Trevor Roycroft


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  • Telecom Act spurs requests for regulatory relief. UNEs drive initial competition, then go away. Intermodal competition (wireless and cable) grow. Are the rising prices the result of rising costs, or the result of the exercise of market power? If costs are rising, say due to the elimination of scale economies, then “competition and deregulation” is a questionable policy. If market power is being exercised, then “competition and deregulation” is a failed policy. If both, then competition and deregulation is a failed policy. Policy Objectives: Innovation. Investment. “ Just and reasonable” rates. Prices that reflect the cost of production. No undue discrimination.
  • Why are these prices rising? Are the three sources of competition identified by the CPUC doing their job? CLEC and UNEs Wireless Cord Cutting VoIP
  • CLECs provide a very small number of access lines. CPUC reports the top 40 CLECs in the state based on access lines. From this list, only MCI makes the top 40 (but CPUC list does not distinguish between business and residential). Outside of low-income households (phonesharks) CLEC industry does not do much push advertising.
  • Can wireless constrain ILEC price increases? Two red flags: (1) Wireless plans are more expensive; (2) AT&T and Verizon, the two largest ILECs are also the largest wireless providers—unlikely to compete against themselves. Data shows that 77% of all HH, and 79% of households that choose to have a telephone still purchase wireline service. Evaluated NHIS survey data on cord cutters. 29000 families surveyed about aspects of phone usage, and demographic and health information. Results show that overwhelming majority of HH’s still maintain a wireline telephone, and that the majority of HH use both wireless and wireline. Some substitution, no doubt, but given nature of wireless plans, not sufficient to restrain ILEC pricing, especially for stand-alone services. Theory—wireless is a close substitute for wireline. If so, then in a large population of consumers, there should not be statistically significant differences in population’s use. For example, it would be surprising to find that there were statistically significant differences in consumer characteristics among those who eat at McDonalds and Burger King.
  • Cable companies typically don’t offer stand-alone voice. Bundle prices are well above stand-alone services. Bundle “competition.”
  • Trevor Roycroft

    1. 1. Regulatory Response to Rising Residential Rates Trevor R. Roycroft, Ph.D. Presented at the 2009 NASUCA Mid-Year Meeting June 30, 2009 Phone Bill [email_address] 508-896-0151
    2. 2. Case Study: Rate Deregulation in California <ul><li>2006 CPUC implemented a “Uniform Regulatory Framework” for the four largest ILECs in the state. </li></ul><ul><ul><li>AT&T, Verizon, Surewest, Frontier </li></ul></ul><ul><li>CPUC concluded that market power has been eliminated, and that competition is statewide due to the availability of UNEs. </li></ul><ul><ul><li>Identifies wireless and VoIP as contributing to the elimination of ILEC market power. </li></ul></ul><ul><li>Rate regulation removed from bundles and ancillary services in 2006. </li></ul><ul><li>Transitional price caps for basic service. </li></ul><ul><ul><li>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. </li></ul></ul>
    3. 3. Proof of any pudding is in the eating... AT&T California Residential Rate Increases         Percent Increase Since URF Increased Rate Rate When URF was Implemented Basic Flat 26% $13.50 $10.69 Basic Measured 28% $7.28 $5.70 Basic LifeLine 14% $6.11 $5.34         Local Toll       13-20 Miles, Day 111% $0.36 $0.17 >21 Miles, Day 71% $0.42 $0.25         Calling Features       Caller ID 62% $9.99 $6.17 Anonymous Call Rejection 242% $6.50 $1.90 Call Forwarding 86% $6.00 $3.23 Call Waiting 86% $6.00 $3.23 Three-Way Calling 86% $6.00 $3.23 Call Screen 86% $6.00 $3.23 Repeat or Speed Dialing 86% $6.00 $3.23 Call Trace 29% $6.00 $4.65         Directory Services       Non-Published Listing 346% $1.25 $0.28 DA Service 226% $1.50 $0.46         Miscellaneous Services       WirePro 101% $6.00 $2.99 Returned Check 276% $25.00 $6.65 Non Published Listing - White page & DA 346% $1.25 $0.28 Non Published - white page only 614% $1.00 $0.14 uSelect Package 3 36% $15.31 $11.26 Advantage Plan/The Works 14% $25.37 $22.32
    4. 4. CLEC Competition
    5. 5. Residential CLECs Still Operating in California CLEC Prepaid-Only? Lowest Basic Rate Unlimited Bundle ACN Communication Services No $25.94 $38.99 Asian American Association No $24.95   Blue Casa Communications No $27.99 $49.99 Budget Phone (Budget Prepay) Yes $49.95   Connectto Yes $27.99 $54.95 Curatel Yes $14.40* $29.40 dPi Teleconnect Yes $39.99 $56.99 EarthLink No $49.95 $69.95 Excel Communications No $39.95 $59.95 MCI No $41.99 $59.99 Midwestern Telecommunications Yes $35.29 $40.29 Phoneco Yes $29.99 $37.98 PNG Telecommunications (Powernet Global) No $21.99 $39.99 Sage Telecom No $24.99 $39.99 TC Telephone No $16.99 $49.99 Telscape No $24/$28 $47/$53 Trinsic No $59.68   *Price for LifeLine eligible customers. This price is roughly double the LifeLine rate available from an ILEC.      
    6. 6. Cord Cutting—General Substitute or Niche Market? Summary of Statistical Analysis of Wireless-Only Choice  Variable Increases or Decreases Chances of Wireless Only? Significance Level <ul><ul><li>Number of Cell Phones in HH </li></ul></ul>Increases 0.00** <ul><ul><li>Number of Individuals in the HH </li></ul></ul>Decreases 0.00** <ul><ul><li>Number Under Age 18 in the HH </li></ul></ul>Increases 0.00** <ul><ul><li>Number Over Age 65 in the HH </li></ul></ul>Decreases 0.00** <ul><ul><li>Number in HH that need help with chores </li></ul></ul>Decreases 0.09† <ul><ul><li>Number in HH that have trouble walking </li></ul></ul>Decreases 0.02* <ul><ul><li>Number that received homecare </li></ul></ul>Decreases 0.01** <ul><ul><li>Number using telephone for health info </li></ul></ul>Decreases 0.02* <ul><ul><li>Home Ownership </li></ul></ul>Decreases 0.00** <ul><ul><li>Male HH Head </li></ul></ul>Increases 0.00** <ul><ul><li>Hispanic HH Head </li></ul></ul>Increases 0.00** <ul><ul><li>Non-white HH Head </li></ul></ul>Decreases 0.00** <ul><ul><li>Age of HH Head </li></ul></ul>Decreases 0.00** <ul><ul><li>Married Couple </li></ul></ul>Decreases 0.00** <ul><ul><li>Higher HH Income </li></ul></ul>Decreases 0.00** <ul><ul><li>  </li></ul></ul>    <ul><ul><li>Chi Square of the Regression: 6,508; Significance Level 0.00 </li></ul></ul>    <ul><ul><li>**Significant at 1%. </li></ul></ul>  *Significant at 5%. † Significant at 10%.  NHIS Survey July-December 2008. Households With: Both Wireless and Landline Landline Only Wireless Only No Phone 59.60% 17.40% 20.20% 1.90%
    7. 7. Telco-Cable Duopoly
    8. 8. Duopoly at Best
    9. 9. Duopoly Pricing: Follow the leader! <ul><li>Cox Communications--only California cable operator that offers basic telephone service as a stand-alone option: </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Cox raised basic rates in response to AT&T and Verizon’s rate increases. </li></ul></ul><ul><ul><ul><li>Basic service rates by 25% </li></ul></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><ul><li>Increased Caller ID prices by 25% after AT&T increased its Caller ID rates. </li></ul></ul></ul><ul><li>Evidence of price leadership, where Cox follows the ILEC’s lead on price increases, does not support the proposition that “competition” protects consumers. </li></ul><ul><ul><li>Dominant ILECs set prices, and other firms “follow the lead.” </li></ul></ul>
    10. 10. Regulatory Response: Fresh Look at Market Structure is Needed <ul><li>Duopoly markets (or duopoly markets with a fringe of resale-based CLECs) are not sufficient to protect consumers. </li></ul><ul><li>Regulatory decisions made based on the UNE-driven “competition” should be revisited. </li></ul><ul><li>Legislative regulatory plans are based on doubtful foundation. </li></ul><ul><li>Investigation into market performance needed. </li></ul><ul><ul><li>Evaluate remaining CLECs. </li></ul></ul><ul><ul><li>Determine where facilities-based providers are serving. </li></ul></ul><ul><ul><li>Evaluate pricing behavior. </li></ul></ul><ul><ul><ul><li>Price-increase triggers to initiate reviews? </li></ul></ul></ul><ul><ul><li>Is investment occurring? </li></ul></ul><ul><ul><li>Is previous broadband “commitment” enough? </li></ul></ul>
    11. 11. Other Regulatory “Hooks” <ul><li>Price cap plan reviews. </li></ul><ul><ul><li>Evaluate plans in light of market changes. </li></ul></ul><ul><ul><li>GDP-PI Inflation. </li></ul></ul><ul><ul><li>Continued availability of capped à la carte services for the ILEC constrains cable price increases. </li></ul></ul><ul><li>Merger review. </li></ul><ul><li>Service quality review. </li></ul>
    12. 12. California Competition Study Available At: <ul><li> </li></ul>