Testimony before the Pennsylvania Senate Consumer Protection and Professional Licensure Committee Regarding

COMPETITION IN THE LOCAL TELEPHONE MARKET

July 1, 1998

SENATOR BELL AND MEMBERS OF THE CONSUMER PROTECTION AND PROFESSIONAL LICENSURE COMMITTEE

My name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania. Once again, it is an honor to appear before your Committee and I thank you for this opportunity to testify on the important issue of local telephone competition in Pennsylvania.

For the vast majority of residential consumers, I think it's safe to say that local telephone competition in Pennsylvania so far has been pretty much of a non-event. Nearly five years after local competition was specifically authorized in Chapter 30 of the Pennsylvania Public Utility Code and more than two years after the landmark federal Telecommunications Act of 1996 was supposed to open up a wave of competition across the nation, there is very little competition for residential local service in Pennsylvania. According to the recent statistics that I've seen, less than one percent of Pennsylvania residential customers have actually switched their local phone service to a competitive local exchange carrier.

On the contrary, to the extent that consumers have seen any effects from the federal Telecommunications Act of 1996, those effects are probably perceived as negative by many people. The federally mandated deregulation of pay phone charges, for example, quickly led to an increase in local pay phone rates from 25 cents to 35 cents (or 50 cents if you don't happen to have the correct change). In addition, though few residential customers have changed their local phone company, there has been an explosion in the need for new telephone numbers by potential competitors and thus a need for several new area codes in Pennsylvania alone. These area code changes are confusing and very expensive to consumers and are not really the result of competition, but rather are the result of the outmoded manner in which telephone numbers are distributed in 10,000 number blocks. That is, even if a new wireline or wireless telephone company has only a handful of customers in a particular area, it must be assigned 10,000 telephone numbers in each and every local exchange which it attempts to serve.

Meanwhile, the anticipated competition for residential local telephone service has remained extremely limited. You may remember the public pronouncements prior to 1996 where local exchange companies, long distance companies, cable companies, and a host of other entities all seemed to be chafing at the bit to get into each others' services and territories. Instead of greater competition, however, we seem to be seeing a frenzied effort toward consolidation, with more and more mergers and acquistions announced almost every week between companies that we were told in 1996 were going to be competing with each other to provide local telephone service. So, for example, instead of competing with NYNEX to win customers in the enormous New York and New England local exchange telephone markets, Bell Atlantic simply bought NYNEX.

Despite all this, I think it is premature to declare that the Telecommunications Act of 1996 is a failure. Competitive markets do not develop overnight. I think it is fair to say though that from the perspective of residential consumers, the 1996 Act certainly has not yet been a success. I think it's also fair to say that we need to take a careful look at our state and federal telecommunications policies to make sure that we are at least headed in the right direction.

In retrospect, I do believe there was at least one fundamental flaw in the reasoning behind the Telecommunications Act of 1996. That was a mistaken belief by many policy-makers that the greatest obstacle to full competition in the telecommunications industry was the state and federal legal barriers that prevented many types of competition. I think the assumption was made in 1996 that if Congress allowed competition, then competition would naturally occur.

I believe Congress was correct in concluding that there were a large number of legal barriers that had to be dismantled in order for competition to occur throughout the telecommunications industry. But it is now clear that this was just the first step, and while necessary, this step was not sufficient to bring about competition, particularly for local residential service. What we have found in reality is that the legal obstacles to competition, which were swept away in 1996, were only a part of the problem, and perhaps not the largest part. Once the legal obstacles were removed we have discovered a wide variety of economic, technical and social obstacles to competition.

I am sure that the potential competitors who are testifying here today will tell you of all the difficulties they have encountered in trying to break into the local monopoly. These range from excessive rates for network elements and inadequate operator support systems to issues as simple as having their customers' names left out of the telephone book. Bell Atlantic, on the other hand, will likely tell you that at least some of their potential competitors don't really want to compete in the local market. That is because, under the Telecommunications Act of 1996, once competition is opened up in the local market, then Bell will be able to compete in the lucrative long distance market.

My own view is that the Pennsylvania PUC should in fact reexamine the rules and rates it has established for the leasing of network elements to potential competitors. Unless and until full-scale facilities-based competition occurs -- such as through cable telephony -- the best bet for competition in Pennsylvania is through the leasing of network elements. I agree with the potential competitors who say that our Commission needs to take another look at the rates and terms it has set for these important services, and it is my understanding that the Commission already has begun such a re-analysis. This is particularly important for residential customers and for customers in rural areas where facilities-based competition may take the longest to emerge.

My greatest concern though at this time is that some of the directions that are being proposed at the state and federal level could actually leave consumers -- particularly residential consumers -- even worse off than they were before the changes in the law occurred. First of all, I am extremely concerned about the whole concept of "rate rebalancing." Rate rebalancing is the practice by which a local exchange company reduces its rates for those services and in those areas where potential competition is the greatest, and offsets those rate reductions with dollar for dollar increases in rates for services and in areas where there is little or no competitive threat. To me, this is the antithesis of real competition and produces a result -- that is, substantial increases in basic residential service rates -- that could not possibly have been intended when either Pennsylvania's Chapter 30 or the federal Telecommunications Act of 1996 were passed.

A second concern I have is with the use of "surcharges" by both local and interexchange carriers to cover costs that they claim have arisen as a result of state and federal legislation. An example of this is the anticipated surcharges that the Federal Communications Commission has authorized for local number portability. I agree that local number portability -- which enables customers to "take their number with them" if they switch telephone companies -- is essential for local competition to occur. But what good is local number portability for residential customers if there are no competitors to take their numbers to? How will consumers feel if they start seeing an additional surcharge on their bill to provide them with a service they cannot use?

In testimony presented to the PUC earlier this year, Phil McClelland of my Office analogized the present situation for Pennsylvania's residential telephone consumers to theatre-goers being invited to attend a show, but when the curtain rises, nothing happens. Worse yet, when the disappointed patrons get up to leave the theatre, they are forced to pay a surcharge for the performance that they haven't yet seen.

Finally, and most importantly, I want to make sure that nothing we do will jeopardize what I believe to be the paramount goal of both state and federal telecommunications policy -- that is, the promotion and maintenance of universal telephone service. I do not think that the goal of universal service will be furthered by adding surcharges or by otherwise increasing basic local service rates to residential customers. The more people who are connected to the telecommunications network, the more we all benefit from that network. Pennsylvania can be proud of its standing as a leader in the Nation in the availability of telephone service to consumers. While more work needs to be done, Pennsylvania has consistently maintained one of the highest "penetration" rates for phone service in the United States. It would be a truly unfortunate result if policies intended to improve service to consumers were somehow allowed to reduce our commitment to universal service as the keystone of our state telecommunications policy.

Thank you again for this opportunity to testify before your Committee. I would be happy to answer any questions that you have.