BEFORE THE PUBLIC SERVICE COMMISSION OF MARYLAND

Transcription

1 BEFORE THE PUBLIC SERVICE COMMISSION OF MARYLAND IN THE MATTER OF VERIZON : MARYLAND INC. S TRANSMITTAL NO. : 1420 PROPOSING TO INCREASE : RATES FOR THE INTRALATA TOLL : CASE NO COMPONENT OF REGIONAL : ESSENTIALS AND REGIONAL VALUE : PACKAGES : VERIZON MARYLAND INC. S REPLY BRIEF IN SUPPORT OF ITS PROPOSAL TO INCREASE THE COMPETITIVE INTRALATA TOLL COMPONENT OF PACKAGES Verizon Maryland Inc. ( Verizon ) hereby submits its reply brief in support of its proposal to increase the competitive intralata toll component of its Regional Essentials and Regional Value packages. None of the criticisms advanced by Staff or OPC in their initial briefs negate Verizon s authority under the existing Alternative Regulation Plan to price separately the competitive intralata toll component of its Regional Essentials and Regional Value plans and to treat that component as a competitive service subject to full price flexibility. At the very least, Verizon has shown good cause for a waiver of any rule that would prohibit Verizon from doing so, since failure to treat the competitive intralata toll component of Verizon s packages as a competitive service deprives Verizon of the benefits of the 2005 Settlement negotiated with Staff and OPC, which reclassified intralata toll to the Competitive Basket. Moreover, there is no public policy justification that would support refusing to allow Verizon price flexibility for intralata toll merely because it is provided as part of a package of services. I. THERE IS NO REQUIREMENT THAT A PACKAGE OF SERVICES BE TREATED AS A SINGLE SERVICE FOR PRICING PURPOSES

2 Staff claims that a package of services must be considered a single service and thus must be priced according to the rules of only one basket the Discretionary Basket 4. (Staff Brief at 4) However, a package of services is precisely that a group of individual services. The fact that they are offered at a volume discount when purchased together does not mean they are the same service. And because each component part constitutes its own service, Verizon should have the ability to price each component separately pursuant to the pricing rules that apply to that particular service. Requiring Verizon to treat the package as a single service subject solely to Discretionary Basket 4 pricing rules, while at the same requiring Verizon to assign the revenues from each component service separately to Baskets 1, 4, and 5, does not strike[] an appropriate compromise between the non-competitive and the competitive baskets, as Staff claims. (Staff Brief at 4) Quite to the contrary, as Verizon pointed out in its initial Brief, denying Verizon the ability to price the competitive component of a package separately as a competitive service as Verizon has proposed to do here is no compromise at all. It actually puts Verizon in a worse position because it prevents Verizon from counting intralata toll revenue towards any price increases when it is provided as part of a package of services, even though there is no dispute that, when the Commission accepted the 2005 Settlement, the Commission declared intralata toll service to be competitive and subject to full pricing flexibility. Neither the Settlement, nor the Commission s order approving it, limited the application of the Competitive Basket pricing rules only to intralata toll that is offered on a stand-alone basis. As Staff admits, the Settlement did not dictate that packages that contain both Basic and 2

3 Competitive services must be priced as a single service under the Discretionary Basket 4 pricing rules. (Staff Brief at 3-4) Staff claims nevertheless that there was an understanding that all packages even those that contain competitive elements would be classified as Discretionary Basket 4 because they were treated as such prior to the settlement. (Staff Brief at 3) Staff ignores the fact that the Settlement fundamentally changed the rules by moving intralata toll service from the Discretionary to the Competitive basket such that any prior understanding about the treatment of toll service no longer applied. As Verizon pointed out in its initial Brief, prior to the 2005 Settlement, intralata toll, like vertical services such as call waiting, was classified as Discretionary. Therefore, at that time, all of the components of Verizon s Regional Essentials and Regional Value packages were categorized either as Basic or Discretionary; none were Competitive. Categorizing the entire package as Discretionary thus had little practical effect on Verizon s pricing flexibility, since both the Basic and Discretionary services were subject to the PCI. When the Commission adopted the 2005 Settlement, however, some packages for the first time included a competitive component intralata toll. Thus, the manner in which Verizon priced those packages before the Settlement does not answer the question of how they should be treated after the Settlement. 1 For its part, Verizon certainly did not understand that moving intralata toll service to the competitive classification would not permit Verizon to price the intralata toll component of packages separately as a competitive service, as Staff now claims. Nor 1 Indeed, Verizon recognized in its filing with the Commission that the Regional Essentials and Regional Value plans had been classified as Discretionary when they were first introduced. However, that designation pre-dated the adoption of the Settlement, which reclassified intralata toll. 3

4 did Verizon understand that Verizon would also lose the ability to count any of the competitive intralata toll revenue toward price increases to its packages, and thus be worse off in relation to pricing flexibility than before the service was reclassified to Competitive Basket 5. (See Verizon Brief at 8) Moreover, as OPC admits (OPC Brief at 6), the Commission has never expressly held that Verizon lacks the ability to price competitive components of packages as separate rate elements it has not addressed the question at all and there is no public policy justification for reaching that conclusion now. As Verizon explained in its initial Brief, the rates for packages are already subject to a highly effective de facto cap, since the component parts of a package are already available on an á la carte basis at just and reasonable rates that are either set by the Commission (as in the case of basic and discretionary components) or, in the case of competitive services, by the competitive market. Verizon cannot viably price a package at a rate that is higher than the sum of the rates charged for its parts, since customers would simply drop the package in favor of the just and reasonable á la carte pricing. Thus, the aggregate package price for the entire suite of services will, as a practical matter, always be lower than the sum of the Commission-approved, just and reasonable á la carte rates. Imposing additional pricing constraints on competitive services to keep them lower than the just and reasonable Commission-approved á la carte rates would be regulatory overreaching. Staff nevertheless claims that Verizon has shown no need for pricing flexibility because it already has the ability to lower the price of bundled services in response to competition. Staff claims that price increases are a counterintuitive reaction to a 4

5 competitive market. (Staff Brief at 4-5) This argument reflects the overly simplistic and false view that competitive prices will always be lower than the non-competitive prices set by regulators. In fact, the price of a competitive service will often be higher than the price set by regulators, since regulators traditionally set prices below levels that a competitive market will bear in order to achieve other policy goals, such as subsidizing basic services. In a competitive market, these below-market regulated prices send improper market signals and actually impede the full development of competition by pricing products below their real market value i.e., the price at which they are valued by consumers. This leads to economic waste by requiring a firm to forego revenue that it would otherwise receive from consumers in a competitive market revenue that could be used for development of new products and services and increased infrastructure investment. It also leads to inefficient allocation of resources by artificially pumping up demand for the under-priced good and artificially suppressing demand for other goods or services that compete with it. This makes it more difficult for competitors to meet those prices. Therefore, when artificial regulatory controls are abolished, prices often increase from below-market regulated prices to levels that more properly reflect the economic value of those services to consumers. For example, this Commission properly found, on April 20, 2005, that Verizon s Directory Assistance services should be reclassified to the Competitive Basket 5. Since that time, Verizon has raised the price for Directory Assistance service twice. When the Commission approved Verizon s first increase to $.75, it found that other telephone companies charge for directory assistance, at rates ranging from $0.50 per call to $1.49 5

6 per call well above Verizon s regulated rate of $ Verizon has recently raised the price for the service to $0.95, roughly in the middle of the competitive range found by the Commission. This clearly demonstrates that granting pricing flexibility in a competitive market does not always mean that prices go down. A correction of prices to market rates can go in either direction, but will always result in increased economic efficiency and better allocation of resources. II. OPC S RELIANCE ON RETAIL PRICING SAFEGUARDS IS MISPLACED OPC relies on certain retail safeguards established by the Commission in adopting the Alternative Regulation Plan. Those safeguards, however, are irrelevant here. First, employing convoluted reasoning, OPC claims that the imputation safeguard adopted by the Commission in Order requires Verizon always to treat packaged services on a single, aggregated basis. The imputation safeguard, however, has nothing to do with this case. As an initial matter, the Commission adopted the imputation safeguard to ensure that the price of the retail service exceeds the cost to Verizon s competitors of other than competitive or OTC inputs to a competitive service, such as switched access (which is an input to toll service). 3 In other words, the imputation standard was established to ensure that Verizon could not engage in a price squeeze by lowering its prices below the price of OTC inputs that competitors must purchase from Verizon to provide the competitive service. Not only does this standard have nothing to do with whether Verizon may separately price a competitive service that is part of a 2 Case No. 9042, Order No , July 21, 2005, fn 2. 3 Case No. 8715, Order No at 86 (noting that the price for the aggregate packaged service must exceed the aggregate incremental costs plus tariffed rates for OTC inputs ). 6

7 package, but the Commission expressly held that imputation on a total service basis need not always apply. To the contrary, the Commission held that no party shall be precluded from petitioning us to require that cost data be provided [by Verizon] on a less aggregated basis. 4 In any event, there has been no claim nor could there be that an increase in the competitive intralata toll component of Verizon s Regional Essentials and Regional Values packages would somehow throw Verizon out of compliance with the imputation safeguard for those packages, which looks to whether prices are lowered to anticompetitive rates, not whether they are raised within the competitive range. Similarly, OPC twists the Commission s unbundling safeguard to claim that Verizon may not offer the Unlimited Toll Plan as part of a package unless it also offers the Unlimited Toll Plan on a standalone basis to retail customers at the same price. OPC misses the mark again. The unbundling safeguard established by the Commission has nothing to do with the question of whether specific services are available to retail customers on a standalone basis. Instead, the unbundling safeguard is meant to ensure that other-than-competitive inputs to a competitive service (e.g., switched access as an OTC input to intralata toll) are available on an unbundled basis to competitors, not to retail customers. In fact, in establishing the unbundling safeguard, the Commission noted its applicability where the purchase of unbundled elements is requested by a cocarrier. 5 Moreover, the Commission made clear that only other-than-competitive service or services will be identified and available as separately tariffed items, not that a 4 Id. 5 Id at 84. 7

8 competitive service must be available on a standalone basis at the same price that it is offered in a package. 6 More fundamentally, however, OPC has misidentified the service at issue. The service is not the Unlimited Toll Plan the service is intralata toll. And Verizon already offers intralata toll on a standalone basis (see Residence 2-Point Service, Md. PSC Tariff 209, Section 2). The only differences between the Unlimited Toll Plan and standalone intralata toll are the rates and terms under which the service is offered. The service itself is the same. For example, Basic local usage service is still Basic local usage service regardless of whether a customer buys unlimited local usage or pays for each call on a measured or message basis. Or to state it another way, a salad bar is a salad bar, regardless of whether you buy a single trip or all-you-can-eat. Nor is this an improper tying arrangement, as OPC claims. There is nothing wrong with offering a competitive service as an add-on to a non-competitive service. Indeed, Verizon s Sensible Minute Plan which Verizon has offered under tariff for eight years and which tariff OPC has not challenged offers per-minute rates that are lower than the rates offered for Verizon s basic intralata toll service (Residence Two- Point Service offered under Tariff 215) and may be purchased only by customers of Verizon local service. (Md. PSC Tariff 215, Section 6, B This plan is available to residence Dial Tone Line customers. ) Yet, the Commission has never considered this 6 OPC, anticipating this obvious criticism to its mischaracterization of the unbundling safeguard, tries to claim that, because Verizon must still file tariffs for competitive services, that the unbundling obligation also applies to Verizon s competitive services provided to retail customers. Yet Staff is mixing apples and oranges. As explained above, Verizon does offer standalone intralata toll on a standalone basis at tariffed rates. Nothing in the tariffing requirement dictates that the standalone rates must be the same as the rates for the same service when it is provided as part of a package. If that were the case, packages would not exist since there would be no ability to discount off á la carte prices (see infra). 8

9 tariff to constitute an improper tying arrangement, and in fact, recently allowed an increase to the tariff rate to go into effect without challenge. 7 In any event, the improper tying arrangements that the Commission sought to prohibit in the MFS Intelenet case cited by OPC were different than the arrangements at issue here. In the MFS Intelenet case, the Commission was concerned that new entrants to the telecommunications market (specifically, incumbent cable companies) might use their dominant position in the cable television markets to require customers to purchase their telecommunications service as a condition of obtaining cable service, which at the time was generally unavailable from any other provider. 8 In other words, the Commission sought to prevent a carrier from conditioning the availability of a noncompetitive service on the purchase of a competitive one. Verizon is not seeking to do that here. 9 At its heart, and counterintuitive to OPC s statutory duties, OPC s argument boils down to a claim that Verizon cannot offer a service at a lower price as part of a package than the price at which it is offered on a standalone basis. Yet if that were the case, then there would be no reason for packages to exist, since Verizon would never be able to provide a volume discount off of the á la carte price of the service. Clearly, prohibiting the provision of discounted services in retail packages would not be in the best interests of consumers in Maryland. 7 Verizon Transmittal No. 1415, accepted October 15, 2006, effective October 21, MFS Intelenet, Case No. 8584, Phase II, Order No , at Verizon does not condition the availability of Basic Basket 1 service on the purchase of competitive intralata toll. Customers may purchase standalone Basic service and obtain competitive intralata toll service from any other company they choose. 9

10 III. PERMITTING VERIZON TO PRICE THE INTRA-LATA TOLL COMPONENT OF PACKAGES AS A COMPETITIVE SERVICE WILL NOT MOOT CASE Staff claims that granting the relief Verizon seeks here will moot Case This is not true. In Case 9072, Verizon is seeking competitive treatment for all services that are provided as part of a package, even those that do not fall within the Competitive Basket 5 on a standalone basis. Here, on the other hand, Verizon is seeking to exercise pricing flexibility that it has already been granted with respect to competitive intralata toll service and is not seeking reclassification of any other service. Certainly, the outcome of this case will not affect other packages of services that Verizon provides, such as its Local Package and Local Package Extra, which do not include intralata toll. Moreover, allowing Verizon the ability to price the intralata toll portion of its Regional Essentials and Regional Value plans does not give Verizon full pricing flexibility. Instead, Verizon must still separately assign revenue among the component parts of the packages into their corresponding baskets to satisfy regulatory accounting requirements imposed by the Commission a one-sided administrative expense that Verizon should not have to bear in a competitive market Staff is wrong that customers buying the Regional Essentials and Regional Value packages are not informed how the increase is allocated among packaged services and claims that raising the rate for intralata toll is somehow a distinction without a difference. Quite to the contrary, Verizon proposes to separately tariff the intralata toll portion of the package in Tariff P.S.C. Md. No. 215, which explicitly identifies the rate charged for the unlimited intralata toll plan. See Transmittal No at Proposed Tariff Change, Tariff P.S.C. Md. No. 215, Section 15, Original Page 2. Therefore, customers know exactly how much they are being charged for intralata toll. 11 Staff muses that Verizon is somehow treating Regional Essentials and Regional Value different than its Freedom packages. This is not the case. Verizon s Freedom packages are nothing more than the Regional Essentials and Regional Value plans purchased together with interlata toll service tariffed at the federal level. Thus, for this Commission s purposes, the Regional Essentials and Regional Value Plans are the Verizon Freedom plans. 10

11 Verizon needs to be able to take advantage of all of the pricing flexibility it already has available to it, including the ability to price separately the component parts of a package. Verizon does not have the luxury to wait for the regulatory process to work its way slowly to the inevitable conclusion that there is strong competition for packages of telephone service in Maryland today. Verizon s tariff filing that initiated Case 9072 was filed back in April Although the Hearing Examiner has been moving the case along, it took more than four months for the case to be delegated to the Hearing Examiner, and the case will likely linger long after a Proposed Decision is issued in the case due to the length of time it generally takes to resolve appeals. That is too long for Verizon to wait for the price flexibility it needs in the competitive market today. CONCLUSION For the foregoing reasons, the Commission should immediately allow Verizon s tariff to go into effect as filed on the ground that it is consistent with the Alternative Regulation Plan and the Commission s adoption of the 2005 Price Cap Settlement. In the alternative, the Commission should grant Verizon a waiver under COMAR of any provision of the Alternative Regulation Plan that would require the Regional Essentials or Regional Value packages to be priced in accordance with Basket 4 rules. As set forth above, Verizon has shown good cause for such a waiver, since customers are already guaranteed just and reasonable rates for packages by the de facto cap on package rates provided by the availability of services on an á la carte basis. 11

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