Regulatory Response to Rising Residential Rates

1. Phone Bill Regulatory Response to Rising Residential Rates Trevor R. Roycroft, Ph.D. Presented at the 2009 NASUCA Mid-Year Meeting June 30, 2009 trevor@roycroftconsulting.org 508-896-0151

2. 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.

3. Proof of any pudding is in the eating...

4. CLEC Competition

5. Residential CLECs Still Operating in California

6. Cord Cutting—General Substitute or Niche Market?

7. Telco-Cable Duopoly

8. Duopoly at Best

9. 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.”

10. 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?

11. 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.

12. California Competition Study Available At: • http://www.turn.org/article.php?id=839