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SBC and Verizon pushed legislation in 2005 to allow the companies to charge whatever they wanted for local phone service. Local phone service is the last bastion of regulation for SBC, and we can expect them to aggressively pursue the kind of legislation in 2006.

The following is a letter written to State Senator David Ford outlining CAC's objections to SBC's and Verizon's bid to deregulate local phone service during the 2005 legislative session.

DATE: Monday, April 25, 2005
TO: Senator David Ford
FROM: Grant Smith
RE: SB 381

Dear Senator Ford,

CAC appreciates the opportunity to take part in continued negotiations with respect to SB 381. We also understand the economic import of expanding broadband throughout Indiana. However, we strongly believe that we need a different starting point than SB 381 from which to address telecommunications issues in Indiana.

CAC is very much in agreement with the view recently expressed in a report by National Association of State Utility Consumer Advocates ("NASUCA", an association of 44 state consumer advocate agencies in 42 states), which states as follows:

"The Telecommunications Act of 1996 was intended as a means to curb incumbent local exchange carrier dominance of local phone service... Instead, what has resulted nine years later is the enfeeblement of even the largest long distance providers and the refortification of the local bottleneck... In the absence of sustainable competition for traditional wireline services, the RBOCs (regional Bell operating companies) have begun to look to so-called "intermodal" competition from cable TV and wireless providers, along with the emergence of Voice over Internet Protocol service (VoIP), as purportedly challenging the RBOC wireline monopoly. However, the RBOCs' portrayal of the potential competitive impact of these alternatives upon RBOC market power for local exchange and exchange access services is overstated and inaccurate." (Lee L. Selwyn, Helen E. Golding, Hillary A. Thompson, "Confronting Telecom Industry Consolidation: A Regulatory Agenda for Dealing with the Implosion of Competition," prepare for NASUCA by Economics and Technology, Inc., April 2005.)

SB 381 as modified by the House starts and ends by providing SBC and Verizon with the means of further entrenching their local market dominance and using that position to subsidize efforts at market dominance across the entire spectrum of telecommunications services, including broadband, in particular., by utilizing deregulated profits from essentially still captive local service ratepayers.

In short, the aim has been to deregulate the very sector where SBC and Verizon have virtual total market dominance - residential and small business ratepayers who have basic local service with unlimited calling. And this circumstance is not likely to change for some time to come, as neither wireless nor broadband services offer a competitive choice to these customers.

SB 381 provides for deregulation and revenue enhancement devices throughout the bill. Any kind of ambiguity or lack of clarity due to inherent contradictions in the language of the bill could easily send SB 381 down the same path as the telecommunications Act of 1996. Given past behavior, we fully expect that each and every decision made by the IURC to the detriment of SBC or Verizon will be vigorously litigated if attempts are made to "fix" the legislation. In fact, SB 381 is so pervasively anti-competitive that simply modifying certain sections of the bill without taking into account its entirety will only result in providing a whitewash for monopoly abuse of the aforementioned customers either through the bill itself or through litigation.

In reviewing the opportunity you have provided us to weigh in on this issue, we don't know where to begin to try to fix a bill whose rationale is completely flawed and that harbors so many traps for residential and small business customers. One just can't alter one aspect of the bill without another aspect providing SBC/Verizon yet another avenue to deregulate or improve their revenue stream unjustifiably on the backs of residential and small business customers:

  • The definitions of basic and non-basic service provide an opportunity to completely deregulate many customers with no market test at all.
  • Making broadband available to 50% or 90% of customers as a basis of deregulation is meaningless since broadband and basic services are not comparable services in terms of price, quality, or in terms of 911 service and broadband may or may not entail voice services with respect to customer choice.
  • Eliminating the statutory ban on Local Measured Service (LMS) provides yet another revenue generating device that is completely unjustified given the cost of service of local calling.

The language we have seen from the OUCC and Time/Warner thus far does not address the full spectrum of concerns we have with respect to monopoly abuse of ratepayers. In order to protect ratepayers adequately and to continue the administrative process of tediously sorting out the state of telecommunications markets, we urge you to draft a conference report with the original language from SB 381 and a study committee to examine the administrative process in terms of determining whether legislative action is necessary with respect to regulatory oversight of the telecommunications industry in Indiana.

Two years ago, the Senate Republican caucus made a similar finding with respect to SBC attempts to create an unassailable market position for itself in the face of highly technical issues. We believe that we face a similar situation here. In this case, SBC and Verizon simply do not want to have to answer to regulators in any way shape or form and are arguing both sides of the fence. On the one hand, they claim they are making broadband investments1; on the other, regulations are somehow inhibiting them. The bottom line in this instance is that regulations, and appropriately so, are prohibiting the likes of SBC and Verizon from charging anything they want for basic service where they completely dominate the market. To properly police these assertions, a periodic technical review of the market, which the current administrative process provides, is what is required.

The IURC has the statutory authority it needs to be flexible with respect to where it and where it does not regulate. Even within the current Opportunity Indiana settlement the Commission can make new findings based on changing market conditions.2 Ergo, there is no reason for the SBC/Verizon language in SB 381. If there is a concern with the administrative process (which is the indirect criticism emanating from Representative Murphy), then let's look at it in a rational and systematic way through the study committee process.

Finally, if members of the legislature are displeased with the actions (or inaction) of the IURC, they are not alone. That does not mean the baby should be thrown out with the bath water. A new Governor will be appointing a new IURC Chairman. While there is no guarantee the new leadership will ultimately do a better job, they should at least be given the opportunity.

Again, we thank you for your dialogue with us and others on this issue. We appreciate how accessible you have been, and understand the significant pressures you may be feeling. Still, we urge you draft a conference report to do the following:

  1. Eliminate the SBC/Verizon telecommunications deregulation provisions;
  2. But reverts to the original or Senate version of SB 381 broadband language; and,
  3. Provide for A study committee to examine the current administrative process with respect to regulatory oversight of the telecommunications industry in Indiana.

Grant Smith

cc. Senators Robert Garton, Jim Merritt, Beverly Gard, David Long, Tim Lanane, John Broden and Representatives Cherry, Ayres, Budak, Becker, Pierce, Moses and Cook.

Appendix I: Excerpts from Expert Testimony in the Most Recent Opportunity Indiana Proceeding, IURC Statement Regarding Competition in Residential Market, NASUCA Statement on the State of Competition in the Telecommunications Industry
The following are excerpts from expert testimony by Trevor Roycroft (Ph.D. in economics) on behalf of CAC in the most recent Opportunity Indiana proceeding. The testimony is dated October 3, 2004:

"The combination of continued SBC Indiana monopoly power in the residential market with emerging competitive forces in the business segment of the market leads to a situation which is ripe for the abuse of monopoly power. Absent regulatory constraint, SBC Indiana could raise residential prices, and utilize revenues earned in the residential market segment to cross subsidize operations in the business market segment. Based on my evaluation of SBC Indiana's market, I conclude that continued regulatory oversight of the market is required. Any regulatory plan governing SBC Indiana's operations must recognize the segmented nature of the marketplace. Residential customers do not face the prospect of market forces capable of constraining SBC Indiana's monopoly power. Regulatory protection must continue for SBC Indiana's residential and small business customers."

Dr. Roycroft found:

  • Residential customers do not have the ability to easily substitute for SBC Indiana local exchange service with offerings from CLECs.
  • Wireless telephony does not provide a suitable substitute for basic local exchange service for the vast majority of local exchange service users.
  • Internet telephony does not offer a viable alternative to SBC Indiana local exchange service.
  • Voice over Internet Protocol may provide an alternative for the relatively small number of residential customers who already have broadband Internet connection. However, VoIP has technical limitations, such as... the inability to utilize E911 service... It is unlikely to provide much of a check on SBC Indiana's monopoly power in the residential market.

IURC, Report to the Regulatory Flexibility Committee, 2004:

"As indicated above, UNE-P (unbundled network element platform) has been the driving force behind the increase in competition and the is the most popular form of CLEC entry today. Action earlier in 2004 by the federal DC Circuit Court... effectively ends that method of competition."

Appendix II: SBC: A History of Bait and Switch
SBC is in the process of systematically rebuilding the Bell empire under its own roof. First, the company successfully overturned the intent of the Telecommunications Act of 1996 through litigation and influence at the FCC. It then acquired Ameritech, has controlling interest in Cingular, bought AT&T wireless, and finally, acquired its former parent company, AT&T.

The company boasts 52 million local-telephone customers across a 13-state region and 49 million wireless customers through its controlling interest in Cingular Wireless. ("SBC-AT&T deal to affect Michigan jobs, rates," Free Business Writers, February 1, 2005.) Others have reported that AT&T had approximately 3 million business customers prior to the announced merger.

In addition to its quick expansion, the company has systematically laid off workers over the past 4 years. SBC eliminated 57,390 jobs, sending the company from 220,090 jobs in 2001 to 162,700 as of early February of this year. ("Companies starting to hire, but not across the board," Knight Ridder, Feb. 2, 2005)

The recent bid for AT&T was no different. SBC spokesperson, Denise Koenig, stated, "With any merger, you look at consolidation, so obviously that's something we're looking at... We expect that there will be some positions in term of redundant jobs to be eliminated." (SBC-AT&T deal to affect Michigan jobs, rates," Free Press Business Writers, Feb. 1, 2005)

The New York Times reported on the same day, "Indeed, one of the big selling points of the deal (the AT&T merger) is that SBC expects to generate $15 billion in savings and new revenue. Some of the cuts will come from merging networks and offices and switching stations. But SBC also plans to eliminate about 13,000 jobs." (Ken Belson and Matt Richtel, "A Telecommunications Architect," New York Times, Feb. 2, 2005)

Other analysts see consolidation in the same light. Anthony Chan, a senior economist at J.P. Morgan stated with respect to the AT&T merger, "A lot of mergers and acquisitions are looking for efficiency gains, which means job cuts."

This is a far cry from SBC statements when the company was eyeing Ameritech. Citing comments filed by SBC with the IURC at that time, PR Newswire stated, "Ameritech and SBC have committed that the merger will not reduce employment levels in Ameritech's five-state region." ("SBC, Ameritech Urge IURC to Support Merger," PR Newswire, March 5, 1999)

However, by September of 2002 the company ... "plans to decrease its workforce by about 11,000, approximately 6% of its total workers. The cuts are in addition to 10,000 jobs SBC has already cut this year." (Michael Martin, "SBC slashes jobs, capital spending," Network World Fusion, Sept. 27, 2002). 2,400 Ameritech workers were impacted. (Jon Van, "SBC slashes 11,000 jobs; blames competition, predicts drop in quality," Sept. 27, 2005) 750 workers were impacted in Northwest, Indiana and Chicago.

Although the company blamed competition, workers in Northwest, Indiana were protesting the lay-offs by November of 2002 in the wake of SBC plans to outsource jobs. (Keith Benman, "Ameritech Workers Protest Job Cuts," Nov. 19, 2002)

Although SBC did lose a small portion of its wireline business, cuts in earnings and jobs could also be attributable to acquisitions. Knight Ridder reported in January of this year when SBC announced 7,000 job cuts, "Much of the earnings decline was due to charges related to the acquisition of AT&T Wireless by Cingular..." ("SBC to hang up on 7,000 jobs to cut costs," Knight Ridder, Jan. 26, 2005).

At the same time, however, the company's revenue was increasing. The same article reported SBC's revenue in the 4th quarter of 2004 increasing by $300 million over the same quarter in 2003, from $10 billion to $10.3 billion. (Knight Ridder, Jan. 26, 2005)

SBC has consistently blamed regulation for its woes while, more likely, building its coffers to purchase the competition. Although a massive company able to influence legislatures and regulators across the country, including the FCC, it spun a tale of unfairness to reduce the workforce and to build revenue that resulted in concentrating a large portion of the telecommunications industry under the SBC logo. Indeed, two years ago at the Indiana General Assembly, the company claimed it was losing money in its wireless and DSL business while boasting to Wall Street that revenue in those areas had never been better.

SBC successfully undermined the Telecommunications Act of 1996 by complaining about UNE-P rates. It has expanded its business into wireless. It has purchased its parent company. It has partnered with the DISH satellite TV to expand into that area of the telecommunications business. (Knight Ridder, Jan. 26, 2005) Now with the pro-SBC provisions of SB 381, the company is attacking the last true bastion of regulatory oversight - captive, local residential and small business customers with respect to price, terms and quality of service- where it has overwhelming market power. Passing SB 381 in its current form is akin to creating a deregulated monopoly. Moreover, if passed in its current form, Indiana will most likely see another round of lay-offs due to the bill's inevitable weakening of quality of service standards.

1In SBC's case, settlement negotiations under regulatory oversight are forcing the company to make high speed services "available to at least 77% of SBC LUs (living units) by June 30, 2008." Moreover, "At least 30% of the high-speed services infrastructure deployed to LUs... will be in Rural Areas...."

2The settlement states that the IURC may "[e]nter an order... approving a change in this Alternative Regulatory Plan necessitated by .... technological change... or other significant and major changes in the telecommunications industry."

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