July 09, 2007

President Peevey
California Public Utilities Commission
505 Van Ness Ave
San Francisco, CA 94102

President Peevey:

It's now nine months after the Commission's deregulation of telecommunications services in the state through its Uniform Regulatory Framework decision. It seems like a good time to gauge the success of this effort.

The URF decision is premised on the finding that Verizon, AT&T, SureWest and Frontier "lack market power needed to sustain prices above the levels that a competitive market would produce." FOF 50 The Commission cited deregulation and reliance on market forces as the means to meet the agency's stated goals of lower prices and increased consumer choice. (page 4, 31-32) Shouldn't consumers have at least begun to see some sign of lower prices, increased choices, and better service? And if they haven't, or worse yet if prices have increased and competition lessened, shouldn't the Commission be concerned?

The formerly-regulated companies have imposed higher prices and more restrictive terms and conditions for their service offerings. They have also benefited from consolidation in the marketplace and huge company-wide profits. Contrary to their claims of being hamstrung by competitors, they display all of the hallmarks of unregulated near-monopolies. Is this the outcome the Commission anticipated? If so, how does this comport with the legislature's expectation that consumers will benefit from competition?

When the Commission deregulated the telecommunications industry, it did not even bother to establish provisions to monitor changes in the marketplace caused by its actions. Has the Commission tracked the advice letter filings AT&T and Verizon have submitted since the beginning of this year? If it had, it would find the results unexpected and troubling. How can this Commission stand by while AT&T has increased rates for:

• Select Custom Calling services by over 50%
• Local Directory Assistance by 117%
• Fees for returned check by 276%
• Local Toll rates by over 70% for some categories
• Fees for having an unlisted number by 446%
• Fees for late payments by adding a $5.50 NRC to past due balances

Even businesses in California, the very market segment that should have the most competitive choices, have been targeted with increases in local usage and access charges of 5-30%. There have also been increases in Centrex and PBX services, Wire Pro for business, Directory Assistance, and specific custom calling services for businesses.

Customers in Verizon territory are not faring any better. Verizon saw fit to raise many of the same rates as AT&T:

• Local Directory Assistance by 114%, and also reducing the free call allowance
• National Directory Assistance by 55%
• Local Toll Rates with average increases at 43%
• Measured Rate Basic Exchange Service by 25% in some cases
• Popular bundles, including local service, raising 5-6.5% but some rates increased as much as 19%.

Businesses are also victims in Verizon territory with increases focused on business-specific services such as measured rate and ZUM calls, Centranet, unlimited usage bundles, inside wire, and PBX services.

It is even worse than it appears on the surface, if you stop to think about it for a moment. Many of the price increases, such as late payment fees, return check charges, directory assistance increases, and toll increases will hit vulnerable consumers with the fewest options. And thanks to URF, consumers have no legal grounds to protest or challenge these increases as unreasonable. With deregulation, if the market will bear it, the customer must grin and bear it as well. Or grimace and bear it, more likely.

Perhaps these concerns over price increases should be mollified by the increased competition since the URF decision issued? Not quite. Competitive telecommunications companies, including VoIP providers, are in trouble. Particularly telling is when the stalwart wholesale competitors file for bankruptcy, such as PacWest did in April, 2007, putting many small carriers at the mercy of companies like AT&T and Verizon for wholesale service. What was once a viable option for many small business customers, Mpower Communications, quietly slipped away from the market, selling its assets in California to TelePacific. Arrival Communications, a small company serving the Central Valley and occasionally active in PUC proceedings, was also recently sold to TelePacific, eliminating another choice for California consumers. And Vonage, the favorite example of emerging competitive threats, is at risk of being put out of business by Verizon. Indeed, some experts suggest that if Verizon wins its patent case, many independent VoIP providers will be out of business.

Where does the Commission find comfort in all of this? Apparently, intermodal competition is where consumers should be looking for relief. There is no denying that cable and wireless companies continue to do very well and are giving traditional wireline services a run for their money. But, up until very recently, cable also had monopoly power giving consumers, at best, a duopoly between a single cable service and a single voice service to choose from. The creation of a state-wide video franchise structure has not changed this landscape. The PUC website indicates they have received only three applications from companies with very familiar names.

Perhaps the Commission takes solace in the knowledge that wireless services have allowed the formerly-competitively-disadvantaged phone giants to thrive even more than before. While AT&T and Verizon raise rates and eliminate competition, corporate executives sitting in San Antonio and New York and the shareholders reap profits beyond most consumers' wildest dreams. In April, AT&T announced that it had doubled its profits in the first quarter of 2007 over last year, earning an amazing $2.85 billion. San Antonio is not the only place Californians are spending their money, New York is also a beneficiary. Verizon announced first quarter, company-wide earnings of $1.5 billion. Both companies have been adding millions of customers a year to their wireless and fiber networks. Verizon boasted that their number of "broadband connections" rose 30% in the past year. Based on these numbers, it is unclear where the robust competition lies to restrain these companies' market power.

This Commission cannot stand back hoping that competition and the market will catch up with these actions. In the URF Decision the Commission made a pledge to be vigilant to "ensure that the market continues to serve California consumers well." The above discussion demonstrates that the market is not serving consumers well and this Commission must move forward to put in place safeguards to protect consumers. We would be happy to meet with your office or any of your colleagues to further discuss this issue.

Sincerely,

Bob Finkelstein, The Utility Reform Network

Michael Shames, Utility Consumers' Action Network

Richard Holober, Consumer Federation of California

Malcolm Yeung, Asian Law Caucus

Ana Montes, Latino Issues Forum

Melissa Kasnitz, Disability Rights Advocates

Ken McEldowney, Consumer Action

CC: Commissioner Chong
Commissioner Grueneich
Commissioner Simon
Commissioner Bohn