e., dedicated, point-to-point) services also include DSL (Digital Subscriber Lines) services. ILEC service types and the percentage providing each type for 2005 are shown in Table 2 and Figure 1. Table 2. Market Coverage for General Services ILECs Service Types # of ILECs % of ILECs Providing Service Providing Service Local Exchange Switched Service % Local Exchange Private Line Service: % Lower Capacity % Higher Capacity % Long Distance Service % DSL (Digital Subscriber Line) % Access Service % Directory Assistance % Operator % Telecom using Cable TV Facilities 0 0.0% Telecom using VoIP 0 0.0% Others % Figure 1. Service Types and Distributions ILECs % ILEC P ro viding Service T ypes % 80.0% 60.0% 40.0% 20.0% 0.0% Switched Private line Long distance xdsl Access Service Directory Assistanc Operator % Types 100.0% 85.3% 38.2% 85.3% 91.2% 44.1% 35.3% A-3 Page 7

59 Competition Survey Year 2006 Final Report 2. CLEC Service Types As of December 2005, of the 235 certified CLECs, 134 (57 percent) were providing some kind of telecommunications service in Oregon (up from 50 percent in 2004). We assume that only those CLECs that responded to our survey were providing services in Oregon. Of the 134 CLECs that were providing services, 58 were providing local exchange service (up from 44 in 2004). Seventy-three CLECs were providing long distance service (up from 56 in 2004), and 35 were providing interexchange private line services. The CLECs service types and distributions are shown in Table 3 and Figure 2. Table 3. Market Coverage by General Services CLECs CLEC Service Types # of CLECs % of CLECs Providing Providing Service Operating CLECs 134 This Service Local Exchange Switched Service % Local Exchange Private Line Service: % Lower Capacity % Higher Capacity % Long Distance Service % DSL (Digital Subscriber Line) % Access Service % Directory Assistance % Operator % Telecom using Cable TV Facilities 2 1.5% Telecom using VoIP 9 6.7% Others % Figure 2. Service Types and Distributions CLECs % of CLECs Providing Different Types of Services, % 40.0% 20.0% 0.0% Sw itched Private line Long distance xdsl Access Service Directory Assistan Operator % Types 43.3% 26.1% 54.5% 20.1% 24.6% 18.7% 17.2% A-3 Page 8

60 Competition Survey Year 2006 Final Report IV. Switched Services Market Size and Share Analysis 1. Market Size and Shares The market share of ILECs has fallen in the local market as CLEC services have expanded. In 2005, there were 134 CLECs competing in the local telecommunication services market. The CLECs as a group had a market share ranging between 9.0 percent and 17.7 percent, depending on how market share is measured. In this report, market share is measured in three ways: (1) customers, (2) lines, and (3) revenues. Table 4. Oregon Switched Service Market Shares Customers Lines Revenue-$millions ILEC 1,300,958 1,803, CLEC 128, , Total 1,429,393 2,150, % Customers Lines Revenue ILEC 91.0% 83.9% 82.3% CLEC 9.0% 16.1% 17.7% Total 100.0% 100.0% 100.0% (1) The CLEC share of retail customers 2 was 9.0 percent. Few customers obtained local exchange switched services from anyone other than their traditional supplier, the ILEC. According to the survey responses, Oregon LECs were providing local exchange switched services to 1,429,393 Oregon customers. ILECs served 1,300,958 (91 percent) of the total, while CLECs served 128,435 customers (9 percent). (See Table 4). While still a small percentage of the total, CLEC switched access customers did increase by 68 percent during 2005, from 76,324 to 128,435, while ILECs had 3.8 percent fewer customers than the prior year. (2) The CLEC share of retail lines 3 was 16.1 percent in 2005 (Figure 3). All Oregon LECs were supplying 2,150,755 (down 3.6 percent from last year) local switched 2 The survey defined "customer" as "any person or entity that has a physical location within Oregon, and has applied for, been accepted, and receives service for a price. Included are residential and business end users (i.e., retail customers), as well as other telecommunications carriers (i.e. wholesale customers)." 3 The survey defined "local exchange lines" as "voice level transmission paths (64kbps digital or <4kHz analog) that link an end user location with the switching center that provides dial tone. For ISDN, each B channel was counted as one line. For Centrex, each station line was counted as one line." A-3 Page 9

61 Competition Survey Year 2006 Final Report telephone lines to retail customers. Of that total, the ILECs were supplying 83.9 percent (1,803,832 or 8 percent less than the prior year) of all lines leaving the CLECs with the remaining 346,923 (16.1 percent of total and a 28 percent increase from the prior year ). The CLECs were supplying an average of 2.7 lines per customer (down from 3.6 in 2004), while ILECs were supplying an average of 1. 4 lines per customer (same as the prior year). The significant drop in CLEC lines per customer, from 3.6 to 2.7, was a result of the relatively large increase in the number of primarily one-line residential customers (82 percent) compared to the increase in often multi-line business customers (16 percent). (3) The CLEC share of retail revenues 4 was 17.7 percent (Figure 3), up from 15.4 in In 2005, retail revenues from total switched access services in Oregon were an estimated $774.1 million (up slightly from $773.4 million in 2004). Of the total, ILECs received $637.3 million (down from $654.3 million in 2004), that was 82.3 percent of total switched access line revenue, and CLECs captured the remaining $136.8 million (up from $119.1 million in 2004), 17.7 percent of total switched revenue. Figure 3. Market Shares for Switched Service Sw itched Service Market Share by Num ber of LINES Serviced, Dec Sw itched Service Market Share by REVENUE 2005 CLECs 16.1% ILECs 83.9% CLECs 17.7% ILECs 82.3% The CLECs achieved a slightly higher share of revenues than lines, and a significantly higher share of revenues than customers. This is because the CLECs have concentrated on providing service to business customers. Of all CLEC switched service revenues, 67 percent was from CLEC business sector in 2005, compared to the ILECs, where business revenue was 35 percent of total revenue in switched service. The ILECs' average annual switched service revenue per line was $353. For CLECs, the annual switched service revenue per line was $394 (see Table 5). 4 The survey defined "revenues" as the amount billed "for switched local exchange services, whether billed in advance or arrears. Include regulated and non-regulated, federal and state charges. Include charges for switched lines, local usage, extended area service (EAS), repair and maintenance services, directory listing services, and add-on features such as call waiting, voice messaging, and caller ID. Exclude taxes that your firm billed to customers." A-3 Page 10

62 Competition Survey Year 2006 Final Report Table 5. Average Switched Service Customers, Lines and Revenues CLECs ILECs Lines / Customer Revenue / Line / Year $394 $353 Revenue / Customer / Year $1,065 $490 The 34 ILECs providing local exchange switched service had 91 percent of customers, (down from 94.7 percent in 2004), 83.9 percent of switched access lines (down from 87.8 percent) and 82.3 percent of switched service revenues (down from 84.6 percent) (see Table 4). Within the ILECs, the Big Four (CENTURYTEL, QWEST, UNITED/SPRINT and VERIZON) incumbent operators have the major market share of local exchange switched service in Oregon. In 2005, the Big Four had 83.1 percent of total customers (down from 86.5 percent in 2004), 77.6 percent of total exchange lines (down from 81.7 percent in 2004), and 76.9 percent of total switched service revenues (down from 79.2 percent in 2004). Table 6. Market Shares of ILECs, CLECs and Big 4 ILECs 2005 CUSTOMERS ILECs/Total CLECs/Total Big-4 ILECs/Total Residential 92.6% 7.4% 84.8% Business 80.2% 19.8% 70.7% Carriers 99.9% 0.1% 99.9% Total Customers 91.0% 9.0% 83.1% SWITCHED LINES ILECs/Total CLECs/Total Big-4 ILECs/Total Residential 92.6% 7.4% 84.9% Business 63.0% 37.0% 58.1% Carriers 96.8% 3.2% 96.8% Total Lines 83.9% 16.1% 77.6% REVENUES ILECs/Total CLECs/Total Big-4 ILECs/Total Residential 89.6% 10.4% 82.4% Business 71.0% 29.0% 66.9% Carriers 93.7% 6.3% 93.7% Total Revenues 82.3% 17.7% 76.9% A-3 Page 11

63 Competition Survey Year 2006 Final Report A. Business Market Share CLECs supplied service to 19.8 percent of business customers in 2005, compared to 9 percent of all types of customers. CLECs supplied 37 percent (32.6 percent in 2004) of business switched access lines (see Figure 4). This is substantially greater than the 16.1 percent CLEC share of Oregon total lines. Similarly, CLECs had a 29 percent (28.4 percent in 2004) share of switched business service revenues, compared to a 17.7 percent (15.4 percent in 2004) of total revenues in the State switched service. Figure 4. Business Market Share, Measured by Lines Served Sw itched Service, Business Lines, 2005 CLECs 37% ILECs 63% The CLEC share of business revenues was higher than their share of bu siness lines. For CLECs, in 2005, the annual revenue per business line was $376. For ILECs, the average was $542 per line. CLECs' market share of switched access lines for business has increased steadily during the past seven years; the share was 11 percent in 1998, and 37 percent in 2005 (see Figure 5). Figure 5. CLEC Business Line Market Share Growth CLEC Market Share - Business Switched Access Lines % 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Business Lines 11.1% 17.6% 14.2% 21.7% 26.3% 24.8% 32.6% 37.0% A-3 Page 12

64 Competition Survey Year 2006 Final Report B. Residential Market Share Table 7. Switched Service RESIDENTIAL Market Shares, S w itc h e d S e rv ic e R E S ID E N T IA L M a rk e t S h a re s R e s id e n tia l C u s to m e rs L in e s R e v e n u e s $ m illio n s IL E C s 1,1 3 3, ,2 2 3, C L E C s 9 0, , T o ta l 1,2 2 3, ,3 2 1, IL E C s /T o ta l % % % C L E C s /T o ta l 7.4 % 7.4 % % (1) The CLEC share of residential customers was 7.4 percent in 2005 (see Table 7), compared to 4 percent a year earlier. According to the survey, Oregon LECs were providing local exchange switched services to 1,223,707 Oregon residential customers. ILECs served 1,133,201 (92.6 percent) of the total, while 90,506 customers were served by CLECs. (2) The CLEC share of residential exchange lines was 7.4 percent in 2005, compared to 4 percent a year earlier. Oregon LECs were supplying a total of 1,321,427 local switched telephone lines to residential customers. ILECs were supplying 92.6 percent or 1,223,853 lines, and the CLECs provided 97,574 residential lines. In 2005, ILECs served 92.6 percent of the residential market; the number was lower than a year earlier (96%). The Big-4 ILECs served 84.9 percent of residential market lines, compared to 88 percent a year earlier. On average, typical residential local phone service is less profitable than typical business service because it costs more on a per line basis to wire an individual home than it does to wire typically more tightly clustered business buildings. About 28 percent of total CLEC lines serve residential customers, while 68 percent of ILEC lines serve residential customers. A greater percentage of CLEC operations focus on the more profitable business sector. (3) Overall residential revenues from local exchange switched service in Oregon in 2005 were an estimated $396.4 million; it was about $399 million in Residential monthly average revenue was $35.1 per line for CLECs, $24.2 per line for ILECs. A-3 Page 13

65 Competition Survey Year 2006 Final Report 2. CLEC Provisioning of Switched Service In December 2005, 39 of the 58 CLECs (67 percent) providing local switched service were ILEC-service-resellers. A CLEC reseller buys complete retail services from ILECs, and then resells to consumers those services under the CLEC's own name. Also, about 41 percent (24/58) of CLECs providing local switched service are fully or partially facility-based providers. These fully or partially facility-based CLECs provided 223,733 switched access lines, which was 64.4 percent of total CLECs' lines, and 10.4 percent of all LECs' switched access lines. Eighteen CLECs reported providing switched access lines or private line services by purchasing unbundled network elements platform (UNE-P) (a UNE-P is a combination of UNEs). There were 128,868 lines served with purchased UNE-P in December Over 52 percent of resold ILEC service occurred in the Portland area. Fifteen percent of resold CLEC service occurred in the Willamette Area (see Figure 6). Figure 6. Market Concentration CLEC Resale of ILEC's Lines in 2005 CLEC Sw itche d Line Through Resale of ILEC's Service, (%) by Region East, 8.69% Ce ntral, 15.08% Coast, 2.58% SW, 7.10% Portland, 52.05% Willamette, 14.51% 3. Market Trends in Switched Access Services CLECs reported 346,923 (or 16 percent of all LECs) of 2,150,755 statewide local switched access lines in service at the end of This represents a 28 percent growth in CLEC switched lines during By comparison, the number of lines served by ILECs decreased by 8 percent during the preceding year, from 1,959,459 to 1,803,832 lines. A-3 Page 14

66 Competition Survey Year 2006 Final Report Figure 7. Change of ILEC Market Share in Switched Services, 1998 to 2005 ILEC Market Share % in Switched Access Services, % 95% 90% 85% Customers Lines 80% Revenues Figure 7 shows the market share of ILEC switched service is on a downward trend. The ILECs share of customers, lines, and revenues have all gone down over the past seven years. CLEC revenue from the residential market was $39.9 million in 2005, up from $24.6 million in ILEC residential revenue was $355 million, down from $374 million. CLEC revenue from the business market was $91.8 million, which was up slightly from the year before. ILEC business revenue decreased 1.5 percent to $224 million from $228 million. Growth in the number of CLEC switched lines has averaged 22.2 percent over the period. During the same period the number of ILEC switched access lines has declined by 2.3 percent per year. The total number of lines has declined by 12.5 percent since 2001, likely due to the increase of cell phone use, replacing a second line with DSL, and use of cable service for Internet access. Table 8. Trends in Switched Access Lines, 1998 to 2005 Date ILEC Lines CLEC Lines Total CLEC Share Dec-98 2,116,322 85,146 2,201, % Dec-99 2,078, ,277 2,199, % Dec-00 2,257, ,578 2,411, % Dec-01 2,238, ,990 2,458, % Dec-02 2,115, ,494 2,386, % Dec-03 2,024, ,571 2,281, % Dec-04 1,959, ,344 2,230, % Dec-05 1,803, ,923 2,150, % A-3 Page 15

67 Competition Survey Year 2006 Final Report Figure 8. Competitive Growth, CLEC Switched Lines CLEC Sw itched Access Line Grow th 350, , , , , ,000 50, CLEC Lines 85, , , , , , , ,923 Figure 9 shows market growth for CLECs. CLEC share of switched service revenue was 17.5 percent in 2005 compared to 5 percent market share in The CLEC share of switched lines was 16.1 percent in 2005, up from 3.9 percent in Finally, the CLEC share of customers was up to 9.0 percent in 2005, from 1.0 percent in While the annual increase for CLEC s witched access lines in the last seven years has averaged 22 percent, the year-to-year increases have ranged from 5 percent to 43 percent. Figure 9. CLEC Growth in Switched Access Services 1998 to 2005 Market Share for Switched Access Services, CLECs/Total, %, % 15% 10% 5% Revenues Lines Customers 0% CLECs' share of residential switched service revenue increased to 10 percent in 2005 compared to 1.3% in Over the same period, CLEC s market share for both residential switched service lines and customers increased to 7.4 percent from 0.7 percent. (See Figure 10) A-3 Page 16

68 Competition Survey Year 2006 Final Report Figure 10. CLEC Residential Market Share for Switched Service, 1998 to 2005 CLEC Residential Mark et Share for Sw itched Service, % 10% 8% Revenues Lines 6% 4% Customers 2% 0% CLECs' share of business switched service revenue increased to 29 percent in 2005 from 8.9 percent in In the same period, the CLEC share of business lines increased to 37 percent from 11.1 percent. CLECs' share of business customers increased to 20 percent from 2.8 percent. (See Figure 11) Figure 11. CLEC Business Market Share for Switched Service, CLEC BUSINESS Sector Market Share for Sw itched Service, % Lines 30% 20% 10% Revenue Custom ers 0% A-3 Page 17

69 Competition Survey Year 2006 Final Report According to FCC News (July 26, 2006), at the end of 2005, US end -use customers obtained local telephone service by utilizing approximately million incumbent local exchange carrier (ILEC) switched access lines (82% of total LEC lines) and 31.6 million competitive local exchange carrier (CLEC) switched access lines (18% of total). By comparison, in Oregon CLECs provide slightly over 16 percent of lines, or about 2 percent less than the national average. (See Figure 12) Figure 12. Market Share Comparison of Switched Access Lines - US vs. Oregon Market Share Comparison of Switched Access Lines - US vs Oregon % 0.00% ILEC CLEC US % 81.98% 18.02% Oregon 83.87% 16.13% A-3 Page 18

70 Competition Survey Year 2006 Final Report V. High Speed Access Services 1. Market Size and Share A. Private Line Service Local exchange private lines are dedicated circuits that customers use to transmit information between two or more pre-selected locations within a telephone exchange. Local private line services vary in capacity. The survey distinguished between lower capacity circuits (speeds less than Mbps) and higher capacity circuits (speeds at Mbps or greater). Total revenue from private line services made up 6.8 percent of total service revenues, DSL was 8.5%, and switched services provided 84.7 percent. Thirty-five CLECs reported they provide local exchange private line services. These CLECs share of the private line market ranged from 6.7 percent for customers to 37.2 percent for lower capacity circuits (see Table 9). The percentage depends on how market share is measured and whether the focus is on lower or higher capacity private line circuits. The survey measured CLEC market share in three ways: (1) customers, (2) circuits, and (3) revenues. Table 9. Local Private Line Services 2005 All LECs CLECs ILECs CLECs % Customers 18,659 1,244 17, % Total Circuits 45,594 15,255 30, % Lower Capacity 33,850 12,596 21, % Higher Capacity 11,744 2,659 9, % Revenues Year $61,911 $17,789 $44, % Revenue / Circuit - Year $1,358 $1,166 $1,454 (1) The CLEC share of local private line customers 5 was 6.7 percent, or 1,244 customers. 6 The ILECs provided service to 17,415 customers, 93.3 percent of the total. 5 The survey defined private line "customers" as "persons or entities that had applied for, been accepted, and were receiving local exchange private line services for a price during the month. Customers include end users (i.e., retail customers) and other telecommunications carriers (i.e., wholesale customers)." 6 Note that survey results may overstate the CLECs' share of local private line customers, since local private line customers may buy private line services from more than one carrier at a time. As a result, a CLEC and an ILEC may report the same customer. A-3 Page 19

71 Competition Survey Year 2006 Final Report (2) The CLEC market share of all private line circuits 7 was 33.5 percent. The CLEC market share of lower capacity circuits was 37.2 percent, while the CLEC market share for higher capacity circuits was 22.6 percent. Total private line circuits, including lower and higher capacity circuits, numbered 45,594 in Table 10. Private Line Revenues, Total ILECs CLECs Shares 100.0% 71.3% 28.7% Million/year $61.9 $44.1 $17.8 (3) The CLECs' share of total private line service revenues 8 was 28.7 percent (see Table 10). CLEC revenues from private line services were an estimated $ 17.8 million annually. 9 Of the total estimated annual revenues, ILECs received $44.1 million (71.3 percent), and CLECs the remaining $ 17.8 million (28.7 percent). The CLECs' share of revenues was greater than their share of customers, indicating that the CLEC are targeting and serving larger customers. B. DSL Service DSL is a technology that combines two way voice and data transmissions at v ery high speeds over normal telephone lines. Total number of DSL in Oregon in 2005 was 257,083, up 39.5 percent from Ninety percent of DSL was provided by ILECs and 10 percent was provided by CLECs (See Figure 13). Revenues from DSL were $ 77.7 million in The survey defined "circuits" as circuit terminations a firm provides and bills to its customers. If a firm provides a circuit that connects two customer locations, and bills the customer for both ends of the circuit, two terminations were counted. The capacity of a circuit is determined by the capacity your firm delivers to the customer at the point of termination, even though the customer may further subdivide that capacity using its own multiplexing or other equipment. 8 The survey defined private line "revenues" as the amount a firm billed in December 2005 for local exchange private line services, whether billed in advance or arrears. This included regulated and nonregulated, federal and state charges. Exclude taxes that your firm billed to customers." 9 Annual revenues are calculated as revenues reported for December 2005 times 12. A-3 Page 20

72 Competition Survey Year 2006 Final Report Figure 13. Oregon Digital Subscriber Lines (DSL) Digital Subscriber Lines (DSL) Service in Oregon 2005 CLEC 10% ILEC 90% 2. CLEC Provisioning of Private Line Circuits Twenty-four facilities-based providers supplied 14,433 (95 percent) of the 15,255 CLECs local exchange private line circuits identified in the survey. However, this does not mean that all of these circuits were provisioned using facilities the CLECs own and operate. Often, a facilities-based carrier owns and operates some telecommunications equipment, but also provides service by resale. Sixteen CLECs provided private line services by reselling ILEC services. Nine CLECs provided private line service by reselling other CLEC services. Most of this resale was to business customers in the Portland metropolitan and Willamette Valley areas. 3. Market Trends in Local Private Line and DSL Services Technological change is the driving force in the telecommunications industry. Many different technologies and types of networks can provide voice telephone service, with new ones arriving seemingly every year. The relatively narrow bandwidth of traditional modems is being replaced by much faster alternatives such as cable modems, digital subscriber lines (DSL), T-1 lines, satellites, fixed or mobile wireless, and fiber optic cable. The percentage of Oregon consumers (residential and business) having high-speed digital access was 16.6 percent as measured by revenue. Oregon's 16.6 percent for high-speed access services consists of 15.3 percent private line service and DSL services, plus 1.3 percent cable TV network in switched services. A-3 Page 21

73 Competition Survey Year 2006 Final Report VI. Market Segments by Region and Type of Service The survey identified six geographic regions within Oregon. The regions are based on clusters of ILEC local exchange serving areas (see Figure 14). The regions are: (1) Portland Metropolitan, 10 (2) Willamette Valley, 11 (3) Southwest Interior, 12 (4) Coast, 13 (5) Central, 14 and (6) East "Portland Metropolitan" region consists of the following exchanges: Aurora, Beavercreek, Beaverton, Burlington, Canby, Carlton, Charbonneau, Colton, Corbett, Estacada, Forest Grove, Gresham, Hillsboro, Hoodland, Lake Oswego, Molalla, Newberg, North Plains, Oak Grove/Milwaukie, Oregon City, Portland, Redland, Sandy, Scappoose, Scholls, Sherwood, Stafford, Sunnyside, Tigard, Vernonia, Woodburn/Hubbard, Yamhill. 11 "Willamette Valley" region consists of the following exchanges: Albany, Alsea, Amity, Aumsville/Turner, Bellfountain, Blodgett, Blue River, Brownsville, Clatskanie, Corvallis, Cottage Grove, Creswell, Dallas, Dayton, Deadwood, Detroit, Drain, Eugene/Springfield, Falls City, Gervais, Government Camp, Grand Island, Grand Ronde, Halsey, Harlan, Harrisburg, Horton, Independence/Monmouth, Jefferson, Junction City, Leaburg, Lebanon, Lobster Valley, Lowell, Lyons, Marcola, McMinnville, Mill City, Monitor, Monroe, Mt. Angel, Murphy/Provolt, Oakridge, Philomath, Ripplebrook, Salem, Scio, Shedd, Sheridan, Silverton, St. Helens, Rainier, St. Paul, Stayton, Summit, Sweet Home, Triangle Lake, Veneta, Willamina. 12 "Southwest Interior" region consists of the following exchanges: Ashland, Azalea, Butte Falls, Camas Valley, Canyonville, Cave Junction, Central Point, Crater Lake, Days Creek, Diamond Lake, Elkton, Fish Lake, Glendale, Glide, Gold Hill, Grants Pass, Jacksonville, Medford, Myrtle Creek, North Umpqua, Oakland/Sutherlin, O'Brien, Phoenix/Talent, Prospect, Riddle, Selma, Shady Cove, Rogue River, Roseburg, White City, Wolf Creek, Yoncalla. 13 "Coast" region consists of the following exchanges: Ash Valley, Astoria, Bandon, Bay City, Beaver, Brookings, Cannon Beach, Chitwood, Cloverdale, Coos Bay/North Bend, Coquille, Depoe Bay, Florence, Garibaldi, Gleneden Beach, Gold Beach, Jewell, Knappa, Lakeside, Langlois, Lincoln City, Mapleton, Myrtle Point, Nehalem, Newport, Pacific City, Port Orford, Powers, Reedsport, Rockaway, Scottsburg, Seaside, Siletz, South Beach, Tidewater, Tillamook, Toledo, Waldport, Warrenton, Westport, Yachats. 14 "Central" region consists of the following exchanges: Antelope, Arlington, Bend, Bonanza, Camp Sherman, Cascade Locks, Chemult, Chiloquin, Condon, Culver, Dufur, Fort Klamath, Fossil, Gilchrist, Grass Valley, Hood River, Klamath Falls, Lakeview, La Pine, Madras, Malin, Maupi n, Merrill, Mitchell, Moro, Mosier, Mt. Hood Meadows, Odell, Paisley, Parkdale, Paulina, Pine Grove, Prineville, Redmond, Rocky Point, Rufus, Silver Lake, Sprague River, Sisters, The Dalles, Tygh Valley, Wamic, Wasco. 15 "East" region consists of the following exchanges: Adrian, Athena/Weston, Baker, Bates, Boardman, Burns, Cove, Dayville, Durkee, Echo, Elgin, Enterprise, Flora/Troy, Haines, Halfway, Harney, Helix, Heppner, Hereford/Unity, Hermiston, Huntington, Imbler, Ione, John Day, Jordan Valley, Joseph, La Grande, Lexington, Long Creek, Lostine, Meacham, Medical Springs, Milton -Freewater, Monument, Mt. Vernon, North Powder, Nyssa, Ontario, Oregon Slope, Pendleton, Pilot Rock, Prairie City, Richland, Ridgeview, Seneca, Spray, Stanfield, Starkey, Sumpter, Ukiah, Umatilla, Union, Vale, Walla Walla (Stateline), Wallowa. A-3 Page 22

74 Competition Survey Year 2006 Final Report Figure 14. Local Exchange Carriers Market Segments and Shares MARKET SEGMENT ANALYSIS 2005 All LECs $912,468,699 Year Total Service Revenue ($) in 2005 Private Line & Switched Data Services Service $139,579,096 $772,889, % 84.70% Circuits: 45,594 DSL: 257,083 Switched Lines 2,150,755 $61,911, % $77,667, % Lower Capacity Higher DSL Residential Business Wholesale (Total) 33,850 11, ,083 1,321, , ,501 2,150, % 30.6% 7.9% 100.0% All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs Portland 59.8% 36.3% 50.3% 14.4% 53.1% 4.6% 45.6% 5.5% 53.2% 21.5% 30.9% 3.1% 46.8% 10.2% Willamette 12.9% 0.4% 24.5% 2.8% 22.1% 2.3% 24.1% 0.7% 21.9% 9.3% 29.6% 0.0% 23.9% 3.3% S.W. 5.8% 0.1% 9.0% 0.9% 7.7% 1.0% 9.6% 0.3% 7.4% 2.0% 13.7% 0.0% 9.3% 0.8% Coast 8.2% 0.1% 2.1% 0.4% 6.6% 0.5% 7.5% 0.2% 5.7% 1.1% 7.0% 0.0% 6.9% 0.5% Central 6.4% 0.0% 8.9% 2.8% 5.4% 1.0% 8.1% 0.4% 7.5% 2.1% 12.1% 0.0% 8.2% 0.9% East 6.8% 0.1% 5.2% 0.4% 5.0% 0.7% 5.1% 0.4% 4.3% 1.1% 6.8% 0.0% 5.0% 0.6% Total 100.0% 37.1% 100.0% 21.6% 100.0% 10.0% 100.0% 7.4% 100.0% 37.0% 100.0% 3.2% 100.0% 16.1% 1. Market Segments by Regions A. Switched Services by Region The survey asked each LEC to report the number of switched local exchange lines it was supplying to customers in each region. Both ILECs and CLECs reported customers in all six regions. The Portland Metropolitan Region, the most populous area in the state, continues to be the largest regional market. It accounted for 46.8 percent (see Figure 15) of all retail local exchange switched lines in the state. Second was the Willamette Valley Region, with 23.9 percent of the lines. The other four regions accounted for less than a third of the state's lines: Southwest Interior ( 9.3 percent), Central (8.2 percent), Coast (6.9 percent), and East (5 percent). A-3 Page 23

75 Competition Survey Year 2006 Final Report Figure 15. Oregon All LEC Switched Lines by Region Switched Line Distribution by Region All LECS 50% 40% 30% 20% 10% 0% Portland Willamette S.W. Coast Central East % 46.8% 23.9% 9.3% 6.9% 8.2% 5.0% Survey responses indicate that CLECs were providing competitive local switched service in all six regions of the state. Competitive entry is highest in the Portland Metropolitan Region. Statewide, CLECs had a 16.1 percent share of switched local exchange lines. Sixty-three percent of CLEC lines are in the Portland Metropolitan Region, followed by the Willamette Valley with 20.3 percent, then Central (5.5 percent), Southwest Interior (4.8 percent), East (3.5 percent) and the Coast (2.8 percent). For the Residential sector, CLECs had 7.4 percent (up from 4.0 percent in 2004) of lines in the State in Seventy-four percent of the CLEC residential lines were in the Portland Metro Region. In the Business sector, CLECs had 37 percent (up from 32.6 percent in 2004) of lines in the State. 58 percent of all CLEC business lines were in the Portland Metro Region. CLECs supplied 40.3 percent of the business lines in the Portland Metro Region. Figure 16. CLEC Switched Lines Business Service by Region CLEC Switched Lines - BUSINESS Share By Region, % 40% 35% 30% 25% 20% 15% 10% 5% 0% Portland Willamette S.W. Coast Central East CLEC All Business% 40.3% 42.4% 26.4% 19.8% 28.2% 25.9% 37.0% A-3 Page 24

76 Competition Survey Year 2006 Final Report B. Private Line Service by Region The Portland Metropolitan Region is the largest regional private line market, with 59.4 percent (see Figure 17) of all retail private line circuits in the state. The second largest was the Willamette Valley, with 15.3 percent of circuits. The other four regions together accounted for 25.3 percent of the state's circuits: Coast ( 6.3 percent), Southwest Interior (6.3 percent), Central (6.7 percent), and East (6 percent). Figure 17. Oregon Private Line Service by Region - Dec All LECs Private Line Distribution, % 50% 40% 30% 20% 10% 0% Portland Willamette S.W. Coast Central East All LECs 59.4% 15.3% 6.3% 6.3% 6.7% 6.0% Lower Capacity Circuits: Of the state's 45,594 local exchange private line circuits, most (74 percent) were in the lower capacity category. The Portland Metropolitan Region was the largest market for lower capacity circuits, with 59.8 percent (see Figure 18) of the lower capacity circuits in the state. The second largest market was the Willamette Valley with 12.9 percent of lower capacity circuits, followed by Coast (8.2 percent), East (6.8 percent), Central (6.4 percent), and Southwest Interior (5.8 percent). Figure 18. Oregon Lower Capacity Circuits Distribution by Regions - Dec All LECs Low er Capacity Circuits by Region, % 45% 30% 15% 0% Portland Willamette S.W. Coast Central East All LECs 59.8% 12.9% 5.8% 8.2% 6.4% 6.8% A-3 Page 25

77 Competition Survey Year 2006 Final Report The CLECs' share of lower capacity circuits was 37 percent statewide. Higher capacity circuits accounted for 25.8 percent of the state's total private line circuits. In December 2005, the market for higher capacity circuits was concentrated in the Portland Metropolitan Region, with 49.6 percent (see Figure 19). The remaining five regions have 50.4 percent of higher capacity circuits. Figure 19. Oregon Higher Capacity Circuits Distribution by Regions - Dec All LECs Higher Capacity Circults by Region, % 60% 50% 40% 30% 20% 10% 0% Portland Willamette S.W. Coast Central East All LECs 50.3% 24.5% 9.0% 2.1% 8.9% 5.2% CLECs' share of higher capacity circuits was 25.2 percent statewide. The regional distribution of private lines has not changed much over the last several years as indicated in Figure 20. Of all private line circuits in 2005, 59.4% were in the Portland Metro Region. Figure 20. Private Line Circuits Distribution, 1999 to Privat e Line C ircuit s D ist rib ut io n b y Reg io n, % 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Portland Willamette S.W. Coast Central East % 27.2% 9.4% 6.6% 8.9% 7.0% % 23.1% 9.2% 9.3% 6.1% 5.0% % 24.3% 7.8% 7.2% 7.2% 6.0% % 26.6% 7.4% 6.1% 5.6% 6.2% % 19.4% 4.6% 5.5% 4.0% 3.7% % 21.6% 7.8% 5.2% 9.3% 6.4% % 15.3% 6.3% 6.3% 6.7% 6.0% A-3 Page 26

78 Competition Survey Year 2006 Final Report C. DSL Service by Region During the year 2005, DSL (refers to all types of digital subscriber lines) service was provided by 257,083 lines and generated $77.7 million in revenue. Of all DSL, 53.1 percent was in the Portland Metropolitan Region (see Figure 21), followed by Willamette Valley (22.1%), Southwest Interior (7.7%), Coast (6.6%), East (5.0%), and Central (5.4%). Figure 21. DSL in Oregon by Geographical Location DSL in Oregon by Geographical Location % 40.0% 20.0% 0.0% Portland Willamette S.W. Coast Central East DSL 53.1% 22.1% 7.7% 6.6% 5.4% 5.0% 2. Market Segments by Type of Service A. Switched Services The survey grouped customers into three sectors: business, residential, and wholesale. Sixty-one percent of switched service lines were in the residential sector, 31 percent were business lines, and 8 percent were wholesale (see Figure 22). Figure 22. Oregon Switched Service Lines by Types Share of Switched Lines by Type, 2005 Wholesale 8% Business 31% Residential 61% A-3 Page 27

79 Competition Survey Year 2006 Final Report B. Private Line A private line is a dedicated, non-switched link from one or more customer-specified locations to one or more customer-specified locations. A circuit is a complete electrical path providing one- or two-way communication between two points comprised of associated send and receive channels. Capacity is determined by the highest data transmission rate in either direction. Figure 23 shows that 74 percent of private line circuits were lower capacity, and that 26 percent were higher capacity. Figure 23. Oregon Private Line Circuits by Types All LECs Private Line Circuits by Type, 2005 Higher Capacity 26% Lower Capacity 74% C. DSL DSL service was provided on 257,317 residential and business lines and accounted for $77.7 million of revenue. The DSL revenue per month was $ 25/line. A-3 Page 28

80 Competition Survey Year 2006 Final Report VII. Business Plans and Competition 1. Capital Expenditures Capital Expenditure is the money spent to acquire or upgrade physical assets such as switches and fiber optic cable. The survey asked for information on investment in capital assets (plant and equipment). Capital expenditures for local exchange service in Oregon were estimated at $141 million, which was 15 percent of total revenue ($912 million). (See Table 11) Of the 235 certified CLECs, 135 reported some level of capital expenditures in 2005, with 76 percent (103 of 135) having made capital outlays of less than $10,000. Total CLEC capital expenditures were $22 million. CLECs' capital investment represented 13.2 percent of CLECs' revenue ($165 million). All 34 certified ILECs reported having made some capital expenditures in Total ILEC capital expenditures were $119 million. ILECs' capital investment represented 15.9 percent of ILECs' revenue ($747 million). Table 11. Capital Expenditures for Local Exchange Service In 2005 Capital Expenditures ILECs CLECs All LECs Less than $10, $10,000-50, $50, , $100,001-1,000, $1,000,001-10,000, More than $10,000, # of LECs had Capital Expenses Estim ated Expenses ($million) $119 $22 $141 Revenues ($million) $747 $165 $912 Investment / Revenue (%) 15.9% 13.2% 15.4% 2. Competition for Residential Market The survey asked all local exchange carriers, "What do you believe are the reasons that you do not have a bigger share of Oregon's residential market (check all that apply)?" Out of 34 ILECs, 15 companies noted that cell phone usage has decreased the demand for wireline and second-line services (see Table 12), and 11 ILECs said they were restrained by geographical location, which made residential competition difficult or expensive. A-3 Page 29

81 Competition Survey Year 2006 Final Report Out of 134 responding CLECs, 29 said they could not compete on price, 21 said they could not compete on facilities, 17 said that the incumbent local exchange carrier has name familiarity, and 13 said that they did not have enough capacity. Since CLECs operations focus principally on business customers, only 9 companies responded that cell phone usage has decreased the demand for residential wire line and second-line services, and 15 CLECs considered that geographic location made residential competition difficult or expensive. The percentage of responding CLECs identifying each of the above reasons for not having a higher share of the residential market has remained about the same over the four-year period that the question has been asked. Table 12. Residential Market Competition R easons # of ILECs # of C LECs C annot com pete on price 2 29 C annot com pete on facilities 0 21 ILEC has nam e fam iliarity 0 17 D o not have en ough capacity 0 13 C ell ph one decreased the w ireline dem and 15 9 H ard to co m pete due to locatio n O ther (explain): Of the 78 CLECs who checked the option "other", most focused their service on business customers or did not provide residential local exchange service in However, some of these 78 CLECs who checked "other", provided reasons why they did not have a bigger share of Oregon's residential market. The respondents' comments were as follows: Will no longer be competing for residential local customers. The ILEC () will sell us a QPP ( Platform Plus) in Rate Group 2 for $29.44 (up $3.10 from 2004) for a line that retails for $13.80 (You do the math). ILEC UNE (unbundled network element) charges have raised 300%-400% making it tougher to profit. ILEC retail rates for same service are lower than wholesale rates (i.e. broadband). Does not provide residential local exchange service because of the Complex Franchise Requirements. Not enough margins to be profitable. It is very expensive to outlay cash which is used to buy extremely expensive equipment. The increase in the price of UNE-P services would have increased our costs to the point of not being able to offer a competitive price. Can't always obtain the necessary facilities from the ILEC at competitive price that allows the development of customer network. A-3 Page 30

82 Competition Survey Year 2006 Final Report VIII. Conclusion In 2005 Oregon's local telecommunications market was a $ 912 million industry, comprised of 2.15 million switched lines, 45,594 private line circuits and 257,083 DSL. Industry wide revenues increased $47 million from However the number of switched lines served is now lower than when this survey was first taken in 1998, reflecting the competitive impact from the cellular phone industry. The local telecommunications markets remain dominated by the incumbent providers, with competitors accounting for 16.1 percent of local exchange switched access lines. CLECs' share of exchange lines in the residential market was 7.4 percent in There does not appear to be sufficient incentives for CLECs to compete with ILECs on a broad scale in the local residential market. CLECs had captured 37 percent (up from 33 percent the year before) of the business lines by the end of 200 5, indicating the larger margins available in that market sector. High-speed digital access accounted for 16.6 percent of total LEC revenue in This was an increase from 11.8 percent in The 16.6 percent revenue figure for high-speed access services consists of 6.8 percent from private line services, 8.5 percent from DSL- Digital Subscriber Line, and 1.3 percent cable TV network in switched services. Capital expenditures in support of local exchange service in Oregon in 2005 were estimated at $141 million, which was 15.4 percent of total revenue ($912 million). Capital investment by ILECs represented 15.9 percent of revenue, while CLECs spent 13.2 percent of revenue on capital investment. In the residential local exchange market, 29 CLECs said they could not compete with the ILECs on price, 21 thought they could not compete on facilities, 17 believed that the incumbent carrier's name familiarity was a barrier, 13 answered that they did not have enough capacity, 9 responded that cell phone usage has decreased the demand for residential wire line and second-line services, and 15 considered that geographic location made residential competition difficult or expensive. Out of 34 ILECs, 15 noted that increased cell phone usage has decreased the demand for wire line and second-line services, and 11 ILECs were restrained by the geographical location, which made residential competition difficult or expensive. A-3 Page 31

83 Competition Survey Year 2006 Final Report Figure 14. Local Exchange Carriers Market Segments and Shares MARKET SEGMENT ANALYSIS 2005 All LECs $912,468,699 Year Total Service Revenue ($) in 2005 Private Line & Switched Data Services Service $139,579,096 $772,889, % 84.70% Circuits: 45,594 DSL: 257,083 Switched Lines 2,150,755 $61,911, % $77,667, % Lower Capacity Higher DSL Residential Business Wholesale (Total) 33,850 11, ,083 1,321, , ,501 2,150, % 30.6% 7.9% 100.0% All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs All LECs CLECs Portland 59.8% 36.3% 50.3% 14.4% 53.1% 4.6% 45.6% 5.5% 53.2% 21.5% 30.9% 3.1% 46.8% 10.2% Willamette 12.9% 0.4% 24.5% 2.8% 22.1% 2.3% 24.1% 0.7% 21.9% 9.3% 29.6% 0.0% 23.9% 3.3% S.W. 5.8% 0.1% 9.0% 0.9% 7.7% 1.0% 9.6% 0.3% 7.4% 2.0% 13.7% 0.0% 9.3% 0.8% Coast 8.2% 0.1% 2.1% 0.4% 6.6% 0.5% 7.5% 0.2% 5.7% 1.1% 7.0% 0.0% 6.9% 0.5% Central 6.4% 0.0% 8.9% 2.8% 5.4% 1.0% 8.1% 0.4% 7.5% 2.1% 12.1% 0.0% 8.2% 0.9% East 6.8% 0.1% 5.2% 0.4% 5.0% 0.7% 5.1% 0.4% 4.3% 1.1% 6.8% 0.0% 5.0% 0.6% Total 100.0% 37.1% 100.0% 21.6% 100.0% 10.0% 100.0% 7.4% 100.0% 37.0% 100.0% 3.2% 100.0% 16.1% While the CLECs had a small percentage of the overall market, they achieved a significant presence in specific market segments. CLECs provided 37 percent of switched business lines. The predominant form of CLEC competitive entry was resale. Highest CLEC market concentration as of December 2005 was in the Portland Metropolitan Region, where CLECs provide 40.3 percent of the business lines. While CLECs still have a small share of the Residential market at 7.4 percent, there was an 82.5 percent increase in residential CLEC lines served in It will be interesting to see results of the next survey to see if this level of increase will continue. Finally, revenues from DSL service increased by 53 percent in While not totally surprising, this was a large increase. Again, the next survey will provide interesting additional information regarding the growth of this market. A-3 Page 32

84 Availability of Advanced Telecommunications Capability in Public Bodies Among the amendments HB 2577 enacted in 2003, was the requirement for the OPUC to develop information on "The number of public bodies, as defined by ORS , providing basic telecommunications infrastructure so that private entities may use that infrastructure to provide advanced information and communications services." According to ORS 285B.486, "advanced telecommunications facilities" means high - speed, dedicated, or switched broadband telecommunications infrastructure or equipment that enables users to send or receive high quality voice, data, or video telecommunications using any technology. During fall 2006, the OPUC staff identified and surveyed public bodies in Oregon to gather information on the existence and use of advanced telecommunications facilities. Survey Results: I. Market in General - Statewide This is the fourth annual survey of public bodies on the availability of advanced telecommunications capability. The survey was sent to 545 public bodies in Oregon of which 363 were completed and returned for a response rate of 66 percent. There were no significant changes in the 2006 availability of high-speed and advanced telecommunications capability in public bodies compared to prior years survey results. Of the 363 respondents, 66.4 percent (241) do not own advanced telecommunications facilities, while 33.6 percent (122) of the respondents own some types of facilities, increasing slightly from a year earlier. Seven percent (27) of respondents are willing to offer some type of high-speed telecommunications services. Five percent (19) of respondents currently offer high-speed telecommunications services (see Figure 1). Figure 1. The Availability of High-Speed and Advanced Telecommunications Capability in Public Bodies The Availability of Capability Do not Own Own Facilities Willing to Offer Currently Offer A-4 Page 1

85 The survey included three questions. 1. Do you own the following telecommunications facilities? a. DSL (digital subscriber line) b. Coaxial Cable c. Fiber (DS-1, DS-3, OCn, SONET, includes Dark Fiber) d. Copper Cable (T-1, DS-1) e. Satellite or Fixed Wireless f. High Bandwidth Switches g. Other Following are descriptions of the various types of advanced telecommunication facilities: a. DSL: Digital Subscriber Line - is a communication technology that uses existing twisted-pair telephone lines to transport high-bandwidth data, such as Internet, multimedia, and video. b. Coaxial cable: Typically used to connect a television to cable TV services, coaxial cable consists of a small copper tube or wire surrounded by an insulating material and another conductor with a larger diameter, usually in the form of a tube or copper braid. c. Fiber Optics: High-speed transmission using light to send images (in telecommunications: voice or data) through a bundle of glass fibers. d. Copper Cable: Copper cable is a pair of traditional copper telephone lines using electric current to carry signals. e. Satellite or Fixed Wireless: A satellite that is used to relay telecommunications information. Fixed wireless means the use of radio or microwaves to connect any two stationary points. f. High Bandwidth Switches: Bandwidth, in digital systems, refers to data speed usually measured in bits per second (bps). High bandwidth is often equated with high-speed. ATM (Asynchronous Transfer Mode) is a high bandwidth, low -delay, connection-oriented, packet-like switching and multiplexing technique. g. Other: Item "other" includes video telecommunications equipment. Currently, of 548 public bodies in Oregon, 122 own some type(s) of advanced telecommunications facilities. Seventy-one respondents own fiber optics, 73 own high bandwidth switches, 48 own copper cable, 52 own satellite or fixed wireless connections, 27 own Coaxial Cable, 9 own DSL, and 5 own other telecommunications facilities. (See Figure 2 for the percent of advanced facilities by type). A-4 Page 2

86 Figure 2. Percentage of Advanced Telecom Facilities by Type in 2006 Percentage of Advanced Telecommunications Facilities by Type in 2006 High Bandwidth Switches 26% Other 2% DSL 3% Coaxial Cable 9% Satellite/ Fixed Wireless 18% Copper Cable 17% Fiber 25% High Bandwidth Switches owned by public bodies increased from 60 to 73 from 2005 to DSL increased from 4 to 9. Fiber Optics increased from 68 to 71, Copper Cable decreased from 50 to 48 and Coaxial Cable increased from 24 to 27. Satellite or Fixed Wireless connections increased from 40 to 52. The bar chart below in displays the data (see Figure 3). The total of the numbers in each row in Figure 3 exceeds the number of responding public bodies with advanced facilities because some own more than one type of advanced telecommunications facilities. Figure 3. Number of Public Entities Owning Advanced Telecommunications Facilities by Type Own Advanced Telecommunications Facilities Total DSL Coaxial Cable Fiber Copper Cable Satellite or Fixed High Bandwidth Other A-4 Page 3

87 2. If you own telecommunications facilities above, are you willing to offer telecommunications facilities to private entities for their use for advanced telecommunication services? If yes, indicate which facilities from the above list? Of the respondents who own facilities 22 percent (27, down from 32 last year) said they are willing to offer their facilities for use by private entities. Eighteen respondents are willing to offer fiber optics, while eight are willing to offer satellite or fixed wireless, and nine are willing to offer high bandwidth switches. (See Figure 4). Figure 4. Number of Public Bodies Owning Facilities Willing to Offer Use to Private Entities Willing to Offer Total DSL Coaxial Cable Fiber Copper Cable Satellite or Fixed Wireless High Bandwidth Switches Other Twenty-five percent of Fiber Optics owners (18/71) are willing to offer those facilities to private entities, followed by 15 percent for Satellite/Fixed Wireless, and 12 percent for High Bandwidth Switches. 3. If you own telecommunications facilities above, do you currently offer telecommunications facilities to private entities for their use for advanced telecommunications services? If yes, indicate which facilities from the above list? Sixteen percent (19/122) of the public bodies with advanced facilities said they currently offer those facilities to private entities for their use for advanced telecommunications services. Eleven respondents currently offer Fiber Optics, eight offer Satellite or Fixed Wireless, and three offer High Bandwidth Switches facilities. As Figure 5 indicates, there has been little change over the last four years in the number of public bodies that offer the use of their advanced telecommunications facilities to private entities. A-4 Page 4

88 Figure 5. Number of Respondents Owning Facilities Currently Offering Service to Others 25 Currently Offer Total DSL Coaxial Cable Fiber Copper Cable Satellite or Fixed High Bandwid Other II. Education Sector Quality education is driving demand for high-speed connections and faster computers. Advanced high-speed telecommunications infrastructure is crucial in order to achieve the expected growth for the public education sector targeted by the state. The greater bandwidth access and higher speed data transmission will clearly provide a competitive advantage to the quality education, and information solutions in Oregon. The survey showed that among 363 respondents, 154 (42%) are school districts, colleges, and universities. Findings show that of the 154 respondents in the education sector, 51 percent (78 schools) own some form of advanced telecommunications facilities, compared to 34 percent of public bodies statewide. Fourteen percent (11 schools) of the education sector respondents that own advanced facilities are willing to offer use of those facilities to private entities, compared to 22 percent of all public bodies statewide. Eight percent (6 schools) of respondents currently offer high-speed telecommunications services, compared to 16 percent of all public bodies statewide (see Figure 6). A-4 Page 5

89 Figure 6. High-Speed Facility Comparison between All Public Bodies and the Education Sector 2006 Hi-Speed Facility Com parison betw een All Public Bodies and Education Sector % 70% 60% 50% 40% 30% 20% 10% 0% Do not Ow n Ow n Facilities Willing to Offer Currently Offer All Public Bodies 66% 34% 22% 16% Education 49% 51% 14% 8% 1. Schools Ownership of Telecommunications Facilities Among Oregon Schools, 43 of the survey respondents own fiber optics, 34 own copper cable, 53 own high bandwidth switches, while 30 own Satellite/Fixed Wireless. Figure 7. Distribution of Advanced Telecommunications Facilities Types - Comparison between All Public Bodies and the Education Sector in 2006 Facility Types - % Ow nership Comparison betw een All Public Bodies and Education Sector in % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% DSL Coaxial Fiber Copper Satellite/ High Other All Public Bodies 3.2% 9.5% 24.9% 16.8% 18.2% 25.6% 1.8% Education 2.7% 11.7% 22.9% 18.1% 16.0% 28.2% 0.5% A-4 Page 6

90 2. Schools Willingness to Offer the Telecommunications Facilities Fourteen percent (11) of the school respondents said they are willing to offer their owned telecommunications facilities to private entities. This compares to 22 percent (27) of all public body respondents that are willing to offer their owned telecommunications facilities to private entities. Figure 8. Distributions of Advanced Facility Types - Owners Willing to Offer to Private Entities All Public Bodies vs. Education Sector in 2006 School Districts and Colleges Willing to Offer the Advanced Facilities to Private Entities % 30% 20% 10% 0% DSL Coaxial Cable Fiber Optics Copper Cable Satellite / Fixed Wireless High Bandwidth Switches All Public Bodies 4% 9% 39% 4% 17% 20% 7% Education 5% 14% 33% 10% 14% 24% 0% Other 3. Percentage of Responding Schools That Currently Offer use of their Telecommunications Facilities to Private Entities Eight percent (6 Schools) of all school respondents currently offer advanced telecommunications facilities compared to 16 percent (19) of all public bodies. Sixteen percent of schools offer fiber optics compared to 16% of all public bodies, 10% offers Satellite / Fixed Wireless compared to 15% of all public bodies. III. Market Distribution by Region The 548 public entities were grouped into six regions based on geographic locations. The six regions are: Portland Metropolitan, Willamette Valley, Coast, Central, East, and Southwest Interior. Distribution across the state of the 122 public entities that own some type of advanced telecommunications facilities is as follows: Willamette 41, East 21, Portland 17, Central 17, Coast 11, and Southwest 15 (see Figure 9). A-4 Page 7

91 Figure 9. Numbers of Public Bodies Who Own Advanced Tele- Facilities by Region Num bers of Public Bodies Who Ow n Advanced Tele-facilities by Region Portland Willamette Central Coast East SW Interior Ow n Facilities The survey identified advanced facilities currently owned, those public entities willing to offer use of their advanced facilities to private entities, and those who currently do offer use of their facilities by geographic area. Statewide, of the 122 public bodies that own high-speed facilities, 27 (22%) are willing to offer their facilities to private entities to use, and 19 currently do offer use of their facilities. Of the 122 public bodies that own advanced facilities, 34 percent (41) are in the Willamette Valley; followed by the East (17%), Portland (14%), Central (14%), Southwest Areas (12%) and Coast (9%). Of the 27 public entities that are willing to offer their advanced facilities for use by private entities, 48 percent (13) are in Willamette Valley, followed by the Central and East, at 16 percent, and the Coast, Portland, and Southwest areas with seven percent each. Of the 19 public entities that currently offer advanced facilities to others to use, 47% (9) are in the Willamette area, with the East, Central, Portland, Coast, and Southwest areas with ten percent each. A-4 Page 8

92 Broadband Services TABLE OF CONTENTS Summary Discussion Introduction.. 2 Findings Broadband Availability Broadband Rates... 3 Broadband Demand Broadband Usage Appendix A-1 Purpose.. A-1 Activity A-2 Limitations of Analysis. A-2 Map 1: National High-Speed Providers by 5-Digit Geographical ZIP Code A-4 Chart 1: High-Speed Lines by Type of End User A-5 Chart 2: Percentage of ZIP Codes with High -Speed Lines by Year.. A-6 Chart 3: National Percentage of ZIP Codes with High-Speed Lines by Year..A-6 Graph 1: Percentage of ZIP Codes with High-Speed Lines by Year A-7 Graph 2: National Percentage of High-Speed Lines by Type. A-7 Chart 4: Cumulative Percent of Zip Codes with Number of High Speed Lines A-7 Graph 3: Percentage of High Speed Lines by Type A-8 Graph 4: Number of High-Speed Lines in Oregon.. A-9 Chart 5: Number of Providers of High-Speed Lines by Year and Type. A-10 Chart 6: Number of High-Speed Lines by Year and Type.. A-10 Map 2: Cities with High-Speed Data Service Provided by Local Cable..A -11 Map 3: Digital Subscriber Line Broadband Access.. A-12 Graph 5: Number of High-Speed Providers by County by Personal Income. A-13 Graph 6: Number of High-Speed Providers by County by Population Density.A-13 Chart 7: Perception of Rates Charged for Broadband Services A-14 Comparison of Rates Charged for Broadband Services with Rest of State. A-14 Chart 8: Demand for Broadband Services at Current Prices.. A-14 Perception of Demand for Broadband Services at Significantly Lower Prices.. A-14 Map 4: Broadband Survey Supply of CAI and DSL with County Population.. A-15 Map 5: Broadband Supply of WIB and SAI with County Population..A -15 Map 6: Broadband Survey Demand with County Population. A-16 Map 7: Broadband Survey Supply of CAI and DSL with Growth in County Pop.. A-16 Map 8: Broadband Survey Supply of WIB and SAI with Growth in County Pop.. A-17 Map 9: Broadband Survey Demand with Growth in County Population. A-17 Tabulation of Broadband Suppliers, Prices and Availability by City.. A-18 Bibliography and Resources B-1 A-5

93 Summary The 2005 Oregon legislature enacted SB 13, which requires the Oregon Public Utili ty Commission to report each legislative session on the availability, demand, and use of broadband services in Oregon. Broadband services, as defined by the Federal Communications Commission, transfer data at rates exceeding 200,000 bits per second. This is the Commission's first legislative report. To gather information for the report, the Commission surveyed representatives from each city and county in Oregon as well as members of the Oregon Telecommunications Coordinating Council. Twenty eight percent of the cities and thirty percent of the counties responded to the survey. The Commission also compiled statistics from published surveys of the Federal Communications Commission and the Oregon Economic and Community Development Department, among other sources. The Commission found the following: As of December 2005, 685,000 high-speed lines served Oregon households, businesses, governments, and schools and universities. For comparison, there were 77,000 high-speed lines in Oregon in December Cable systems accounted for 55 percent of the high-speed lines and Asymmetric Digital Subscriber Lines accounted for 35 percent (ADSL transfer "uploaded" and "downloaded" information at differing speeds). Symmetric DSL, traditional wireline, fiber, satellite, mobile wireless and fixed wireless accounted for the rest of the high-speed lines. As of December 2005, only 2 percent of the zip code areas in Oregon had no broadband service provider as compared to 22 percent in December In December 2005, 57 percent of the zip code areas in Oregon had four or more broadband service providers. Broadband service options are greatest in the Portland Metropolitan area, the Willamette Valley, and Southern Oregon. Prices for DSL access do not appear to vary significantly across the state, with a low of $24.95 per month, and a high of $37.99 per month. Cable Internet pricing varies even less, with the minimum and maximum prices at $51.99 and $52.95 respectively. There does not appear to be any DSL or cable-modem service available in Wallowa County. The trends in Oregon mirror those of the nation as a whole. Page 1 of 4

94 DISCUSSION Introduction The 2005 Oregon Legislature enacted Senate Bill 13 that directed the Public Utility Commission (Commission) to analyze and report on the availability, demand and usage of broadband services. The legislation also precluded the Commission from gathering information for this study by imposing reporting requirements on the telecommunications utilities. Broadband services are defined as the transfer of data of at least 200,000 bits per second both in transmitting and receiving. To undertake the study, working with members of the Oregon Telecommunications Coordinating Council, the Commission prepared and transmitted surveys to Oregon cities and counties. The Commission also reviewed information from publicly available sources. This report is the culmination of that effort. Findings Broadband Availability The number of high-speed lines in the state continues to grow, having increased ten-fold since the year 2000 (Appendix: Chart 6, page A-10). Similar to the national trend, the use of high speed Internet access service provided by the local cable company, is positively correlated with income and population density, although the majority of Oregonians have access to some sort of high speed Internet (Appendix: Graph 5, Graph 6, both page A-13). There was no evidence of a similar correlation between population density and DSL (Digital Subscriber Line), wireless, satellite, or dial-up Internet. All Oregonians that have phone lines have access to dial-up Internet access service, although, for some, that access incurs a long distance charge. 4 Ninety-eight percent of Oregon zip codes have at least one high speed line, and over half have at least four lines, where a high speed line is defined as one that provides over 200,000 bits per second in at least one direction (Appendix: Graph 2, Chart 4, both page A-7). Nationally, ninety-nine percent of all zip codes have at least one high speed line. 1 The state keeps pace with the nation, in terms of Page 2 of 4

95 percentage of zip codes with high speed providers and number of providers per zip code (Appendix: Graph 1, page A-7). Cable Internet access services comprise more than half of the current supply of broadband in the state at 55 percent, with Asymmetric DSL coming in second at 35 percent. Symmetric DSL, Traditional Wireline, Fiber, Satellite, Mobile Wireless and Fixed Wireless technologies are also used to provide service in the state, although at levels hovering around one percent (Appendix: Graph 3, page A-8). Of those, Fixed Wireless is the only technology that has seen significant growth in distribution in 2005, more than doubling from 2,726 lines to 5,969 lines (Appendix: Chart 6, page A-10). The Portland metropolitan area, the Willamette Valley, and Southern Oregon have the most options of high speed Internet providers, with most of those areas having seven or more providers. However, as stated, the vast majority of the state has at least one high speed service provider. This information was not reflected by survey respondents, indicating a lack of knowledge of service options by the public in general (Appendix: Map 2 (A -11), Map 3 (A-12), Map 4 (A-15), Map 5 (A-15), Map 7 (A-16), Map 8 (A-17)). Broadband Rates Aside from dial-up services, of those representatives that felt able to assess the pricing of broadband, the majority felt that local services were either moderately priced or somewhat expensive. Forty percent of those with dial-up available thought that the service was inexpensive. Although less than ten percent of the respondents felt that their service of cable, wireless, DSL and satellite was inexpensive, mildly or extremely. However, the majority of respondents did not feel that they could accurately compare pricing of local services to those across Oregon. 4 Aside from dial-up services the majority of respondents did not feel comfortable assessing the level of local demand for broadband services. 4 Further research shows that although access rates may not be considered extremely low, they do not, in fact, vary widely throughout the state. Among the areas that have DSL access, the lowest price for basic service is $24.95 per month. The highest charge is $37.99 per month, the average being $ Page 3 of 4

96 Cable Internet pricing is even more consistent throughout the state, with the minimum and maximum prices at $51.99 and $52.95 respectively, leaving the average at $52.55 per month. Broadband Demand In terms of customer demand, satellite and dial-up responses were vastly different from those of cable, DSL, and wireless. Six and thirteen percent of dial - up and satellite customers felt that, at current prices, demand was extremely low. Alternatively for cable, DSL and wireless, no more than two percent of respondents felt that local demand was low. Instead, 25 percent of representatives responded that DSL incurred moderate demand. Additionally, thirteen percent of cable and wireless respondents felt local demand was moderate and seventeen percent of cable respondents thought that demand at current prices was high. We also polled respondents for their perception on local demand for services at significantly lower prices. Clearly, many respondents felt that demand would be higher were prices lower. However, many respondents commented that the majority of local residents would be happy to purchase high speed service at prices that were comparable to those of the rest of the state. Broadband Usage Over forty percent of respondents responded that their community used broadband for e-commerce, distance learning, and recreation or gaming. More than thirty percent of respondents indicated that their community utilized broadband for e-government applications, telework and telecommuting. Just above twenty percent of communities use broadband for public safety applications, telemedicine and telehealth. Other mentioned applications include research and development, online community participation, publishing, library applications and public equipment and supplies orders. 4 Some respondents commented that their usage of broadband services was restricted by the ADSL offered in their area. That is, where cable was not available, DSL was the high speed service of choice. However, the majority of DSL available throughout the United States, and indeed Oregon, is ADSL, or asymmetric DSL, where upload speeds are restricted to be lower than download speeds. Page 4 of 4

97 APPENDIX PURPOSE Under ORS , Oregon has a stated goal to improve the quality of life for the residents of Oregon by bridging economic gaps that may be caused, in part, by digital gaps. To that end, it is the intent of the legislature to promote access to broadband services across the state for present and future generations. In order to meet the guidelines for broadband implementation, the state has set several benchmarks, including the assessment of current broadband service. Senate Bill 13, enacted in 2005, directs the Public Utility Commission of Oregon (Commission) to prepare analyze and present to the 2007 Legislature a report that assesses: The availability of broadband services, the rates charged for broadband services, the demand for broadband services and the usage of broadband services. developing this report the Commission is directed to not impose reporting requirements on telecommunications utilities Hence, the Commission is charged with assessing the desirability and availability of Internet access services throughout the state of Oregon. The Commission, with assistance from members of the Oregon Telecommunications Coordinating Council (ORTCC) conducted a survey, soliciting, city and county representatives and the ORTCC members to collect data on the availability and desirability of varying types of Internet access in their communities. The respondents were requested to speak on behalf of the members in their community about preferences and affordability, including: Number of providers for various Internet services Pricing of existing broadband service Demand for various Internet services at different price points Current usage of broadband for government applications Route redundancy and route diversity In A - 1

98 ACTIVITY To conduct the research, the Commission worked closely with members of the Oregon Telecommunications Coordinating Council to create surveys tailored to cities and counties. The survey was sent to each member of the ORTCC and a representative from each Oregon city and county. The survey respondents were asked to answer the questionnaire as representatives of a geographic area, not as personal recipients of the survey. Once the surveys were returned, the responses were entered into a database by Commission staff. The database was structured to allow a wide range of geographical - focused analysis, as well as analysis by business activity, income level and population. To maximize the usefulness of the data set, Commission staff conducted follow-up requests to those survey recipients who had not yet completed the survey. Once the data entry was complete, initial graphical and regional analysis was performed to determine the existence of a correlation between services, demand and demographic, regional, and economic factors. To be certain that due diligence was completed, staff also compared survey results to findings from other surveys and research, including the 2005 high speed FCC report 1, Oregon Economic and Community Development Department DSL map 2, and cable map 3. With the information from the survey, and additional research data, trends and implications were compiled into this report. LIMITATIONS OF ANALYSIS There were several limitations to the analysis. First, the response rate to the surveys was somewhat low. Of the 280 surveys mailed to city and county representatives, the Commission received responses from 79 [28% response] and 11 [30% response], respectively. If federal survey response rates are any indication of quality or quantity of information, prior to 2005, voluntary submissions represented less than.05% of total high speed lines, and now with new orders in place, still only represent, at most 2%. This offers insight into the fact that only providers with more than 250 lines in a given state are obligated to report. As for those who did respond, many may not have felt confident in their general knowledge of the local broadband environment and thus were reluctant to provide precise numerical assessments of service availability, demand, pricing and usage. Another limitation to the analysis was the prohibition of burdensome contact with telecommunications providers. Therefore, A - 2

99 our analysis and results must rely on individual perception of local markets and independent research. While the prohibition understandably protects telecommunications providers from government information requests, it nevertheless reduced the richness of the data set. Additionally, although much information can be gathered from the FCC and other government agencies, as providers are required to register with the FCC, non-facilities based Internet service providers are not under any governmental reporting obligation. Facilities based providers are those that own the portion of the communication facilities that contains the end-user portion. Finally, the present survey did not query about all types of broadband available in the state of Oregon (including fiber), and did not differentiate between ADSL and other types of DSL. Therefore some statistical tests were not applicable to these services. Therefore, the Commission presents the above analysis in consideration and in light of the limitations and aforementioned data exclusions. A - 3

100 Map 1 source 1 From the map above, we can see that Oregon fares very similar to the rest of the country in terms of high-speed Internet access, aside from several small sections of zero delivery access, which may be related to the line of sight destruction caused by the Cascade Mountain range, as well as unpopulated areas and National Forest lands. A - 4

101 Chart 1 Residential and Small Business Oregon - High-Speed Lines by Type of End User (Over 200 kbps in an least one direction) 2,000 2, Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec 66,261 82, , , , , , , , , ,550 Other 10,578 10,323 26,769 26,235 32,453 28,332 15,198 15,504 21,059 56,607 97,985 Total 76,839 93, ,048 19, , , , , , , ,535 source 1,5-14 Consistent with the rest of the country, the number of high-speed lines in Oregon has been increasing every year since recording began in A - 5

102 Chart 2 Oregon - Percentage zip codes with High-Speed Lines by Year (Over 200 kbps in an least one direction) Number of Providers Jun Dec June Dec Jun Dec Jun Dec Jun Dec Jun Dec Zero 14% 22% 9% 14% 12% 8% 6% 5% 4% 4% 3% 2% one 19% * * * 15% 14% 11% 10% 8% 11% 11% 5% Two 19% * * * 20% 20% 20% 18% 18% 19% 16% 10% three 22% 64%* 64%* 59% 17% 19% 15% 18% 16% 19% 17% 12% four 14% 6% 11% 14% 12% 14% 14% 17% 17% 11% 9% 13% Five 8% 7% 7% 8% 7% 8% 7% 7% 8% 9% 11% 10% Six 4% 1% 6% 4% 9% 8% 7% 5% 6% 3% 5% 9% seven 1% 0% 3%** 2%* 7% 7% 4% 2% 3% 4% 5% 6% eight 0% 0% ** ** 2% 3% 3% 4% 5% 4% 3% 5% nine 0% 0% ** ** 0% 0% 5% 4% 5% 4% 2% 5% Ten or more 0% 0% ** ** 0% 0% 7% 11% 9% 11% 17% 23% *Recorded as one-three in these years ** Recorded as seven-or-more in these years source 1,5-14 Chart 3 Nationwide - Percentage zip codes with High-Speed Lines by Year (Over 200 kbps in an least one direction) Number of Providers Jun Dec June Dec Jun Dec Jun Dec Jun Dec Jun Dec zero 33% 27% 22% 21% 16% 12% 9% 7% 6% 5% 2% 1% one 26% 23% 20% 19% 18% 17% 16% 15% 14% 12% 9% 6% two 18% 18% 17% 16% 16% 17% 17% 17% 17% 16% 14% 12% three 9% 11% 13% 13% 13% 14% 14% 15% 15% 15% 15% 15% four 5% 6% 8% 9% 10% 10% 11% 11% 12% 12% 13% 14% five 3% 4% 5% 6% 7% 7% 8% 8% 8% 9% 10% 10% six 3% 3% 4% 4% 5% 5% 5% 6% 6% 6% 7% 8% seven 2% 2% 3% 3% 3% 4% 4% 4% 4% 5% 5% 6% eight 1% 2% 2% 3% 3% 3% 3% 3% 4% 4% 4% 5% nine 0% 2% 2% 2% 2% 2% 3% 3% 3% 3% 4% 4% ten or more 0% 2% 4% 4% 6% 8% 11% 11% 12% 13% 18% 21% source 1,5-14 Compared with the rest of the country, Oregon has kept pace with the number of high speed lines. In 2005, nationally, one percent of zip codes had zero providers (compared with Oregon s two percent) and 20.7 percent had ten or more (compared with Oregon s 23%). The graphs below demonstrate this visually. A - 6

103 Graph 1 Percent of Zip Codes with High Speed Providers 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec Dec Oregon-Zero Providers Nation-Zero Providers Dec 2002 Dec Dec Oregon-Four or More providers Nation-Four or More Providers Dec 2005 Graph 2 Chart 4 5 or more 47% % of zip codes 0 2% 4 10% 1 7% 2 16% or more 3 18% % of zip codes cumulatively # of lines %of zip codes exactly A - 7

104 Graph 3 Percentage of High Speed Lines by Type 0% 1% 7% 35% 55% 1% 1% source 1 ADSL SDSL Traditional Wireline Cable Fiber Fixed Wireless Other The majority of high speed access in this country, is provided in the way of Cable. T he second most frequent technology is Asymmetric DSL (ADSL). The other technologies, in total, account for ten percent of all high speed lines. A - 8

105 Graph 4 Number of High Speed Lines in Oregon 800, , , , , , , ,000 0 Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 source 1,5-14 The number of high speed lines has been increasing at an increasing rate, since 1999, when the FCC began recording high-speed data. A - 9

106 Chart 5 Oregon - Number of Providers of High Speed Lines by Year and Type (Over 200 kpbs in an least one direction) Type of Provider Jun Dec June Dec Jun Dec Dec Jun Dec Jun Dec ADSL SDSL ** ** ** ** ** ** ** ** ** Traditional Wireline ** ** ** ** ** ** ** ** ** Cable Modem * * * * * Fiber ** ** ** ** ** ** ** ** ** 8 9 Satellite ** ** ** ** ** ** ** ** ** * * Fixed Wireless ** ** ** ** ** ** ** ** ** 9 9 Mobile Wireless ** ** ** ** ** ** ** ** ** * * Power Line & Other Total (Unduplicated) source 1,5-14 Competition, defined by the number of providers, registered with the FCC has increased every year since In addition, the types of lines have expanded since 2000, giving consumers more alternatives. Chart 6 Oregon - Number of High Speed Lines by Year and Type (Over 200 bps in at least one direction) Type of Jun Line Dec Jun Dec Jun Dec Jun Dec Jun Dec 2004 Dec Jun Dec ADSL SDSL Traditional Wireline Cable Fiber 27,062 19,989 31,644 25,877 57,899 68,747 82,555 95, , , , , ,053 ** ** ** ** ** ** ** ** ** ** ** 7,579 7,693 ** ** ** ** ** ** ** ** ** ** ** 4,666 4,958 * * * * * * 165, , , , , , ,277 ** ** ** ** ** ** ** ** ** ** ** 3,143 3,392 Satellite Fixed Wireless Mobile Wireless Power line & Other All High Speed Lines ** ** ** ** ** ** ** ** ** ** ** * * ** ** ** ** ** ** ** ** ** ** ** 2,726 5,969 ** ** ** ** ** ** ** ** ** ** ** * * * * * * 27,551 25,012 29,517 34,451 37, ,062 44,186 76,839 93, , , , , , , , , ,535 source 1,5-15 The number of high speed lines has been increasing at an increasing rate, since 1999, when the FCC began recording high-speed data. A - 10

107 Map 2 source 2 Cable Internet in Oregon is concentrated on the coast, Willamette Valley, Portland Metro, and the southwestern part of the state. A - 11

108 Map 3 source 3 DSL internet in Oregon is concentrated on the coast, Willamette Valley, Portland Metro, and the southwestern part of the state. A - 12

109 Graph 5 Cable Internet Providers by Income 35 Number of High Speed Providers per County $20,000 $22,000 $24,000 $26,000 $28,000 $30,000 $32,000 $34,000 $36,000 $38,000 source 1,16 Graph Personal Income # of Providers by Population Density 30 Number of HighSpeed Providers per County Population per Square Mile source 1,16 Cable Internet in Oregon, like cable Internet, nationally, seems to be correlated with income and population density. Further study may confirm or dispute this inference. A - 13

110 Chart 7 Perception of Rates Charged for Broadband Services in Oregon Inexpensive Somewhat Inexpensive Moderately Priced Somewhat Expensive Extremely Expensive Not Able to Assess DSL 1.1% 5.4% 30.4% 23.9% 3.3% 16.3% Cable 1.1% 3.3% 17.4% 20.7% 5.4% 13.0% Wireless 5.4% 4.3% 15.2% 10.9% 4.3% 31.5% Satellite 0.0% 0.0% 7.6% 13.0% 18.5% 35.9% Dial Up 14.1% 26.1% 18.5% 8.7% 1.1% 17.4% Comparison of Rates Charged for Broadband Services with the rest of the State Much Less Expensive Somewhat Less Expensive Equally as Expensive Somewhat More Expensive Much More Expensive Not Able to Assess DSL 0.0% 1.1% 18.5% 10.9% 8.7% 43.5% Cable 0.0% 2.2% 16.3% 8.7% 3.3% 32.6% Wireless 2.2% 3.3% 8.7% 9.8% 5.4% 45.7% Satellite 0.0% 0.0% 18.5% 4.3% 2.2% 50.0% Dial Up 1.1% 3.3% 28.3% 13.0% 2.2% 38.0% source 4 The majority of consumers find broadband services either moderately priced, or somewhat expensive. Most respondents were not able to compare local rates with the rest of the state. Of those that were, most believed that their service was equally as expensive as the rest of Oregon. Chart 8 Demand for Broadband Services at Current Prices in Oregon Extremely Low Demand Somewhat Low Demand Moderate Demand Somewhat High Demand Extremely High Demand Not Able to Assess DSL 0.0% 7.6% 25.0% 15.2% 12.0% 26.1% Cable 1.1% 6.5% 13.0% 17.4% 9.8% 40.2% Wireless 2.2% 9.8% 13.0% 7.6% 9.8% 45.7% Satellite 13.0% 12.0% 9.8% 0.0% 3.3% 51.1% Dial Up 6.5% 16.3% 18.5% 9.8% 5.4% 32.6% All Types 1.1% 4.3% 18.5% 26.1% 7.6% 32.6% Perception of Demand for Broadband Service at Significantly Lowe r Prices Extremely Low Demand Somewhat Low Demand A - 14 Somewhat High Demand Extremely High Demand Moderate Demand Not Able to Assess DSL 0.0% 1.1% 4.3% 25.0% 37.0% 19.6% Cable 1.1% 3.3% 5.4% 16.3% 26.1% 34.8% Wireless 0.0% 2.2% 8.7% 14.1% 20.7% 41.3% Sat ellite 3.3% 7.6% 10.9% 8.7% 8.7% 48.9% Dial Up 6.5% 17.4% 10.9% 12.0% 10.9% 30.4% All Types 0.0% 0.0% 2.2% 28.3% 39.1% 20.7% source 4 Demand for premium high speed access is greater than that for dial-up and satellite. As expected, demand is even higher at lower prices.

111 Map 4 Broadband Survey Suppley 1 CLATSOP 2 COLUMBIA $27,940 $27,745 November TILLAMOOK $27,089 4 WASHINGTON $33,347 0 MULTMAH $36,117 0 YAMHILL $27,030 2 POLK $26,671 4 UMATILLA $24,484 0 HOOD RIVER $25,237 2 SHERMAN $23,599 5 CLACKAMAS $37,094 7 MARION $27,128 1 JEFFERSON $22,735 0 WHEELER $22,832 5 BAKER $22,331 4 GRANT $26,163 3 LINN $25,091 0 CROOK $22,719 2 DESCHUTES $29,853 4 LANE $27,788 6 DOUGLAS $21,783 1 COOS $26,031 4 UNION $26,179 1 GILLIAM $25,242 6 WASCO $24,958 2 LINCOLN $27,605 3 BENTON $33,988 0 WALLOWA $25,574 0 MORROW $27,901 2 MALHEUR $20,222 1 HARNEY $24,293 0 LAKE $24,271 1 JOSEPHINE $23,367 4 JACKSON $28,531 1 KLAMATH $24,917 3 CURRY $25,084 0 CAI & DSL Supply Key: # County = (# of responses) (county) $00,000 (per capita income) >100,000 40,001-99,999 Population < 40,000 Map 5 Broadband Survey Supply 1 CLATSOP 2 COLUMBIA $27,940 $27,745 November TILLAMOOK $27,089 5 WASHINGTON $33,347 0 MULTMAH $36,117 1 YAMHILL $27,030 2 POLK $26,671 0 HOOD RIVER $25,237 5 CLACKAMAS $37,094 1 GILLIAM $25,242 6 WASCO $24,958 7 MARION $27,128 2 LINCOLN $27,605 4 UMATILLA $24,484 2 SHERMAN $23,599 1 JEFFERSON $22,735 3 BENTON $33,988 0 WHEELER $22,832 1 MORROW $27,901 0 WALLOWA $25,574 4 UNION $26,179 5 BAKER $22,331 4 GRANT $26,163 3 LINN $25,091 1 CROOK $22,719 4 LANE $27,788 1 COOS $26,031 2 DESCHUTES $29,853 5 DOUGLAS $21,783 2 MALHEUR $20,222 2 HARNEY $24,293 0 LAKE $24,271 1 JOSEPHINE $23,367 3 CURRY $25,084 WIB & SAI Supply source 5 JACKSON $28, KLAMATH $24, Key: # County = (# of responses) (county) $00,000 (per capita income) 4 A - 15 Population >100,000 40,001-99,999 < 40,000

112 Map 6 1 CLATSOP CLATSOP $27,940 Broadband Survey Demand 0 COLUMBIA COLUMBIA $27,745 November TILLAMOOK $27,089 3 WASHINGTON $33,347 1 YAMHILL $27,030 2 POLK $26,671 0 HOOD RIVER $25,237 0 MULTMAH $36,117 4 CLACKAMAS $37,094 5 MARION $27,128 1 MORROW $27,901 0 JEFFERSON $22,735 2 BENTON $33,988 0 WHEELER $22,832 2 BAKER $22,331 2 GRANT $26,163 1 LINN $25,091 0 CROOK $22,719 DESCHUTES $29,853 3 LANE $27,788 3 DOUGLAS $21,783 1 COOS $26,031 0 WALLOWA $25,574 2 UNION $26,179 1 GILLIAM $25,242 3 WASCO $24,958 2 LINCOLN $27,605 1 UMATILLA $24,484 1 SHERMAN $23,599 1 MALHEUR $20,222 0 HARNEY $24,293 0 LAKE $24,271 1 JOSEPHINE $23,367 4 JACKSON $28,531 2 CURRY $25,084 All BB Demand 1 KLAMATH $24, Key: # County = (# of responses) (county) $00,000 (per capita income) 3.5 & above >100,000 Population 40,001-99,999 < 40,000 Map 7 Broadband Survey Supply 1 CLATSOP 2 COLUMBIA.66% 1.25% November TILLAMOOK 1.02% 4 WASHINGTON 2% 0 MULTMAH 1% 0 YAMHILL.74% 2 POLK 1.11% 0 HOOD RIVER.62% 5 CLACKAMAS 1.42% 7 MARION 1.23% 0 MORROW 1.66% 1 JEFFERSON 1.73% 3 BENTON 1.33% 0 WHEELER 0% 5 BAKER -.30% 4 GRANT -.84% 3 LINN.75% 4 LANE.82% 0 CROOK 10.29% 2 DESCHUTES 5.94% 6 DOUGLAS.54% 1 COOS -.01% 0 WALLOWA -.28% 4 UNION.40% 1 GILLIAM -.53% 6 WASCO.15% 2 LINCOLN.01% 4 UMATILLA.20% 2 SHERMAN -1.05% 2 MALHEUR -.16% 1 HARNEY.13% 0 LAKE.07% 1 JOSEPHINE 1.33% 3 CURRY.19% CAI & DSL Supply 4 JACKSON 1.73% 0 1 KLAMATH.39% >100,000 Key: # County % source 4 A - 16 = (# of responses) (county) ( population growth) Population 40,001-99,999 < 40,000

113 Map 8 Broadband Survey Supply 1 CLATSOP 2 COLUMBIA.66% 1.25% November TILLAMOOK 1.02% 4 WASHINGTON 2% 0 MULTMAH 1% 0 YAMHILL.74% 2 POLK 1.11% 0 HOOD RIVER.62% 5 CLACKAMAS 1.42% 7 MARION 1.23% 0 MORROW 1.66% 1 JEFFERSON 1.73% 3 BENTON 1.33% 0 WHEELER 0% 0 WALLOWA -.28% 4 UNION.40% 1 GILLIAM -.53% 6 WASCO.15% 2 LINCOLN.01% 4 UMATILLA.20% 2 SHERMAN % 5 BAKER -.30% 4 GRANT -.84% 3 LINN.75% 0 CROOK 10.29% 2 DESCHUTES 5.94% 4 LANE.82% 6 DOUGLAS.54% 1 COOS -.01% 2 MALHEUR -.16% 1 HARNEY.13% 0 LAKE.07% 1 JOSEPHINE 1.33% 4 JACKSON 1.73% 3 CURRY.19% 1 KLAMATH.39% >100,000 0 WIB & SAI Supply Key: # County % 3+ = (# of responses) (county) ( population growth) Population 40,001-99,999 < 40,000 Map 9 Broadband Survey Demand 1 CLATSOP 2 COLUMBIA CLATSOP.66% COLUMBIA 1.25% November TILLAMOOK 4 WASHINGTON 1.02% 2% 0 MULTMAH 1% 0 YAMHILL.74% 2 POLK 1.11% 0 HOOD RIVER.62% 5 CLACKAMAS 1.42% 6 WASCO.15% 7 MARION 1.23% 2 LINCOLN.01% 4 UMATILLA.20% 2 SHERMAN % 0 MORROW 1.66% 3 BENTON 1.33% 0 WHEELER 0% 4 GRANT -.84% 5 BAKER -.30% 3 LINN.75% 2 DESCHUTES 5.94% 4 LANE.82% 0 CROOK 10.29% 6 DOUGLAS.54% 1 COOS -.01% 4 UNION.40% 1 GILLIAM -.53% 1 JEFFERSON 1.73% 0 WALLOWA -.28% 1 HARNEY.13% 2 MALHEUR -.16% 0 LAKE.07% 1 JOSEPHINE 1.33% 4 JACKSON 1.73% 1 KLAMATH.39% 3 CURRY.19% All BB Demand source A - 17 Key: # County % = (# of responses) (county) ( population growth) Population >100,000 40,001-99,999 < 40,000