Assessing Pricing Behavior Under Deregulation

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2. Current Environment. Flood of legislative deregulation of telephone rates under ILEC political pressure, Commissions also deregulatingMassive AT

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Assessing Pricing Behavior Under Deregulation

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1. 1 Assessing Pricing Behavior Under Deregulation David Brevitz June 14, 2006 NASUCA Mid-Year Meeting

2. 2 Current Environment Flood of legislative deregulation of telephone rates under ILEC political pressure, Commissions also deregulating Massive AT&T and Verizon construction programs Emphasis on bundling of telephone, internet access, cable TV Basic local exchange rates are being increased for revenue not cost reasons

3. 3 Rate Deregulation Most states have had ILEC-initiated deregulation bills in the legislature, some are now passing Policy Objective: “promote market based competitive forces” Many bills focus on deregulation of service bundles But basic local service also addressed in some bills, subject to separate treatment

4. 4 Legislative Rate Deregulation Between October 2004 and September 2005, 22 states deregulated services—NRRI State Rate Report, April 2006 A growing list of states face deregulation of basic service rates for residential consumers, now or in the next few years “Many states have already deregulated bundled services”—NRRI State Rate Report, April 2006

5. 5 Legislative Rate Deregulation Flood of legislative deregulation embraces policy of reliance on competitive market forces Policy is ill-conceived and ill-considered Deregulating into likely cable/ILEC duopoly Independent operating status of VoIP providers not assured Continuing industry consolidation Policy change cannot be immediately reversed, but consumer advocates must gather and maintain information to address abuse of market position and prices Vonage is leading VoIP provider, IPO was grudging since it could not find a buyer at $2 B. price tagVonage is leading VoIP provider, IPO was grudging since it could not find a buyer at $2 B. price tag

6. 6 Verizon Fios Program Verizon plan for extensive fiber optic upgrades and deployment to add TV and very high speed internet to bundles $6-7 billion to be spent over 5 years Per the Wall Street Journal: “by far the most expensive and extensive plan” among the telcos Based on worries Verizon is spending too much, investors have “hammered” Verizon stock price More like cable, all programs broadcast simultaneously, some on-demand programming, VZ plans to switch to IPTV at a later date; Verizon has not provided estimate of costMore like cable, all programs broadcast simultaneously, some on-demand programming, VZ plans to switch to IPTV at a later date; Verizon has not provided estimate of cost

7. 7 AT&T Internet TV Service New internet technology is to be used to deliver TV signals, avoids cost of fiber optics to home Planned spending of $4.6 billion to make “IPTV” available to 19 million homes in 41 markets by the end of 2008 $800 million being spent in Texas, $247 million in Kansas based on recent legislation Plan has a number of financial community skeptics, as does Verizon’s plan Programs stored on central server; program called up same way as a web page Programs stored on central server; program called up same way as a web page

8. 8 Verizon and AT&T Pricing Fairfax County, Va Cox Cable: $102.04 per mo. for telephone, cable TV and high speed internet Verizon: $104.85 is the least expensive package including unlimited calling San Antonio, Tx “controlled launch” to “hundreds” of subscribers, pricing not yet available SBC statement that bundle price will move toward $90

9. 9 Verizon and AT&T Business Focus Focus is on the very high speed internet & Cable TV bundle Urgency is to address financial community concern that there is no return for 5-10 years No concern about basic service except to increase revenues, offset Wall Street worries, migrate customers to bundle, pay for broadband infrastructure

10. 10 Basic Local Exchange Rate Increases Increasingly permitted by legislation and Commissions ILEC’s real reason for increases is to increase revenues and cash Cost arguments are used for PR purposes “Migration Strategy”—service bundles are excepted from price increases

11. 11 BLES Rate Increases Basic service rate increases “going in” Idaho, up to 10% rate increase, then deregulation in 2-4 years Iowa, $1 per month up to $19 cap, deregulation procedure is available (10 Qwest exchanges deregulated) Indiana, $1 per year to 2009, then BLES is deregulated Oklahoma, deregulation and $1.90 increase a/o April/07 Wisconsin, $2.50 annual limit 1st two years, then BLES is deregulated Oklahoma decision subject to court appealOklahoma decision subject to court appeal

12. 12 BLES Rate Increases Missouri, basic telephone rates up 10-13%, $.93 to $1.26 per month Increase will not apply to bundles AT&T states “we need the revenue to continue providing good service and to invest in new technology”

13. 13 Reliance on “Market Forces” Competition is assumed, not demonstrated, policymakers are deregulating into a two-wire, duopoly market structure Markets are very highly concentrated, not even close to “many buyers, many sellers” competitive market construct Wireless has different functional characteristics, not a substitute for basic service; ATT or VZ bundles not demonstrably provided over wireless; VoIP is not an independent stand alone optionWireless has different functional characteristics, not a substitute for basic service; ATT or VZ bundles not demonstrably provided over wireless; VoIP is not an independent stand alone option

14. 14 Reliance on “Market Forces” Primary competition will be between cable company and ILEC Some locations have only one choice—ILEC only or cable only Rivalrous behavior now between cable and ILECs, as each are expanding into the other’s markets But, when duopoly equilibrium is reached, deals will end and prices will rise Woodvalley Terrace, can’t get DSLWoodvalley Terrace, can’t get DSL

15. 15 Reliance on “Market Forces” ILEC incentive to move customers from lower revenue basic services to higher revenue bundles Lack of comparably priced functionally equivalent BLES alternatives BLES prices increase, subject only to “cap” of the bundle price SBC (AT&T) has stated BLES prices are protected by the “cap” of the bundle price

16. 16 Monitor Prices Under Deregulation Collect and track prices in states where BLES has been deregulated, versus those states that have not deregulated Provide data support for future policy debates regarding pricing behavior in the market, as experienced (duopoly) Provide “rapid response” capabilities for anecdotes from other states in legislative or commission hearings Demonstrate experienced pricing patterns under deregulation “Nebraska has been deregulated for years, and nothing bad has happened there”, or “we don’t want deregulation in order to increase rates, there is too much competition out there”“Nebraska has been deregulated for years, and nothing bad has happened there”, or “we don’t want deregulation in order to increase rates, there is too much competition out there”

17. 17 Prices to Monitor For all 50 states: Basic local exchange service Urban Rural Lifeline service Bundle prices “basic” bundle Complete bundle package Rate of change can be calculated by state, or by groups (e.g., regulated versus deregulated BLES); Rates of change can be compared to changes in other measures such as social security benefits, minimum wage, or income levels Bundles should be monitored as there are some differences. Freedom package $5 cheaper in Maine than in NY. Freedom Extra package is $10 cheaper.Rate of change can be calculated by state, or by groups (e.g., regulated versus deregulated BLES); Rates of change can be compared to changes in other measures such as social security benefits, minimum wage, or income levels Bundles should be monitored as there are some differences. Freedom package $5 cheaper in Maine than in NY. Freedom Extra package is $10 cheaper.

18. 18 Collection of Price Data Has price data already been collected? No doubt varies by state How far back does data need to be collected? 1995 (pre-date Telecom Act)? 2000? Separate collection of billing elements (SLC, BLES, surcharges, taxes, etc) Which ILECs should be tracked in each state? Ways to keep price data current and up to date Need to understand state specific reasons for some price increases—e.g, inclusion of Touch Tone, price cap adjustment, rebalancing or legislated increases

19. 19 FCC Reference Book Contains limited price information Rates for cities in 40 states as included in BLS Urban CPI survey, beginning in 1986 Omitted states are Delaware, Idaho, Kansas, Nevada, New Hampshire, North Dakota, Oklahoma, South Dakota, Vermont and Wyoming Not all states are “complete” for monitoring needs—Nebraska: Grand Island included, but not Omaha BLS CPI created for different purpose, track urban telephone price changes To assess Nebraska, I would want to understand experience in Omaha Also, the information is not very current, 2004 is most recent available year BLS CPI created for different purpose, track urban telephone price changes To assess Nebraska, I would want to understand experience in Omaha Also, the information is not very current, 2004 is most recent available year

20. 20 FCC Reference Book Picked these as states that have deregulated, mostly recently. 2004 is last available year. Older FCC data doesn’t always have surcharge data.Picked these as states that have deregulated, mostly recently. 2004 is last available year. Older FCC data doesn’t always have surcharge data.

21. 21 2 States Not Included in BLS CPI Urban

22. 22 “Model” legislative language Once ILEC is deregulated, experience shows much less cooperation (data) can be expected Deregulation acts should include language that requires the ILEC to provide pricing data regularly as needed for the price monitoring program NASUCA effort to provide draft model language to accomplish this in future deregulation legislation?

23. 23 BLES Deregulation Like it or not, basic service prices are being deregulated Data and information is needed, not anecdotes, for future efforts to slow down or rectify deregulation Consumer advocates should take steps now to create database of prices to be able to demonstrate actual pricing behavior under deregulation

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