COM/vdl Decision 94-09-065 September 15, 1994 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA In the Matter of Alternative ) Regulatory Frameworks for Local ) I.87-11-033 Exchange Carriers. ) (Filed November 25, 1987) ) ) ) Application 85-01-034 ) Application 87-01-002 And Related Matters. ) I.85-03-078 ) Case 86-11-028 ) I.87-02-025 ) Case 87-07-024 ) (See Appendix A for appearances.) - 1 - I.87-11-033 et al. COM/vdl * INTERIM OPINION I. Executive Summary This order concludes the Implementation Rate Design (IRD) proceeding, the third phase of our investigation (I.87-11-033) into the design of a New Regulatory Framework (NRF) for GTE California Incorporated (GTEC) and Pacific Bell (Pacific). This phase of our investigation settles two inquiries simultaneously: an inquiry into the further extension of competition within the Local Access and Transport Areas (LATAs), and an inquiry into the proper level of pricing and pricing flexibility authorized for local exchange companies (LECs) who will be competing to retain customers of competitive telecommunications services. This case is narrowly focused on the arrival of intraLATA competition, the appropriate extent of that competition, and the requirement for pricing flexibility for the LECs concurrent with the arrival of competition. Competition is expected to bring a wide array of choices to consumers and enable both LECs and the interexchange carriers (IECs), their competitors, to invest in a diversity of telecommunications services, to the ultimate benefit of consumers. In Decision (D.) 89-10-031, which adopted the NRF for GTEC and Pacific, we foresaw a growing number of alternatives to LEC services. In response, we devised an incentive framework which separated services into three categories: Category I - monopoly services for which no competition is authorized; Category II - discretionary or partially competitive services for which competition is authorized, with pricing flexibility between appropriate price ceilings and price floors; and Category III - fully competitive telecommunications services with full pricing flexibility and minimal tariff requirements. These three categories form the framework for the development and application of key pricing policies in this decision. - 2 - I.87-11-033 et al. COM/vdl * An important dimension to this order is that while our pricing policies for competitive services set the stage for competition for intraLATA toll and other telephone services, these policies are intended neither to result in a windfall to the NRF companies nor to deprive GTEC or Pacific of a fair opportunity to earn a competitive rate of return. To accomplish this balancing, every rate change ordered by this decision which results in a revenue increase or decrease is offset by countervailing rate changes or revenue adjustments so that the cumulative effect of all revenue changes for each NRF company is zero (revenue neutrality). Because of interactions among the components of the rate design, however, achieving revenue neutrality can be complicated. For example, as we lower rates for competitive services, customers' use of these services will increase, resulting in additional revenues. Additional net revenues expected from the stimulation of toll, toll-like services, and switched access services can serve to lessen the need for rate increases for other services. To derive these additional revenues and associated costs, we estimate the volumes of additional toll calling resulting from the adopted rates by applying appropriate demand elasticity factors. In addition, the goal of revenue neutrality put some constraints on our ability to follow the general pricing policies that we had hoped to follow consistently in developing the rate design. The limitations of the revenue rebalancing have forced us to deviate from our preferred pricing principles in many instances throughout this decision. Both GTEC's and Pacific's rate designs result in new rates effective January 1995, and any existing recurring surcharges or surcredits carried over from previous years will be eliminated. Final rates are established for January 1, 1995, without revenue rebalancing surcharges. - 3 - I.87-11-033 et al. COM/vdl ** Authorization of Competition This order authorizes competition for toll and toll-like services. Calls placed under the Zone Usage Measurement (ZUM) zone 3 schedule (13-16 miles) are retained as a Category I monopoly service. Inter- and intraexchange private line services and special access services are open to competition and are consolidated into fewer rate schedules, as proposed by GTEC and Pacific, with any existing resale restrictions on private lines lifted. Centrex and CentraNet services and Private Branch Exchange (PBX) trunks are authorized for competition. However, the restriction against competition for local loop services is retained. Local (IntraLATA) Directory Assistance services remain a Category I service, but IEC Directory Assistance has been moved to Category II. Foreign exchange services remain a monopoly Category I service. Credit card, coin operated, operator-handled, and 0+ or 0- calls placed from pay telephones may be handled by any certificated competitor, and toll services may also be resold by third-party certificated providers when calling cards are used. The GTEC Rate Design: Modified Cost-Based Pricing Todays's decision will permit each company to have a fair opportunity to recover its authorized revenue requirement based on its own array of services. GTEC's current surcharge of about 15% on exchange services will be eliminated, and the price of each of its services will be known to the consumer and fixed as of January 1, 1995. GTEC's rate design reflects four guiding principles: (1) residential basic exchange rates, including flat rate service, measured rate service, and installation charges will be set below their direct embedded cost (DEC) in order to continue progress to achieve the universal service goals of this Commission; (2) all other monopoly Category I telephone services will be priced either at their current price or at their DEC, whichever is higher. This principle assures that the rates for all telephone services not marked for special treatment will recover their DECs, while - 4 - I.87-11-033 et al. COM/vdl * consumers currently paying more than DECs will pay the current rate and will therefore benefit from the removal of the 15% surcharge from the current prices for exchange services; (3) all telephone services reclassified from Category I to Category II are priced at DEC or the company's proposed rate, whichever is higher; and (4) all services already in Category II will be priced at the company's current rate or DEC, whichever is higher. These four principles guide the rate design for GTEC's overall services, with limited exceptions as described in the text of this decision. Pacific's Rate Design: Cost-Based Pricing Pacific's rate design is derived from cost-based pricing principles. Pacific's residential basic exchange services are priced below DEC and installation charges are set at current levels, in deference to universal service goals of this Commission and of this state. Otherwise, Category I monopoly services are set equal to DEC, and then reduced by 5% to accommodate the constraints of the revenue rebalancing. (For competitive reasons, switched access services are priced at DEC with no percentage reduction.) Category II services are set at the company's proposed price, or at the price floor (either long-run incremental costs (LRIC) or DEC, whichever is lower) if the company's proposed price is below the price floor. For Pacific's rate design, no distinction is made between services newly shifted from Category I to Category II and existing Category II services; in both cases the company's price is adopted as long as the price remains above the price floor. However, we deviate from these general principles for some of Pacific's services. Detailed explanations for such deviations are found in the following chapters. Local Measured Usage For both GTEC and Pacific, local measured usage, i.e., calls between 0 and 12 miles, is retained as Category I monopoly services with no downward pricing flexibility. However, the LECs are prohibited from blocking certain types of calls completed - 5 - I.87-11-033 et al. COM/vdl * within the local area. This is intended as a convenience to the customer who may desire to use an alternate provider, and as a convenience to LECs and competitors who will not have to concern themselves with blocking or blocked calls. GTEC's local usage (including Foreign Exchange Service (FEX) usage and pay phone usage schedules) will be maintained at current rates. Pacific's local usage and FEX usage will be set at DEC minus 5% and the FEX usage premium is eliminated. Pacific's Customer-Owned Pay Telephone (COPT) usage is also based on DEC minus 5%, but 1 cent is added to each call to fund directory assistance service. Local Transport and Switched Access In keeping with our overall policy of cost-based pricing, we eliminate the Carrier Common Line Charge (CCLC) as a revenue source for the LECs. We set rates for Pacific's switched network access and local transport service at DEC, and for GTEC's corresponding services at the proposed rates. Transport services remain in Category I, pending further examination of this issue in the Commission's Open Access and Network Development (OAND) proceeding, (Rulemaking (R.) 93-04-003, Investigation (I.) 93-04-002), which addresses central office access and unbundling of the transport service, among other issues. The mileage-sensitive transport rate is eliminated for both Pacific and GTEC, and switched transport services are priced at DEC for Pacific and at proposed rates for GTEC. Universal Service Goals and Lifeline Service It is the well-established policy of this Commission and this state that the value of the telephone network to all subscribers is enhanced as a greater portion of the state's population is connected to the public switched network and may be reached by anyone calling into California's local networks. It is our goal to ensure that nothing in this rate design hinders the future attainment of telephone service by at least 95% of California's households. The recommended overall change in prices - 6 - I.87-11-033 et al. COM/vdl * is intended to balance increases in local exchange monthly rates against substantial discounts in toll services, so that total bill impacts on customers are minimal and do not impede the goal of universal service. While we are committed to keeping basic service affordable, the record in this case also indicates that even at an affordable level of pricing, many low-income, nonwhite, and particularly non-English-speaking people who can afford regular telephone service or who are eligible for lifeline phone service do not have telephones. In part, this may be due to a lack of information about ordering and maintaining telephone service. Whatever the reasons may be, the record strongly suggests that both GTEC and Pacific must significantly improve their customer outreach and educational programs to achieve a 95% penetration rate for phone service among nonwhite and non-English-speaking households. This order examines the record from the workshop on universal service goals and sets targets for both GTEC and Pacific to increase their penetration rates by better educating and informing all customer groups about service connection and affordable rate plans. In addition to better consumer information, a key component to universal service is a lifeline rate which makes telephone service affordable for low-income customers. The cost of maintaining this necessary subsidy should be borne by all end-users of certificated telecommunications services through a surcharge, since all end-users benefit from the value of a universal network. All subscribers should recognize the economic efficiency of directly subsidizing lifeline service, so that the essential access to medical and family support systems and the ability to seek employment and remain employable are maintained. All telecommunications customers share in support of lifeline programs and will benefit from the societal value of lifeline programs; therefore, surcharges are assessed on all end-users in order to pay - 7 - I.87-11-033 et al. COM/vdl * for these social goals, which include the Universal Lifeline Telephone Service (ULTS) program and the DEAF trust program. A uniform statewide lifeline rate is adopted for all LECs, except certain small LECs. LECs will offer eligible customers lifeline service at one-half of Pacific's flat and measured service rates and charges ($5.62 and $3.00, respectively). Statewide service connection charges for ULTS customers are set at $10.00 for the initial telephone installation. Small and Mid-Sized Local Exchange Companies This proceeding focused primarily on rate designs for the two NRF companies. Rate design for small and mid-sized companies is appropriately done either when a company requests authority to operate under the NRF or in the course of each company's next general rate case. Small and mid-sized companies have participated vigorously in this case, mainly to alert the Commission to the potential impacts on them of intraLATA competition and the new rate design for Pacific and GTEC. This order recognizes that small and mid-sized companies have been dependent on toll and access revenues and intercompany settlement revenues to recover Commission- authorized revenue requirements. Intercompany settlement pooling will continue after the implementation of intraLATA competition with settlement payments to small and mid-sized companies offsetting losses in access and toll revenues up to the statewide service average rate of return. The small and mid-sized LECs may increase rates for basic monopoly service by as much as 100% of the current tariff rates, or up to a rate level of 150% of Pacific's basic exchange rates, whichever is lower. The California High-Cost Fund (CHCF) will continue to be available to small and mid-sized LECS that file general rate cases by December 31, 1995. Contracts and Imputation Finally, this order restates and clarifies the appropriate standards for imputation of price floors for contracts and for the LECs' bundled competitive services using monopoly - 8 - I.87-11-033 et al. COM/vdl * building blocks. All requests for approval of contracts and for pricing flexibility for bundled services that include monopoly building blocks are expected to follow the imputation standards adopted in this decision. LECs must continue to file contracts with the Commission with full disclosure of all contract terms and conditions available to Commission staff. Contracts with prices above the servicewide floor price can be filed under the Express Contract Procedure and are effective in 14 days. Conclusion This order completes the investigation into intraLATA competition and rate design for the new incentive framework implemented in D.89-10-031. This order takes another step in the transition from traditional regulation of monopoly telephone service to a fair and fully competitive market for telecommunication services. As part of our next steps in this transition, we will consider presubscription for toll calling, so that customers who wish to use a provider other than their LEC will not be required to dial 10 plus three digits (known as 10XXX dialing) to access an alternate provider. - 9 -