TESTIMONY OF IRWIN A. POPOWSKY, CONSUMER ADVOCATE OF PENNSYLVANIA

REGARDING S.B. 667, 668 and 669: TELECOMMUNICATIONS

BEFORE THE MEMBERS OF THE

SENATE CONSUMER PROTECTION AND PROFESSIONAL LICENSURE COMMITTEE

My name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania. Thank you for the opportunity to testify before you on these important legislative initiatives regarding the future of telecommunications policy in Pennsylvania.

As the statutory representative of Pennsylvania's utility consumers, I share the obvious concerns of the numerous Senators who sponsored this legislation that many of the anticipated consumer benefits of prior telecommunications law reforms at both the state and federal level have been slow to materialize.

Rather than significantly enhanced competition in many segments of the telecommunications industry, for example, we have seen increased consolidation through mergers and acquisitions. The most relevant of these combinations from a Pennsylvania consumer perspective, of course, is the proposed merger between our two largest incumbent local exchange companies, Bell Atlantic and GTE. These two companies share common borders throughout much of Pennsylvania. Yet, rather than compete to enter each other's service territories, these companies, like so many others throughout every segment of the telecommunications industry, have decided that they would rather join together.

Perhaps unlike some of the other witnesses who will appear at these hearings, however, I do not believe that the goal of our telecommunications policy in Pennsylvania should necessarily be to maximize competition. Rather, my goal is to maximize consumer welfare and the public benefits that can be obtained from telecommunications service in our Commonwealth. Where consumer benefits are best provided through competition, then I support competition. Where regulation is necessary, however, to protect consumers and to preserve such paramount public goals as universal telephone service at just and affordable rates, then I will support such regulation.

With respect to the three bills that are before this Committee today I would therefore at least like to begin by discussing some of the critical consumer protection issues that are addressed in this legislation.

First, I want to enthusiastically support the restrictions in Senate Bill 669 on what I consider to be the pernicious practice of "rate rebalancing." In enacting Chapter 30 of the Pennsylvania Public Utility Code in 1993, the General Assembly defined a set of "protected" services, including basic local calling and touch tone service, and declared that any plan approved by the Commission under Chapter 30 must "ensure the continued affordability of protected telephone service." Despite this requirement, a number of companies have proposed and the Commission has approved, alternative regulatory plans where the companies may be permitted to raise basic residential rates every year by as much as $3.50 per month or by 40%, whichever is greater, as long as these increases are matched by rate reductions in other services. These other services may include business services, long distance company access charges, or non-protected optional residential services. Under these plans, these substantial increases in basic residential service can be implemented each year regardless of how much profit the company is making and regardless of how little money the company is spending on network modernization. In one recent case in which a telephone company sought a $3.45 basic residential monthly rate increase in order to offset reductions in long distance company access charges, our Office tried to present evidence that the company was already earning more than 20% on equity and was actually spending less money on network modernization than it had been spending before the approval of its alternative regulatory plan. The Commission ruled by a 4-1 vote, however, that this evidence was irrelevant and could not be submitted in a rate rebalancing proceeding under that company's plan. I would note that this company's overall price cap plan allowed the company to raise its overall rate level each year by an amount equal to the rate of inflation minus 2.8%. So, for example, if the rate of inflation were 3.8%, the company could raise overall rates by only 1%. Yet, under its plan as approved by the Commission, the Company could raise its "protected" basic service rates each year by 40% or more.

Under Senate Bill 669, I am happy to say that "protected" services would actually be protected which I believe was your intent when you enacted Chapter 30 to begin with. Senate Bill 669 would limit rate increases for protected services, such as basic residential local service, to no more than the average overall increase allowed under the company's rate plan. It seems to me that the point of price cap regulation is to cap prices. It also seems to me that if we are going to have protected services, then we ought to protect them -- and that does not mean that we are going to raise those rates each year by 40 times as much as we raise overall rates. I would strongly urge you to adopt the rate protection provisions of Senate Bill 669 as soon as possible, so that they can be applied in Chapter 30 cases that are currently pending before the Commission and in rate rebalancing cases that may be filed in the future.

I also support the language in SB 669 that would require a formal periodic review by the Commission of alternative regulation and network modernization plans. I agree that the Commission should review and, if appropriate, modify or revoke such plans if they are not meeting the criteria established by the General Assembly in Chapter 30.

Turning to Senate Bills 667 and 668, which address more competitive issues, I would first note my agreement with the merger review provisions of SB 667. Under these provisions, the PUC could not approve mergers or acquisitions by local exchange telecommunications companies in Pennsylvania that would "substantially lessen" or "inhibit development" of competition. In addition, the Commission could not approve a merger unless the local exchange company had met the requirements of Section 271 of the federal Telecommunications Act of 1996. Section 271 sets forth the local competition market opening requirements that must be met by the Regional Bell Operating Companies, such as Bell Atlantic, before they are permitted to provide long distance telephone service to customers within their own regions. I believe the sponsors of this legislation are correct in requiring that a company meet the requirements of Section 271 as a condition for merger approval. Indeed, that was precisely one of our Office's recommendations in expert testimony that we recently filed in the Bell Atlantic-GTE merger case that is pending before the PUC.

My only disagreement with SB 667 is that it appears to not only require a PUC determination that the company is in compliance with Section 271, but it specifically requires prior Federal Communications Commission (FCC) approval of the Section 271 application before the merger can be approved in Pennsylvania. My concern with this additional step is that it effectively makes the Pennsylvania merger decision contingent on the action of a federal agency. Clearly, the FCC will have to rule on both the merger and the 271 application in any case, but I would rather have the Pennsylvania merger decision made by the Pennsylvania PUC, not by the FCC. If our PUC finds that a merger is in the public interest and that it meets the competitive standards set forth in Senate Bill 667, then I think the PUC should be able to act on that merger for purposes of our Pennsylvania jurisdictional issues.

Also, as a technical matter, Section 1105 of SB 667 refers to acquisitions by "a local exchange telecommunications company, as defined in section 3002" of the Public Utility Code. My concern is that this definition might not include acquisitions of or by the local exchange company's parent company that is actually involved in the acquisition. It will be important for the final legislation on this issue to ensure that all relevant corporate entities are included in the applicable provisions. This may include, for example, all "affiliated interests" of a local exchange telecommunications company as that term is defined in Chapter 21 of the Public Utility Code.

Finally, turning to Senate Bill 668, I agree with the basic thrust of this bill, which would require our largest local exchange companies to provide competitive "retail" services through a corporate affiliate that is structurally separated from the "wholesale" entity that will supply network elements to its own affiliate and to all other non-affiliated competitive providers on a non- discriminatory, arm's length basis. In terms of competitive fairness, this type of approach seems to me to make sense. Assuming that it ultimately receives Section 271 approval, a Bell retail competitive local exchange company that can provide a package of local, long distance, data, and possibly video services will likely be a formidable competitor in any event. I, for one, look forward to the day when Bell Atlantic is able to provide a full range of competitive telecommunications services throughout Pennsylvania. It is essential that Bell not be given an unfair competitive advantage, however, and the type of structural separation proposed in SB 668 may be one way to begin to achieve that goal.

A critical provision in SB 668 from my perspective, however, is one that addresses the opposite of the competition scenario. That is, what happens to customers, particularly residential customers, who do not choose to switch to a competitive local exchange company. It appears to me that this question is dealt with in §2922(1) of Senate Bill 668, where it states that: "All retail services and functions shall be provided by a separate corporate affiliate which shall operate as a competitive local exchange telecommunications company with the exception of the provision of service to retail customers who do not choose to subscribe to a competitive local exchange telecommunications company for a given service." Based on my reading of that exception, I assume that the existing local exchange company would continue to serve customers who do not wish to switch. In essence, the existing local exchange company would remain the "default" provider, or "provider of last resort" in a manner comparable to the provision of default service by electric distribution companies under our recently enacted electric choice legislation. I also assume, though it is not specifically stated in Senate Bill 668, that this default service would continue to be subject to price regulation by the PUC. Clearly, given the state of competition in Pennsylvania now and in the reasonably foreseeable future, we are not ready to totally "deregulate" the price of basic local telephone service. This could be disastrous, particularly for rural customers and, indeed, for residential customers throughout most of Pennsylvania.

I would go further, however, and strongly recommend that these default rates be "capped" at no more than their current levels for a period well into the future. This is consistent with the rate cap principles established in Pennsylvania's electric choice legislation. It is also consistent with the position taken by the prime sponsors of this legislation, Senators White, Madigan and Fumo, both in the expert testimony filed on their behalf in the Bell Atlantic-GTE merger proceeding as well as in the Joint Petition filed by the Senators and several competitive local exchange carriers in the current "Global Settlement" proceedings. In the Global Settlement case, Senators White, Madigan and Fumo have called for a cap on Bell's protected service rates through December 31, 2003. Through their experts' testimony in the merger case, the Senators have called for a rate cap on non-competitive local exchange services to extend for eight years from any merger approval.

I agree absolutely with the Senators' positions on the need for rate caps in those proceedings. I think it is necessary, however, to import that protection into this legislation. This could be accomplished, for example, by adding language along the following lines to Section 2922(1) of Senate Bill 668:

While some might argue that this type of provision will make it difficult for competitors to "win" customers from the default provider, I would respond that if competitors (including Bell's own CLEC under this legislation) can provide services or packages of services that are attractive to consumers, and if the market rules are fair and non-discriminatory, then those competitors will have an opportunity to be able to win their fair share of customers. Again, I do not support competition for the sake of competition. I support competition for the sake of providing benefits to consumers that would otherwise be impeded by excessive regulation. It is not a benefit, in my opinion, to double consumers' rates so that a competitor can then come in and offer them a 10% discount for the same service.

It is my hope that the type of "default" service envisioned in this legislation will become an unnecessary vestige of the past as a wide array of lower priced and higher value telecommunications services become available to all Pennsylvanians. It is my expectation, however, that whatever rules you establish here, competition will be slow to develop in  at least some parts of Pennsylvania and that many consumers will be understandably reluctant at first to enter the competitive market for basic local telephone service. That is why I would urge the General Assembly to seriously consider some of the pro-competitive steps set forth in this proposed legislation, but also to recognize that vital consumer protections are still needed in order to preserve the goal of universal telephone service both during and after the long transition to a more competitive telecommunications market.

I will be available to discuss the provisions of this legislation with individual members and staff of the Committee in the future and I would be happy to answer any questions you may have at this time.

April 28, 1999