The Status of Competition and Regulation in the Telecommunications Industry Public Utility Commission of Oregon January 2005
The Status of Competition and Regulation in the Telecommunications Industry Oregon Public Utility Commission January 2005 - Executive Summary - State law directs the Public Utility Commission to prepare an annual report on competition in Oregon's telecommunications industry. This is the sixth annual report. To gather information for the report, the Commission surveyed all local exchange carriers. We also surveyed Oregon cities, counties, school districts, community colleges, universities, and people's utility district's that own coaxial, digital subscriber lines, fiber optics cable and other advanced telecommunication infrastructure. The major findings of the report are: Oregon's 34 incumbent carriers serve the lion share of Oregon's wireline customers. As of the end of 2003, incumbent carriers served about 86 percent of the wireline lines in Oregon and about 93 percent of the private lines (dedicated circuits between two or more locations). Oregon's four largest incumbent carriers Qwest, Verizon, Century Tel, and Sprint served about 80 percent of the wireline lines in Oregon. The other 30 incumbent carriers served about 6 percent of the wireline lines in Oregon. From December 2002 through December 2003, Oregon's competitive carriers share of the wireline market in Oregon went from 11.3 percent to 13.9 percent. Competitive carriers served a tiny share of the residential market 2.8 percent and nearly a third of the business market (30.5 percent). More than 90 percent of competitive carriers' customers are in the Portland Metropolitan and Willamette Valley areas. From December 2002 through December 2003, the number of competitive carriers operating in Oregon went from 101 carriers to 118 carriers. Forty-nine of those companies offered switched (dial tone) service. More than half of the competitive exchange carriers provide switched service by reselling wholesale services offered by incumbents. However, the largest competitive carriers serving business customers are facility-based (own much of the necessary network equipment). About a third of the public entities responding to the survey (119 out of 341) own some type of advanced telecommunications equipment such as fiber optic lines, cable, and DSL.
About six percent of the public entities responding to the survey offer high-speed telecommunication services to homes and businesses. Eleven percent of the respondents reported that they are willing to sell high-speed service to homes and businesses. Other major events over the past year affecting competition in Oregon are the following: In early 2004, the United States Court of Appeals vacated major portions of an order by the Federal Communications Commission (FCC) related to unbundled network elements (UNEs). Competitive carriers buy UNEs at regulated prices from incumbent carriers to provide services to consumers. As a result of the ruling and subsequent FCC action, UNE-P (a widely-used package of unbundled network elements) will not be available to competitors in the future, thus limiting wireline-onwireline competition. The current FCC is promoting "intermodal" competition between wireline, wireless, and cable operators. A number of companies are now offering internet-based phone service in Oregon. Others such as Qwest and Comcast plan to begin offering this phone service in Oregon in 2005. An outstanding issue with the new service is how it will be regulated in the future. Telephone companies and cable companies are increasingly competing with each other to provide a bundle of phone, high-speed internet, and TV service to customers. There appears to be a trend toward industry consolidation. The three largest Regional Bell Operating Companies now also provide almost three-quarters of the wireless phones nationally. Cable companies also appear to be bundling wireless with wireline and broadband services. Effectively, this may limit the number of competitors in each marketplace if consolidation continues potentially restraining price competition. In early 2004, Oregon consumers gained the ability to retain their old number when switching from wireline phones to wireless phones and between wireless carriers. Competition between landline and wireless carriers continues to increase in Oregon and elsewhere. In light of continuing changes in telecommunications technology and markets, the FCC opened rulemakings to examine and reform the intercarrier compensation system and the universal service funding and delivery mechanism. The FCC decisions on these issues will have a major impact on the competitive positions of the carriers and technologies in the market. Executive Summary Page 2
FOREWORD The 1999 Oregon Legislature passed House Bill 2577 (HB 2577), which, "[d]irects the Public Utility Commission to report annually to Governor and Legislative Assembly or Emergency Board on status of competition and regulation in telecommunications industry" (emphasis in original). The purpose of this report, which is due on or before January 31 of each year, is to ensure consistency with the Federal Telecommunications Act of 1996, to enhance fair competition and to promote deregulation of the telecommunications industry. The 2003 Oregon Legislature amended HB 2577, requiring this report to include information on one additional topic (number 8 below). This report satisfies the requirements of HB 2577 by providing information on the eight topics listed in the Bill. The numbered tabs (1-8) in this report relate to the eight topics listed in HB 2577. The topics are: (1) The status of competition in the telecommunications industry. (2) Significant changes that have occurred in the telecommunications industry during the preceding 12 months. (3) Statutes that inhibit or discourage competition in and deregulation of the telecommunications industry. (4) Specific actions taken by the commission to reduce the regulatory burden imposed on the telecommunications industry, including telecommunications utilities and competitive telecommunications providers. (5) Specific actions taken by the commission to maximize the opportunities for telecommunications utilities and competitive telecommunications providers to achieve pricing flexibility, including rate rebalancing, exemption from regulation and streamlined regulations. (6) Specific actions taken by the commission to: (a) Minimize implicit sources of support; and (b) Maximize explicit sources of support that are specific, sufficient, competitively neutral and technologically neutral and that support telecommunications services for customers of telecommunications providers in high-cost locations. (7) Statutes that should be enacted, amended or repealed to enhance and respond to the competitive telecommunications environment or promote the orderly deregulation of the telecommunications industry. (8) The number of public bodies, as defined by ORS 174.109, providing basic telecommunications infrastructure so that private entities may use that infrastructure to provide advanced information and communications services. In addition, ORS 759.050(9) requires the Commission to report annually to the Legislative Assembly regarding competition in the telecommunications industry in Oregon. A copy of that report is attached behind tab A-1.
TABLE OF CONTENTS (1) The status of competition in the telecommunications industry A. Commission Survey of the Status of Telecommunications Competition in Oregon 1-1 B. Commission Actions and Policies to Promote Competition 1-3 C. The Current Telecommunications Regulatory Landscape 1-5 (2) Significant changes that have occurred in the telecommunications industry during the preceding 12 months A. Legislative Changes 2-1 B. Competitive Activity 2-1 C. Technological Advances 2-1 D. Mergers and Acquisition 2-3 E. Rates 2-3 F. Local Number Portability 2-3 G. Federal Activities 2-4 H. Qwest Corporation's Entry into Long Distance 2-9 (3) Statutes that inhibit or discourage competition in and deregulation of the telecommunications industry 3-1 (4) Specific actions taken by the Commission to reduce the regulatory burden imposed on the telecommunications industry, including telecommunications utilities and competitive telecommunications providers A. Streamlining Certificates of Authority 4-1 B. Regulatory Relief for Incumbent Carriers 4-1 C. HB 3241 of 1999. Revised Affiliated Interest Reporting Requirements 4-3 D. SB 931 of 1999. Revised Dollar Thresholds for Commission Approval 4-3 E. Expedited Complaint Procedure 4-4
The Status of Competition and Regulation In the Telecommunications Industry F. Simplified Extended Area Service (EAS) Approval Process 4-4 (5) Specific actions taken by the Commission to maximize the opportunities for telecommunications utilities and competitive telecommunications providers to achieve pricing flexibility, including rate rebalancing, exemption from regulation and streamlined regulations A. Competitive Zones (ORS 759.050) 5-1 B. Price Listing (ORS 759.030(6)) 5-2 C. Service Deregulation (ORS 759.030(3)) 5-3 (6) Specific actions taken by the Commission to: a) Minimize implicit sources of support; and b) Maximize explicit sources of support that are specific, sufficient, competitively neutral and technologically neutral and that support telecommunications services for customers of telecommunications providers in high-cost locations A. The Oregon Customer Access Plan 6-1 B. The Oregon Universal Service (OUS) Program 6-2 (7) Statutes that should be enacted, amended or repealed to enhance and respond to the competitive telecommunications environment or promote the orderly deregulation of the telecommunications industry 7-1 (8) The number of public bodies, as defined by ORS 174.109, providing basic telecommunications infrastructure so that private entities may use that infrastructure to provide advanced information and communications services 8-1 Attachments Competitive Providers Report to Legislature A-1 SB 622. Price Cap Regulation A-2 Local Telecommunications Competition Survey Results and Analysis A-3 Advanced Telecommunications Capability in Public Entities A-4 Contents Page 2
The Status of Competition and Regulation In the Telecommunications Industry (1) The status of competition in the telecommunications industry A. Commission Surveys of the Status of Telecommunications Competition in Oregon Has the Commission conducted surveys to assess the level of competition in Oregon? Yes. In January 2004, the staff of the Public Utility Commission of Oregon sent a survey to 256 local exchange carriers (LEC) for the purpose of assessing the status of local telephone competition in Oregon. The survey asked all of the local exchange carriers, both incumbent (ILEC) and competitor (CLEC), to provide information about their local services during December 2002. The staff received responses from all 34 1 ILECs and 178 out of 222 2 CLECs, for a total response rate of 90 percent. This was the fifth annual survey conducted by the Commission. In addition to the primary survey referenced above, another survey was sent to 535 public bodies in early November 2003. This second survey is needed since the 2003 Legislature made changes to the existing legislation that requires this report. The new survey asks about the existence and use of telecommunications facilities by public bodies. Reports, including detailed analysis of results from the two surveys, "Local Telecommunications Competition Survey" and "Availability of Advanced Telecommunications Capability in Public Entities 2004," are attached as A-3 and A-4. What were the results of the surveys? There were 118 CLECs operating in Oregon in December 2003, or 17 more than the previous year. The number of CLECs was 222, which is up from 210 last year. So while the number of CLECs increased slightly over the last year, somewhat more of the CLECs were actually conducting business in Oregon. Forty-nine of the 118 operating CLECs were competing in the local exchange switched services market. Competitive entry in Oregon's local telecommunications market, based on market share, is still small, especially in the residential sector. Total CLEC market share was 13.9 percent (up from 11.3 percent) of local switched telephone lines. However, CLECs had only 2.8 percent of the residential market. More 1 The Survey treats CenturyTel of Oregon, Inc., and CenturyTel of Eastern Oregon, Inc., as two utilities. 2 The survey was sent to approximately 20 CLECs who may not have been certified to provide local exchange service at the time the survey was distributed. 1-1
The Status of Competition and Regulation In the Telecommunications Industry competitive entry is occurring in the business sector where CLECs were supplying 30.5 percent of business customers' switched local exchange lines, up from 26.3 percent the in 2002. CLEC penetration of the local private line market was 6.6 percent measured by share of private line circuits. The predominant form of CLEC competitive entry was resale. Twenty-eight of the 49 CLECs providing local exchange service were ILEC-service-resellers. The degree of competitive entry into Oregon's telecommunications market varies across different regions of the state. In Portland and the Willamette Valley, CLECs were providing 40.3 percent and 23.5 percent of business customers' switched local exchange lines, respectively. In the other four regions of the state, CLECs were providing between 5.4 percent and 15.8 percent of the business market. The following chart illustrates CLEC penetration into Oregon regional business and residential markets. CLECs had 5.1 percent of the residential market in Portland, and 3 percent or less in the others areas of the state. What is the CLECs' share of the market by region? CLEC Market Shares By Switched Lines & Regions 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Portland Willamette S.W. Coast Central East Statewide Residential 5.1% 0.7% 0.8% 0.4% 1.0% 3.0% 2.8% Business 40.3% 23.5% 15.8% 5.4% 15.0% 7.6% 30.5% While CLECs provide service to increasing shares of business customers' switched local exchange lines across the state, the bulk of the CLEC entry has been in the Portland metropolitan region. The following chart shows that of all business switched service lines provided by CLECs, 75.2 percent were in the Portland area. 1-2
The Status of Competition and Regulation In the Telecommunications Industry Where are the CLECs focusing their business sector activities? CLEC Switched Business Line Distribution By Region 80% 60% 40% 20% 0% Portland Willamette S.W. Coast Central East CLEC Bus 75.2% 15.8% 4.0% 0.8% 3.3% 0.9% The figure below shows CLEC market share growth for revenues, lines served, and customers. By 2003, CLEC revenues had more than doubled compared to 1998, increasing from $45.3 million to $103.5 million. Annual increases for CLEC switched access lines in the last five years have ranged from 21 percent to 43 percent. The average annual increase was 30.8 percent. How has CLEC market share changed over the last several years? Market Share for Switched Access Services, CLECs/Total, %, 1998-2003 20.0% 15.0% 10.0% Revenues Lines 5.0% Custom ers 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 B. Commission Actions and Policies to Promote Competition What state and federal laws encourage competition in the telecommunications industry? In 1985, the Legislative Assembly adopted a goal for the State of Oregon "to secure and maintain high-quality universal telecommunications service at just and reasonable rates for all classes of customers and to encourage innovation within the industry by a balanced program of regulation and competition" (ORS 759.015). The federal Telecommunications Act of 1996 (Federal Act) is 1-3
The Status of Competition and Regulation In the Telecommunications Industry pro-competition as well. It gives the Federal Communications Commission (FCC) and each state utility Commission important roles in opening telecommunications markets to competition. What is the Commission doing to promote greater telephone competition in Oregon? Key actions by the Commission to promote competition are: 1. Granting certificates of authority to competitive carriers in an efficient manner. See Section (4) A for details. 2. Providing new pricing flexibility for incumbent carriers as competition develops in "competitive zones" See Section (5) A for details. 3. Requiring dialing parity so that long distance carriers gain equal access to all local telephone customers. 4. Arbitrating disputes between competitive and incumbent carriers regarding terms and conditions of interconnection. 5. Resolving complaints by competitive carriers against the incumbents. 6. Ensuring non-discriminatory access by competitive carriers to the incumbent carriers' networks (e.g., access to unbundled network elements such as local loops and switches). 7. Setting reasonable rates for unbundled network elements based on long-run incremental cost. 8. Exempting services from rate regulation if the Commission finds that competition exists. See Section (5) C for details. 9. Exempting services from prior approval when the incumbent shows that the services are subject to competition or are non-essential. See Section (5) B for details. 10. Responding to Qwest Corporation's desire to provide long distance services in Oregon according to the market-opening requirements of the Federal Act (section 271). See Section (2) H for details. 11. Implementing the Oregon Universal Service Fund for areas of the state served by Qwest Corporation and Verizon Northwest in 2000, with implementation in the balance of the state occurring in 2003. See Section (6) B for details. 1-4
The Status of Competition and Regulation In the Telecommunications Industry C. The Current Telecommunications Regulatory Landscape What Commission regulations apply to incumbent carriers? Oregon has 34 incumbent carriers. Eleven of these are telecommunications cooperatives. The remainder are telecommunications utilities. The law requires telecommunications utilities to provide adequate service at just and reasonable rates. Telecommunications utilities are subject to varying degrees of rate, profit, consumer protection, service quality, and price cap regulation. Further discussion of price cap regulation can be found after Tab A-2. Telecommunications cooperatives are subject to utility-like rate regulation only with respect to the rates that they charge the long distance carriers for exchange access. Does the Commission have different regulations for different types of carriers? Yes. Oregon and federal laws recognize two types of telecommunications carrier: (1) incumbent carriers, and (2) competitive carriers. The incumbent carriers were providing telecommunications services as regulated monopolies at the onset of competition. Competitive carriers are entering the telecommunications market. In Oregon, incumbent carriers, operating as telecommunications utilities or cooperatives, are regulated, due to their near total dominance in local telephone markets. Cooperatives, which are also classified as incumbent carriers, are subject to limited regulation, as described in the previous answer. Different forms of regulation are available to telecommunications utilities. (See Section (2)). New entrants are classified as competitive carriers since they compete with the incumbents and each other. What flexibility is afforded to utilities and the Commission under current statutes? While some aspects of the telecommunications industry are still regulated, the Commission allows regulation to be flexible so that utilities may respond to increased competition. Flexibility occurs in the following ways: Competitive Zones If a service in a particular geographic area is subject to competition, the incumbent utility will be granted downward pricing flexibility for that service. Price Listing If a service is non-essential or subject to competition, an incumbent utility may receive pricing flexibility but the revenues and costs from that service are still reviewed in a rate case. Service Deregulation If competition exists, or certain other conditions are met, an incumbent utility may ask that a service be deregulated. If service deregulation is granted, the revenues and 1-5
The Status of Competition and Regulation In the Telecommunications Industry costs from that service are treated "below the line" and are not reviewed in a rate case. Price Cap regulation An incumbent utility may ask for pricing and earnings flexibility under ORS 759.195. Qwest Corporation (Qwest), formerly known as US West Communications, Inc., was granted an alternative form of regulation (AFOR) under this statue from 1992 1996. Since December 30, 1999, Qwest has operated under a different form of price cap and floor regulation pursuant to ORS 759.410. To date Verizon Northwest, Inc. (Verizon), formerly known as GTE Northwest Incorporated, has not filed for price cap regulation under ORS 759.195, ORS 759.410, or ORS 59.255 another AFOR statute. The chart on the following page displays the level and type of regulation for the incumbent local exchange telecommunications carriers, as well as, competitive carriers. It is important to note that while a service may be listed as "regulated," there may be many options for pricing flexibility available to both the utility and the Commission. 1-6
The Status of Competition and Regulation In the Telecommunications Industry Chart 1: Telecommunications Regulatory Landscape Today (January 1, 2005) Form of Regulation/Oversight May Provide InterLATA Long Distance only through Separate Affiliate Required to Sell any Network Element to Competitors Required to Offer Wholesale Discounts to Competitors Approval of Affiliated Interest Contracts Regulate Earnings of Company Price Review on Non-basic Service 5 Price Regulated on Basic Service 4 Subject to PUC Consumer Protection Rules Service Quality Rules Apply 3 Capital Recovery Set by PUC 2 Price Regulated on Access Charges Required to Serve All Customers Contribute to Universal Service Programs 1 PUC Certification to Provide Telecom Service in Oregon Qwest Verizon CenturyTel Sprint (Local Service) Small Independent Telecommunications Utilities Incumbent Carriers Cooperatives Long Distance Carriers Local Facilities Based Carriers Resellers Cable Companies as Telecommunications Providers Government / Municipalities as Telecommunications Providers Competitive Carriers Wireless Carriers 6 Under the Telecommunications Act of 1996, certain carriers have an exemption from these requirements. However, the PUC has the authority to revoke this exemption. Small Independent Telecommunications Utilities are allowed to operate under a modified regulatory approach that can be revoked by the PUC. Some form of regulation/oversight applies. 1 Carriers contribute to the PUC's programs for low income & hearing impaired consumers and to federal programs for schools, libraries, and rural health care. Long Distance Carriers do not contribute to the PUC's low income or hearing impaired program. 1-7 2 Regulation of a cooperative's capital recovery applies only to access charges. HB 2557 exempts telecommunications utilities with less than 50,000 access lines from minimum service quality standards related to the length of time it takes the utility to respond to questions from customers. In a competitive zone, where calls are exchanged between an incumbent carrier and a competitive carrier, an incumbent carrier gains pricing flexibility for the types of services offered by the competitive provider. Incumbent carriers can apply to the Commission for pricing flexibility, or elect pricing flexibility under Chapter 1093, OR Laws 1999 (i.e., SB622). Qwest elected the latter effective 12/30/99. Wireless carriers do not contribute to the USF unless they elect to; they do contribute to OTAP and TDAP. 3 4 5 6
The Status of Competition and Regulation In the Telecommunications Industry (2) Significant changes that have occurred in the telecommunications industry during the preceding 12 months A. Legislative Changes What recent legislation has had an impact on the telecommunications industry? No bills were passed by the regular session during 2004 that have a significant impact on the telecommunications industry. B. Competitive Activity How many competitive local service providers are there in Oregon? During 2004, there was little change in the number of providers authorized by the Commission to provide competitive local service. At the end of 2003, there were 200 competitive local service providers in Oregon. By the end of 2004, there were 197. As of December 2004, the Commission had authorized 397 providers to provide competitive interexchange services, such as long distance and operator services. This is a decrease from last year's count of 424. Each year the Commission grants about 90-100 new applications for interexchange authority. The total number of competitive providers certified in Oregon decreased to 414 at the end of 2004, from 442 at the end of 2003. C. Technological Advances What new technologies are being deployed in the telecommunications industry? Digital Subscriber Line Digital Subscriber Line service (DSL) combines traditional voice telephone service with high speed Internet (broadband) service on one telephone line. DSL allows data transmission at high speeds (greater bandwidth) over ordinary telephone lines between a telephone customer's premises and a telephone company central office. These transmissions are then routed through a specialized data network. Voice calls are routed in the traditional way. DSL has some technical limitations and mileage limits (customers must be no more than three miles from a central office). DSL services can work over a mixture of copper and fiber lines. Additionally, the DSL footprint can easily be extended to those pockets outside of the three-mile limit with a Digital Subscriber Line Access Multiplexer (DSLAM). The DSLAM serves as the point of interface between a number of subscriber premises and the carrier network. The price of 2-1
The Status of Competition and Regulation In the Telecommunications Industry these devices continues to drop and DSLAMs are being deployed in more locations, as customer demands are identified. The FCC, in its August 21, 2003 Triennial Review Order, required incumbent carriers to allow and facilitate "line splitting." Under a line splitting arrangement, one competitive carrier provides voice service using the low frequency portion of a line, while another competitive carrier uses the high frequency portion to offer the DSL broadband component. Telephone Service over Cable Cable TV companies are increasingly offering services, often in packages, that include Internet connectivity, telephone service that tie in to the traditional telephone network, and cable TV service, all over the cable TV coaxial cable. Use of this technology is expanding, and new services and packages are now available outside the Portland metropolitan area. Cable companies offering these services must make substantial investments in a two-way transmission technology to replace the original one-way transmission design used for TV service. Fiber Optics Use of fiber and optical transmission technology is increasing rapidly. Because of the increased bandwidth this technology offers, the industry is moving toward providing every home the capability of voice, high-speed data, and video services (known as the "triple play"). All services will become data services and differ only in the priority of their delivery. Verizon has built its business plan on the ability to provide "triple play" service. Technological improvements have boosted the capacity of a single fiber strand 18,000 fold over the past 20 years. One laser on one strand of fiber can provide capacity equivalent to 516,096 voice lines. Each strand can currently support 80 lasers. This capability continues to grow. Voice over Internet Protocol (VoIP) Certain carriers are increasingly using the Internet to provide voice services. Eventually, a dedicated network will handle this traffic using the Internet Protocol. This protocol is basically software that tracks Internet addresses, routes outgoing messages, and recognizes incoming messages. The FCC has classified VoIP as an interstate service, not subject to state regulation. VoIP providers do not pay traditional carriers for use of their networks, nor do they contribute to state or federal universal service funds. The FCC is still considering the regulatory future of VoIP. 2-2
The Status of Competition and Regulation In the Telecommunications Industry Broadband over Power Line Broadband over Power Line (BPL) technology offers another way to access broadband services. BPL works through local neighborhood power distribution lines in both aerial and buried environments. Though the basic technology has been around for some years, the current technology has made BPL more economical. BPL can provide both fixed and mobile end-users broadband access of up to 25 Mbps bandwidth, which has the capability to provide the "triple play." The main technical concern over BPL is the potential radio frequency interference to other private, commercial, and military radio licensed services. Testing has shown that BPL stray transmissions can be reduced to acceptable levels, but interference is still a concern. Although BPL is a very promising technology, most of the electric industry seems to be backing off of their initial interest. Cost estimates are still too high for wide spread deployment of this technology, especially in rural areas. BPL offers a viable way to provide "triple play" services to customers, but the future of the technology is unknown. D. Mergers and Acquisitions What recent mergers or acquisitions have had an effect on the telecommunications industry in Oregon? Oregon statutes provide the Commission the authority to review electric, natural gas, and water utility mergers under ORS 757.511. However, the Commission does not have this kind of authority with regard to telecommunications mergers. There were no significant mergers between wireline carriers during 2004. E. Rates What major rate changes have occurred recently? No major rate changes have occurred recently. F. Local Number Portability What is the status of telephone number portability? If customers stay at the same location, local number portability allows them to keep their telephone numbers when they change from one local service provider to another. Local number portability, using the permanent database technology, was first deployed in the Portland area in September 1998. Since then, Qwest 2-3
The Status of Competition and Regulation In the Telecommunications Industry has installed number portability capability for 99 percent of local telephone lines in its Oregon service territory. Verizon and United Telephone Company of the Northwest (dba Sprint) have deployed number portability throughout their Oregon service areas. Most of the small telephone utilities and cooperatives have also made number portability available. Number portability, including the charges for it, is under the jurisdiction of the FCC with some authority delegated to the Commission. The FCC ordered wireless (cellular) carriers to implement number portability in the 100 largest MSAs effective November 24, 2003, so customers can keep their cell phone numbers when changing from one wireless carrier to another. The Portland metropolitan region was affected by this change. The number portability requirement for all other areas went into effect May 24, 2004. The FCC also ordered wireline (landline) telephone companies, including both incumbents and competitive providers, to implement wireline to wireless number portability so that customers can change service from wireline to cellular carriers and keep their wireline telephone numbers. This latter form of number portability became available in early 2004, except for five incumbents that have been granted temporary waivers until they can upgrade their equipment. Reverse number portability, from wireless to wireline is not required and will not be available. Location number portability, which allows customers to keep their numbers no matter where they move, will not be implemented for several more years. G. Federal Activities What federal activities have influenced Oregon markets? The Telecommunications Act of 1996 (Telecommunications Act) and FCC decisions implementing its provisions are the subject of continued dispute, uncertainty and litigation. Eight years after its passage, the competitive marketplace continues to be affected by court decisions and changes in FCC rules pursuant to the Telecommunications Act. The resulting uncertainty has created financial problems for competitive carriers, including bankruptcies and difficulty in raising capital. Unbundled Network Elements On August 21, 2003, the Federal Communications Commission (FCC) released its order in the "Triennial Review" proceeding concerning issues related to Unbundled Network Elements (UNEs). Competitive Local Exchange Carriers (CLECs) purchase UNEs from Incumbent Local Exchange Carriers (ILECs) in order to provide services to consumers. The FCC order maintained the major UNEs that CLECs have relied upon, particularly one known as UNE-P. UNE-P is 2-4
The Status of Competition and Regulation In the Telecommunications Industry a combined element containing both a local loop and local switching services which allows CLECs to enter the local exchange market without having to build their own local networks. On March 2, 2004, the United States Court of Appeals for the District of Columbia Circuit vacated major portions of the FCC's order. The Court generally took a much more restrictive view of the statutory standard that the FCC must meet in ordering ILECs to offer UNEs to their competitors. In response, on August 20, 2004, the FCC adopted interim rules for the remainder of this year and is conducting an expedited proceeding to adopt final rules by the end of 2004. UNE-P is not expected to be available to competitors in the future and this will severely restrict CLECs' ability to provide competitive services unless they have their own local exchange facilities in place. The FCC is moving away from UNEs as a basis for competition and is relying instead on "intermodal" competition. Broadly speaking, intermodal competition refers to competition among companies that have their own local networks in place. Examples include wireless carriers and cable companies. In a related development, the FCC has substantially exempted ILECs from their obligations to provide competitors with unbundled loops connecting subscribers with central offices (UNE-L) when they deploy fiber networks to the curb or all of the way to the home. As a result of these developments, UNEs are no longer expected to play a major role in the development of competitive markets. TELRIC (Total Element Long Run Incremental Cost) The courts have determined that, under the Telecommunications Act, the FCC has the authority to develop a pricing methodology that each state must use to price unbundled network elements. The FCC's pricing methodology is a Total Element Long Run Incremental Cost model (TELRIC). States set prices using their own numerical inputs. The FCC has signaled its intent to change its TELRIC methodology. When the FCC amends its methodology, each state will need to update their prices. There is considerable controversy over the current FCC methodology. Lack of certainty over pricing, which is driven to a large degree by federal policies, is a hindrance to competition. Intermodal Competition for Local Exchange Service Wireless Telephony Wireless services continue to grow very rapidly. From June 2003 to June 2004 there was a nearly thirteen percent increase in the number of wireless subscribers in Oregon. There are now nearly as many wireless telephone numbers as wireline in Oregon. A recent development is the implementation of local number portability (LNP). A consumer is now able to retain his or her 2-5
The Status of Competition and Regulation In the Telecommunications Industry telephone number when switching local exchange carriers, including when switching from a wireline carrier to a wireless carrier. Although there were numerous problems during the early implementation of number portability, the process now appears to be working more smoothly. As a result of local number portability, increasingly attractive wireless rate plans, and consumer acceptance of wireless services, some households are beginning to view wireless services as a total replacement for traditional telephone service. Intermodal Competition for Local Exchange Service Cable Telephony Cable companies have been quite successful in competing against ILECs for traditional telephone service in some markets. For example, in Omaha, Qwest has reportedly lost approximately half of its customers to the cable company. Cable companies can employ traditional telephone technology, but they are increasingly relying on Internet protocol (IP) technology called Voice over Internet Protocol (VOIP). This is described more fully below. The technology and services of traditional telephone companies and cable companies are converging. Telephone companies and cable companies in most areas will both be offering voice telephone service, high speed internet access, and one way entertainment services, frequently on a bundled basis known as "triple play." Many observers predict that consumers will increasingly rely on a single provider for these services, so that individual customers will either subscribe to a network from a traditional telephone company or a network from a cable company, but not both. The market performance of this duopoly in local wireline broadband services is a critically important question as regulation recedes. Strong disagreements exist as to whether the market will behave more like a competitive market or more like a monopoly market. An important factor is whether wireless services, such as wireless phones and wireless broadband access, and satellite entertainment services can exert significant competitive market pressure. Intermodal Competition for Local Exchange Service-VoIP As suggested above, VoIP presents a major competitive threat to local exchange service. VoIP is an application that uses an underlying IP network to provide a substitute for traditional telephone services. The VoIP application can ride on a digital subscriber line (DSL) internet access line obtained by a subscriber from the telephone company, a cable modem connection obtained by a subscriber from a cable company, a wireless internet connection, or over a dedicated connection maintained by an enterprise. It can use the public internet, a dedicated VoIP IP network maintained by carriers to provide higher quality than 2-6
The Status of Competition and Regulation In the Telecommunications Industry the public internet offers, or over a private IP network (usually called an Intranet). As a result, VoIP promises to offer a very competitive alternative to traditional telephone service across a wide range of market segments, i.e. to any customer with a suitable IP network connection. The fact that VoIP is an IP application means that it can be offered and used from anywhere in the world. In a series of ad hoc cases, the FCC has generally held that VoIP services are inherently interstate in nature and hence exempt from regulation by state public utility commissions. In addition, VoIP services generally do not pay access charges for their use of the public switched network and generally do not contribute to the federal Universal Service Fund (USF). VoIP has therefore raised a set of critically important public policy issues that the FCC intends to resolve during the coming year. These issues will fundamentally affect the viability of competition, the fate of the public switched network, and the continuing commitment to universal service in rural and other high cost areas. Intercarrier Compensation There is general agreement that the current system of intercarrier compensation for the exchange of telecommunications traffic is fundamentally flawed and in danger of collapse. There are two basic problems: 1) There is a wide range of charges for intercarrier compensation to local exchange networks imposed on other carriers depending on the type of carrier and the geographic origin and destination of the traffic. These arbitrary distinctions are almost impossible to enforce and result in gross competitive distortion. Exploitation of the inconsistencies in this rate structure by carriers seeking competitive advantage is rampant. 2) Since most of these charges are well above an appropriate economic cost of carrying the traffic, these charges also generate major incentives to bypass the local exchange networks in favor of more market priced alternatives, such as wireless phones and VoIP services. As examples of the effects, large amounts of toll traffic have shifted to wireless services and VoIP services have a major artificial competitive advantage. A consensus is developing that fundamental reform is required. A primary goal of intercarrier compensation reform is to develop a unified system of intercarrier compensation in which charges do not arbitrarily differ across carriers and jurisdictions. A second primary goal is to set the unified charge at a level that makes economic and marketplace sense, generally much lower than many of the charges that are in effect today. The FCC has a goal of deciding this issue by the middle of 2005. This decision will have a major impact on the competitive positions of the carriers and technologies in the marketplace. One of the major 2-7
The Status of Competition and Regulation In the Telecommunications Industry issues in this debate is whether state public utility commissions should cede their jurisdiction over intrastate access charges to the FCC. Intercarrier compensation reform is expected to lead to much lower revenues for local exchange carriers than they have traditionally generated. This raises difficult issues as to where the carriers will make up these lost revenues. As a result, intercarrier compensation reform is closely linked to universal service reform. Universal Service The federal universal service program has multiple objectives: 1) provide financial support for networks in rural and other high cost areas in order to achieve statutory objectives for universal availability of services at reasonably comparable rates; 2) provide financial support to low income families so that they can afford to have basic telecommunications service; 3) provide financial support for the deployment of telecommunications services to rural health care providers; and 4) provide financial support for the deployment of telecommunications services to schools and libraries. The federal USF faces a number of serious challenges. Numerous examples of waste, fraud and abuse have been identified in the schools and libraries program. Many people argue that the high cost fund should be expanded in order to make broadband access to the Internet available in rural areas, a goal which political leaders at the highest levels have endorsed so that the United States will not continue to lag well behind many other countries in the deployment of broadband services. Finally, the FCC and many state public utility commissions have authorized additional eligible telecommunications networks for USF funding. For example, the Public Utility Commission of Oregon has authorized two wireless carriers, RCC of Minnesota and United States Cellular, to receive universal service funding so that they can expand their networks in rural Oregon. These decisions generate additional funding obligations for the USF. In addition to the increasing demands for USF just described, intercarrier compensation reform is expected to generate large additional demands on the USF in order to offset lost access charge revenues, particularly by ILECs that service rural and other high cost areas. A widely discussed estimate of this amount is about $2 to $3 billion per year. 2-8
The Status of Competition and Regulation In the Telecommunications Industry At the same time that demands for USF are increasing, the mechanism for generating resources for the USF is failing. The USF is funded by a surcharge on interstate revenues that is currently approaching 10 percent. Decisions by the FCC have had the effect of reducing the revenues to which the charge is applicable. A series of legal and allegedly illegal actions by carriers has also had the effect of reducing the revenue base for the USF. The FCC recognizes that the federal USF cannot be supported by the current method much longer and has committed to adopting a revised funding formula for USF contributions during 2005. The most likely candidate for a replacement funding mechanism is to impose a charge for network connections, like traditional telephone lines, broadband service connections such as cable and DSL and wireless connections. Either in conjunction with or as an adjunct to a connections fee, a charge might be imposed on telephone numbers. Whether and how the related issues of intercarrier compensation and universal service reform are resolved during 2005 will have a profound impact on the competitive positions of carriers in the marketplace and on what services and rates will be available in rural areas. H. Qwest Corporation's Entry into Long Distance What is the status of Qwest's effort to become a long distance carrier? In December 2002, the FCC approved Qwest's application to provide in-region long distance services in nine of the fourteen states where Qwest is a local service provider. In April 2003, the FCC approved Qwest s application to provide in-region long distance service in Oregon, and Qwest began providing such service in May 2003 through an affiliate, Qwest LD Corporation. In early 2003, the Commission had filed with the FCC an affirmative recommendation on Qwest s application, and in November 2002, the Commission had granted Qwest LD Corporation authority to provide long distance service in Oregon. The Commission conducted an extensive investigation to determine whether it should make an affirmative recommendation to the FCC. Section 271 of the Federal Act requires Qwest to comply with a 14-point checklist to show that it has opened its local markets to competitors. In a Final Recommendation Report issued August 19, 2002, the Commission concluded that Qwest met the Federal Act's requirements. In reaching this conclusion, the Commission benefited greatly from its participation in an extensive multi-state evaluation of the systems Qwest uses to communicate with and provide services to its local service competitors. State Commissions that regulate Qwest participate in the Qwest Regional Oversight Committee (ROC). The ROC has developed procedures to coordinate 2-9
The Status of Competition and Regulation In the Telecommunications Industry oversight and updates of Qwest s plan to comply, as much as possible, with requirements related to approval of its section 271 applications. The group will continue to coordinate its efforts with those of the FCC in this area. 2-10
The Status of Competition and Regulation In the Telecommunications Industry (3) Statutes that inhibit or discourage competition in and deregulation of the telecommunications industry None Identified. 3-1
The Status of Competition and Regulation In the Telecommunications Industry (4) Specific actions taken by the Commission to reduce the regulatory burden imposed on the telecommunications industry, including telecommunications utilities and competitive telecommunications providers A. Streamlining Certificates of Authority How has the Commission reduced regulatory burden? In December 2001, the Commission adopted revisions to its administrative rules that speed up and simplify applications to transfer certificates of authority. The revised rules allow two providers to file a joint application to transfer authority in whole or in part. The procedure allows providers to coordinate merger and acquisition activity with issuance of Commission certificates. In December 2002, the Commission modified its administrative rules governing competitive provider applications in order to incorporate electronic filings, and to speed up Commission procedures for granting authority. As a result, it is easier for applicants to file applications. In March 2003, the Commission began publishing notice of applications bi-weekly, instead of monthly. The changes allowed the Commission to handle applications more efficiently, and applicants for authority to provide competitive telecommunications service, or to transfer authority, now obtain approval approximately five weeks sooner than in prior years. B. Regulatory Relief for Incumbent Carriers What actions can the Commission take to provide regulatory relief? The Commission has the following options for granting regulatory relief to incumbent telecommunications utilities: 1. The Commission may approve an incumbent's alternative regulation plan (e.g. price caps). Such a plan could include a provision that the Commission would no longer review the incumbent's profits. 2. When the Commission certifies new competitors and approves creating a competitive zone, the Commission provides the incumbent telecommunications utilities downward pricing flexibility. 3. Prior to Commission approval, incumbents may enter into customer-specific contracts for competitive reasons. 4. The Commission may exempt a service from regulation, including rate regulation, if the Commission finds that competition exists. 4-1