BEFORE THE SENATE COMMUNICATIONS AND HIGH TECHNOLOGY COMMITTEE

BEFORE THE SENATE COMMUNICATIONS AND HIGH TECHNOLOGY COMMITTEE Senator Jake Corman, Chairman Testimony of SONNY POPOWSKY CONSUMER ADVOCATE Regarding Chapter 30 of the Public Utility Code State College, PA September 10, 2002 Office of Consumer Advocate 555 Walnut Street Forum Place, 5th Floor Harrisburg, PA 17101-1923 (717) 783-5048 Office (717) 783-7152 Fax Email: spopowsky@paoca.org 70657

CHAIRMAN CORMAN AND MEMBERS OF THE SENATE COMMUNICATIONS AND HIGH TECHNOLOGY COMMITTEE My name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania. I am pleased to appear before this Committee once again regarding the extraordinarily important issue of what the General Assembly should do with respect to Pennsylvania s telecommunications policy in light of the possible expiration of Chapter 30 of the Public Utility Code on December 31, 2003. I testified before this Committee in Harrisburg on June 17, 2002, regarding the origins and intent of Chapter 30 when it was enacted in 1993. Today, I hope to inform the Committee about how Chapter 30 has worked to the benefit or detriment of Pennsylvania consumers during the last nine years. At a future hearing, it is my understanding that the Committee will seek specific recommendations as to what the General Assembly should do in the future when Chapter 30 reaches its statutory expiration date. In all these hearings, I am attempting to speak from a consumer perspective, not from the perspective of any or all of the many telecommunications providers who seek to sell their services to those consumers. Not surprisingly, in my view, the results of Chapter 30 for Pennsylvania consumers have been mixed. First and very importantly from my perspective, Pennsylvania still ranks among the national leaders in terms of the percentage of households who have telephone service in their homes. According to FCC statistics, in 1993, the so-called telephone "penetration rate" was 97.5%. That is, 97.5% of Pennsylvania households had some type of basic telephone service in their homes. The national average at that time was 94.2%. According to the most recent figures I have found, the penetration rate in Pennsylvania in 2001 was 97.1%, still above the national average of 94.5%, and 1

equal to or higher than all but four other states in the Nation. In my opinion, no matter what else we do in Pennsylvania, we should seek to ensure that basic telephone service remains available and affordable to all Pennsylvanians. Indeed, as I said in my testimony in June, this was the first goal identified in Chapter 30 and I believe we have had some success in continuing to meet that goal, though there is still room for substantial improvement. I would add that Pennsylvania s strong overall record on universally available basic telephone service has been achieved in spite of our woeful failure to take advantage of federally available "lifeline" program funds that provide a substantial discount to low income customers in order to obtain and retain telephone service. According to the most recent FCC statistics, Pennsylvania ranks in the bottom ten states in the country in terms of percentage of eligible low income consumers who take part in the lifeline program. While California had 3,196,661 lifeline recipients at the end of the year 2000, Pennsylvania had 48,644. The tiny state of Rhode Island had almost as many customers receiving lifeline assistance -- 47,412 -- as Pennsylvania. As compared to other states, Pennsylvania clearly has not done enough to promote and expand the availability of funds from the federal lifeline program. If we were to do so, then we could expect basic service penetration rates to increase even more, particularly among low income consumers. Significantly, while 97.1% of Pennsylvania households have telephone service, that number drops to 93.8% for households with incomes of less than $10,000 per year. One of the reasons that I think that Pennsylvania has maintained a high overall penetration rate is that the Pennsylvania-regulated portion of basic service rates has remained fairly stable, particularly in the Bell Atlantic-PA (now Verizon PA) territory which still serves the majority of Pennsylvania telephone customers. As part of its Chapter 30 plan, Bell Atlantic agreed 2

to a long-term freeze on basic service rates. That freeze was called into question in 1996 when Bell Atlantic sought to "rebalance" its rates in a way that would have increased rates for many rural and residential consumers. Our Office vigorously opposed that rate rebalancing request, as did many members of this Senate, including most prominently Senator Bell and Senator Madigan. The company s request was rejected by the Public Utility Commission. Subsequently, as part of its Global Order in September, 1999, the Public Utility Commission extended the Bell Atlantic-PA basic service rate freeze through December 31, 2003. As a result of these actions, the Pennsylvnia regulated portion of basic rates for most Verizon PA customers today are about the same as they were in 1993. I refer here to the Pennsylvania regulated portion of rates because, unfortunately, the Federal Communications Commission (FCC) has seen fit over recent years to increase or create new federal charges or surcharges that appear on the local telephone bills of most consumers. These include increases in the Subscriber Line Charge, which pays for access for consumers to long distance services, from $3.50 to $6.00 per month, as well as federal universal service and local number portability surcharges. In addition, for many of the other incumbent local exchange telephone companies, the Pennsylvania PUC has allowed provisions in their Chapter 30 plans that permit the companies to request rate rebalancing increases of up to 40% in each year, as long as those increases are offset by reductions in other services, such as the access charges paid by long distance companies such as AT&T and MCI. Our office has fought virtually every one of those proposed increases, in an attempt to keep the increases at a minimum. In my opinion, the General Assembly in Chapter 30 never intended to permit those kinds of substantial increases in basic services -- which are indeed referred to in Chapter 30 as "protected services." I certainly have no objection to telephone companies 3

reducing rates for services that are priced too high, but that does not mean that the companies should be allowed to make up for those reductions simply by increasing the rates for protected services such as residential basic service, particularly since there is still very little competition for those services in many parts of Pennsylvania. Fortunately, in its Global Order in 1999, the Commission imposed an overall rate cap of $16.00 per month for the Pennsylvania-regulated average residential basic service rates for all companies through 2003. My hope is that some type of cap at or near this level will be continued either by legislation or regulation well into the future. With respect to telephone profit levels under Chapter 30, I obviously can t speak for the incumbent Pennsylvania telephone companies, but I would argue that they have done quite well financially under the terms of their Chapter 30 plans that free them from any regulatory limits on the amount of profits that they can earn. In Bell Atlantic s Chapter 30 proceeding in 1994, for example, our Office argued that annual changes in Bell s overall rate levels should be based on a formula set at the rate of inflation minus 6%, and that all remaining excess profits, over a fair rate of return on equity of 11.8%, should be shared equally between ratepayers and Bell Atlantic stockholders. The Administrative Law Judges in the case recommended a formula of inflation minus 5.29% and recommended adoption of the OCA s proposed profit-sharing mechanism. The Commission, however, approved a formula of inflation minus 2.93%, with no profit sharing. The Commission made this determination in light of Bell s commitment to build a state-of-the-art 45 megabit per second broadband network throughout all urban, suburban and rural portions of its service territory. Had the Commission adopted the ALJs rate formula recommendation, the OCA estimates that the cumulative reductions in Bell Atlantic s rates since 1994 would have totalled more than $1.5 billion. 4

We estimate that the Commission s modification to the ALJs recommendation also produced more than $800 million in cumulative additional profits for Bell Atlantic-PA. The question is what did Pennsylvania get in return for removing any limits on the profits that its telephone utilities could achieve under Chapter 30? Well, for one thing, as I noted above, as a result of the Verizon PA rate freeze and the Global Order rate cap, we got some level of rate stability at generally reasonable rate levels. The whole theory of "price cap" regulation under Chapter 30, as opposed to "rate of return" regulation under traditional ratemaking, is that consumers shouldn t care how much profit a utility makes, as long as the prices that the customer pays are capped at a reasonable level. I can accept that theory -- indeed, that is the heart of the bargain which underpins our successful electric restructuring legislation in Pennsylvania -- but that is why I am adamantly opposed to rate rebalancing, where the prices of protected services can be raised substantially even where utilities are earning profit levels of 15 to 30%. If those companies -- and there are many such companies in Pennsylvania -- need to lower access charges or other rates in order to meet competition -- they should pay for those reductions out of their excess profits, rather than turn to basic service ratepayers who are supposed to be protected by rate caps. This type of rate rebalancing, where a utility can simply increase one set of rates in exchange for reducing another, is specifically forbidden under the Pennsylvania electric restructuring act that was passed in 1996. The other element that Pennsylvania consumers were supposed to receive from their local telephone companies in exchange for the right to earn unlimited profits was the deployment of a state-of-the-art broadband network, even in areas of the Commonwealth where it would ordinarily be uneconomical to deploy such a network. On this issue, again, I would say that the 5

results have been mixed. Overall, I would have to conclude that Pennsylvania has not become a leader in the deployment of broadband services to customers. Ironically, I would say that the biggest network deployment problems are not in the areas served by the small rural telephone companies in Pennsylvania. It is my understanding, for example, that nearly all of Pennsylvania s small rural telephone companies provide high speed Digital Subscriber Line (DSL) service in nearly all of their exchanges. The biggest problem company is probably Verizon North the former GTE, which was the last company to file a Chapter 30 plan, several months after the statutory deadline in 1998; the only company to have its initial Chapter 30 plan rejected outright by the Commission; and the company that did not have its final plan approved until April of this year, 2002. Even though Verizon North is now part of one of the largest, richest communications conglomerates in the world, at the House of Representatives Consumer Affairs Committee hearing in Reading on August 15, the witness for Verizon could only promise that one third of Verizon North customers could expect to receive broadband service by the year 2005. As for Verizon PA (the former Bell Atlantic-PA), the question of whether the company has succeeded in accelerating broadband deployment to rural areas appears in part to depend on how one defines "rural" and how one defines "broadband." At the Reading hearing, the Verizon representative testified that, by 1998, Verizon PA had met the broadband availability requirements of its approved Chapter 30 Plan for 36% of its urban access lines, 29% of its suburban lines, and 23% of its rural lines. Verizon also stated that as of July 2002, Verizon PA had installed DSL facilities in 39 of its urban, 77 of its suburban, and 33 of its rural offices. Yet, in a report filed with the FCC pursuant to the Bell Atlantic/GTE merger requirements, Verizon states that as of 6

January 1, 2002, Verizon PA and Verizon North combined have deployed ADSL in only 5 of their 127 rural wire centers. The difference may be explained in part by the fact that for purposes of Verizon PA s Chapter 30 reports, exchanges such as Altoona, Mechanicsburg, and Middletown are designated as rural areas, while for purposes of the FCC report, those and many similar areas are reported in the urban category. As compared to other former Bell Atlantic states and other states with similar telephone loop density, our analysis suggests that in terms of actual ADSL lines in service, Pennsylvania is below average. That is, based on FCC and Census data, Pennsylvania falls below the average of former Bell Atlantic states and states with comparable density patterns in terms of both the number of ADSL lines per 1000 households and ADSL lines per square mile. One other interesting statistic, in light of the focus of Chapter 30 on broadband deployment by incumbent local exchange companies, is that more Pennsylvania consumers today receive broadband service over cable modem lines than do so over telephone company ADSL service. According to the FCC, as of December, 2001, there were 136,829 ADSL lines and 190,915 cable modem lines in Pennsylvania. Despite the focus of Chapter 30 on balanced broadband deployment in urban, suburban and rural areas, it is difficult to determine what steps have been taken by companies like Verizon PA and Verizon North that they have not taken in other similarly situated states. It is also difficult to determine what they have done under the broadband requirements of Chapter 30 that they would not have done in the absence of such requirements. Indeed, it is impossible to answer that last question definitively, since we will never know what actions our telephone companies would have taken if Chapter 30 had never been passed or if it had been enacted in some other form. The 7

real question, I submit, is whether Chapter 30 is truly working for the benefit of consumers in Pennsylvania and whether the Chapter 30 model should continue after 2003. Members of my Office s staff have met with people in places like Kutztown and Warren and Titusville and what we ve heard is similar to what you heard at your hearing last month at Westminster College in New Wilmington. That is, from a practical standpoint, many communities, particularly rural communities, simply cannot wait until 2015 to be assured of receiving some form of high speed internet access in order to provide business, educational, and medical services. They are not wedded to a particular technology or a particular bandwidth or a particular company or set of companies. They are interested in real services that will allow their communities to keep up with the rest of Pennsylvania and, indeed, the rest of the Nation in our 21 st Century economy. In the cover letter to witnesses who were asked to testify at today s hearing, Senator Corman also asked about the state of competition in the Pennsylvania telecommunications market. While Pennsylvania ranks high among states regarding the overall level of competition in local service, I remain concerned that such competition is not widespread in many areas of the state and is particularly weak for residential customers. Well over a million access lines or 14 percent of the lines in Pennsylvania are served by competitive local exchange carriers. But that still leaves about 7.5 million access lines that are served by the incumbent local exchange carriers such as Verizon PA and Verizon North. Perhaps more importantly, that competition is not spread evenly throughout the Commonwealth and is much less prevalent for residential customers than for business customers. For example, in its July 26, 2001, report on Verizon Pa s request to win permission to offer long distance service to its Pennsylvania customers, the United States Justice Department found that while 8

competitors served approximately 23% of the business lines in the Verizon Pa territory, the competitors served less than 8% of the residential customers. I do not have access to similar breakdowns for Verizon North and other incumbent local exchange companies, but I would expect that the penetration of competitive providers is generally much lower for both business and residential customers outside of the Verizon PA service territory. My point here is simply that we have a long way to go before anyone can argue that basic service telephone customers in Pennsylvania do not need the protection of some form of price regulation for their incumbent telephone companies. I would also urge you to reject any suggestions that the way to get more competition in Pennsylvania is to raise the retail rates charged by incumbent local companies. As I have argued persistently in the electric restructuring debate, the goal of introducing competition into regulated utility service is not to raise consumers rates above regulated levels. I do not believe that we should seek to double or triple your constituents basic telephone rates simply in the hope that competitors may someday offer to beat those rates with a 10% discount. Finally, I would note that the elimination of traditional rate regulation of local telephone companies has been found in some states to lead to a deterioration in basic service quality for customers of those companies. In Pennsylvania, both PUC and FCC statistics generally showed a disturbing increase in telephone consumer service complaints from 1995 through 2000, though I am pleased to report that FCC statistics show a decline in such complaints in the year 2001. One of my concerns is that some customers in Pennsylvania still complain that they are not able to consistently dial up to the Internet at 28 or 56 kilobits per second, let alone receive broadband service at 1.5 or 45 megabits per second, as proposed in Chapter 30 and the original Bell Atlantic-PA Chapter 30 plan. The telephone companies response to these complaints is to point out that current 9

PUC regulations and tariffs only require the companies to provide voice grade service, not data service. In other words, while all Pennsylvanians may be entitled to have access to 1.5 megabit per second broadband access by the year 2015, they are not entitled to receive even minimal quality modem service in Pennsylvania in the year 2002. Our Office is in the process of preparing proposed amendments to the PUC s service quality regulations, which we intend to file in the next few weeks. We hope that the PUC will bring Pennsylvania s telephone service quality standards up to more appropriate levels, even before the General Assembly is required to tackle the more difficult task of deciding what to do about these issues on a long-term basis. Thank you again for permitting me to testify before your Committee on these issues of paramount importance to Pennsylvania consumers. I look forward to continuing to work with you, your staffs, and your fellow members of the General Assembly on the future of telecommunications policy in this Commonwealth. 70657 10