Regulatory Response to Rising Residential Rates

Trevor R. Roycroft, Ph.D.Presented at the 2009 NASUCA Mid-Year Meeting

June 30, 2009

Phone

Bill

trevor@roycroftconsulting.org508-896-0151

Case Study: Rate Deregulation in California

2006 CPUC implemented a “Uniform Regulatory Framework” for the four largest ILECs in the state. AT&T, Verizon, Surewest, Frontier

CPUC concluded that market power has been eliminated, and that competition is statewide due to the availability of UNEs. Identifies wireless and VoIP as contributing to the

elimination of ILEC market power. Rate regulation removed from bundles and

ancillary services in 2006. Transitional price caps for basic service.

2008 CPUC Order allowed $3.50 per month basic service increases for January 1, 2009 and January 1, 2010, with full pricing flexibility beginning January 1, 2011.

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Proof of any pudding is in the eating...AT&T California Residential Rate Increases      

 Percent Increase Since URF Increased Rate

Rate When URF was Implemented

Basic Flat 26% $13.50 $10.69 Basic Measured 28% $7.28 $5.70 Basic LifeLine 14% $6.11 $5.34        Local Toll       13-20 Miles, Day 111% $0.36 $0.17 >21 Miles, Day 71% $0.42 $0.25        Calling Features      Caller ID 62% $9.99 $6.17 Anonymous Call Rejection 242% $6.50 $1.90 Call Forwarding 86% $6.00 $3.23 Call Waiting 86% $6.00 $3.23 Three-Way Calling 86% $6.00 $3.23 Call Screen 86% $6.00 $3.23 Repeat or Speed Dialing 86% $6.00 $3.23 Call Trace 29% $6.00 $4.65        Directory Services      Non-Published Listing 346% $1.25 $0.28 DA Service 226% $1.50 $0.46        Miscellaneous Services      WirePro 101% $6.00 $2.99 Returned Check 276% $25.00 $6.65 Non Published Listing - White page & DA 346% $1.25 $0.28 Non Published - white page only 614% $1.00 $0.14 uSelect Package 3 36% $15.31 $11.26 Advantage Plan/The Works 14% $25.37 $22.32

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CLEC Competition

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Residential CLECs Still Operating in California

CLEC Prepaid-Only?Lowest Basic Rate

Unlimited Bundle

ACN Communication Services No $25.94 $38.99 Asian American Association No $24.95  Blue Casa Communications No $27.99 $49.99 Budget Phone (Budget Prepay) Yes $49.95  Connectto Yes $27.99 $54.95 Curatel Yes $14.40* $29.40 dPi Teleconnect Yes $39.99 $56.99 EarthLink No $49.95 $69.95 Excel Communications No $39.95 $59.95 MCI No $41.99 $59.99 Midwestern Telecommunications Yes $35.29 $40.29 Phoneco Yes $29.99 $37.98 PNG Telecommunications (Powernet Global) No $21.99 $39.99 Sage Telecom No $24.99 $39.99 TC Telephone No $16.99 $49.99 Telscape No $24/$28 $47/$53Trinsic No $59.68  *Price for LifeLine eligible customers. This price is roughly double the LifeLine rate available from an ILEC.    5

Cord Cutting—General Substitute or Niche Market?

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Summary of Statistical Analysis of Wireless-Only Choice 

VariableIncreases or Decreases

Chances of Wireless Only? Significance LevelNumber of Cell Phones in HH Increases 0.00**Number of Individuals in the HH Decreases 0.00**Number Under Age 18 in the HH Increases 0.00**Number Over Age 65 in the HH Decreases 0.00**Number in HH that need help with chores Decreases 0.09† Number in HH that have trouble walking Decreases 0.02* Number that received homecare Decreases 0.01**Number using telephone for health info Decreases 0.02* Home Ownership Decreases 0.00**Male HH Head Increases 0.00**Hispanic HH Head Increases 0.00**Non-white HH Head Decreases 0.00**Age of HH Head Decreases 0.00**Married Couple Decreases 0.00**Higher HH Income Decreases 0.00**     Chi Square of the Regression: 6,508; Significance Level 0.00    **Significant at 1%.  *Significant at 5%. †Significant at 10%. 

NHIS Survey July-December 2008. Households With:Both Wireless and

Landline Landline Only Wireless Only No Phone59.60% 17.40% 20.20% 1.90%

Telco-Cable Duopoly

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Duopoly at Best

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Duopoly Pricing: Follow the leader! Cox Communications--only California cable

operator that offers basic telephone service as a stand-alone option: Rather than establishing price for basic service

based on its costs, Cox offers basic service prices to reflect prices offered by either AT&T or Verizon, depending on the customer’s location.

Cox raised basic rates in response to AT&T and Verizon’s rate increases. Basic service rates by 25% à la carte calling features like call waiting and three-way calling,

25% per month for the first feature, and by 100% per month for additional features.

Increased Caller ID prices by 25% after AT&T increased its Caller ID rates.

Evidence of price leadership, where Cox follows the ILEC’s lead on price increases, does not support the proposition that “competition” protects consumers. Dominant ILECs set prices, and other firms “follow the lead.”

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Regulatory Response: Fresh Look at Market Structure is Needed Duopoly markets (or duopoly markets with a fringe of

resale-based CLECs) are not sufficient to protect consumers.

Regulatory decisions made based on the UNE-driven “competition” should be revisited.

Legislative regulatory plans are based on doubtful foundation.

Investigation into market performance needed. Evaluate remaining CLECs. Determine where facilities-based providers are serving. Evaluate pricing behavior.

Price-increase triggers to initiate reviews? Is investment occurring? Is previous broadband “commitment” enough?

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Other Regulatory “Hooks” Price cap plan reviews.

Evaluate plans in light of market changes. GDP-PI Inflation. Continued availability of capped à la carte

services for the ILEC constrains cable price increases.

Merger review. Service quality review.

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California Competition Study Available At:

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http://www.turn.org/article.php?id=839