Lower phone rates unlikely anytime soon
In August 1999, the state Public Utility Commission ordered local telephone giant Verizon Communications Inc. to split its Pennsylvania operations into two pieces, as a way to jump-start local telephone service competition.
Tomorrow, the PUC is expected to reiterate its order for Verizon’s ‘structural separation’ into wholesale and retail entities. But Pennsylvanians may be no closer to seeing meaningful competition (as in lower prices) in local telephone service.
That’s because the commission’s ruling will come amidst a blizzard of static from Verizon and its competitors – AT&T, MCI-WorldCom and others – about whether competition actually exists in Pennsylvania, and whether the order to separate will make the situation better.
Verizon has challenged the PUC’s order in court, but last October state Commonwealth Court unanimously upheld the order, and an administrative law judge agreed, preparing the way for tomorrow’s order.
‘On Thursday, the world is not going to change,’ says Carl Giesy, regional director for law and public policy for MCI-WorldCom. ‘Consumers are not going to all of a sudden see a range of new products and services. Structural separation is a solution for the long term.’
The PUC’s so-called ‘global order’ acknowledges that Verizon serves as both a wholesaler and a competitor to other local phone companies, creating an inherent conflict of interest. It also says that Verizon has not done enough to make its infrastructure available to companies seeking to provide local telephone service.
Verizon has put the cost of a structural separation at $1 billion, and says that job losses and rate hikes could follow. Verizon has indicated that a PUC affirmation of the global order will signal yet another round of court challenges, not competition in the market place.
‘If the commission moves forward with structural separation, then I can all but guarantee that we will be involved in further litigation,’ says Ron Weigel, director of government relations for Verizon-Pennsylvania.
Weigel says if the PUC takes an extreme action, such as ordering immediate compliance, Verizon would seek a stay of the order. ‘That could make for indefinite delay, and that is not what we are interested in doing.’
‘If Pennsylvania has ordered it, Verizon ought to go ahead and do it,’ says Mark Cooper of the Consumer Federation of America. ‘You have to change the economic incentives of the wire owners. As long as Verizon refuses to meaningfully open the market, the structural separation seems to be the best option.’
The big question is just what form the separation will take. The PUC can choose from a number of proposals, most offered up by Verizon’s competitors, or it could come up with something completely different.
‘We proposed something called ‘Loop-Co’ where the local loop would be segregated as wholesale, and the rest retail,’ says Giesy. MCI-WorldCom rents local service capacity from Verizon, a situation that Giesy says allows MCI-WorldCom only a ‘beachhead’ to compete for local service.
AT&T has its own proposal, which its analysts say would cost Verizon only $41 million to implement.
‘There is no single action the commission can take to open the market to competition that would be better than structural separation,’ says Jim Ginty, president of AT&T-Pennsylvania. ‘Under the PUC’s global order, customers benefit from lower prices, better service, and more innovation.’
Verizon’s Weigel claims that local telephone competition is proceeding in Pennsylvania without structural separation. ‘We’re losing 45,000-50,000 resident customers a month,’ he says. He even refers to the New York market as an example of competition without separation.
Cooper of the Consumer Federation says that there is a vigorous competitive market in New York, without structural separation.
‘We worked very hard to make New York work, and it has worked very well. The problem is that Verizon has been unwilling to replicate New York elsewhere, and they do seem to be backsliding on some services in New York.’
But critics dispute those numbers and point out that Verizon still holds more than 90 percent of the local market in Pennsylvania.
‘Structural separation is the only realistic solution we have seen that is presented,’ says state Sen. Mary Joe White, a Republican from Franklin, who, along with Sens. Vincent Fumo, a powerful Philadelphia Democrat, and Roger Madigan, a Williamsport Republican, joined in a suit to force Verizon to comply with the ordered separation.
In December, Fumo announced a proposal to scuttle the structural separation in exchange for a series of higher fines for Verizon if it did not voluntarily open up the market.
‘I don’t think that is a solution,’ says White. ‘It amounts to just adding a little premium on the fines they would get. That presumes that they would continue to violate the rules.’
‘That was an affront to me,’ says Madigan, ‘that they’d rather pay the pe nalties than do the right thing and provide the service.’
Madigan says the PUC commissioners are working on ways to end the legal wrangling. ‘My hope would be that even if it is not the full separation, it would be something that would bring assurances of full competition.’
‘The outlook for local phone competition is long term, I’m afraid,’ says White. ‘With the importance of the Internet, every additional month of delay sets us back even further.’