N.Y. Revises Pricing Policy But Some Rates Jump

Telecom Policy Report,  April 17, 2006  

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New York State has adopted a new telecom-policy framework giving incumbent carriers flexibility in pricing in response to what state regulators say is an increasing presence of competition in the industry. However, the decision is also raising basic telephone-service rates for consumers.

The state's Public Service Commission (PSC) voted to adopt a Statement of Policy and Order in its so-called Competition III proceeding - the third formal evaluation of telecom policies since 1989 - that has pro-competitive and deregulation overtones while embracing obligations to provide and fund basic services and "Lifeline"-style universal service programs to consumers. In looking at the "rapid development" of voice and other telecom services now being provided over new networks that are different from and compete with traditional wireline networks, the PSC said intermodal competition now includes digital phone services provided by cable television companies, by competitive local exchange carriers (CLECs), by Voice over Internet Protocol (VoIP) providers and by wireless carriers.

"Roughly 90 percent of New Yorkers now have the choice of at least two alternatives to traditional wireline service, and tens of thousands of customers are choosing these newer services each month to obtain savings, innovative services and other value-added offerings," says PSC Chairman William M. Flynn. "The reality is that telephone service is no longer a natural monopoly, and this commission is taking the necessary steps to allow the competitive market to flourish while prioritizing important consumer protections."

Although it ostensibly recognized a healthy status of competition, including in residential markets, the PSC directed its staff to monitor the market and to report back in one year on any additional action or changes in policy that might be necessary. Staff also was directed to develop a new report on consumer protection measures and choices, reportedly including providers that are not subject to PSC jurisdiction.

Basic Service Pricing Upped

The determination on basic services was that the prices set for this service "are not properly aligned with the associated costs borne by the service providers, ultimately jeopardizing their ability to continue providing them on an ongoing basis." Its flexibility ruling permits incumbents, if they so choose, to gradually adjust the prices for basic service to reflect their actual costs in order to promote network reliability and assure the continued provision of universal basic service. This part of order requires the continuation of basic telephone service, with two options available to consumers: flat-rate and message-rate basic service where currently offered. It applies to Verizon, Frontier Communications (formerly Rochester Telephone) and 38 smaller companies said to have lost millions of customers to new rivals.

Under the flat-rate option, which includes unlimited local calling, Verizon was authorized to increase its monthly charge by $2 per year up to a cap of $23, and Frontier was authorized to increase its monthly charge by $2 per year for two years (after which it would need further commission review to continue to make future increases).

Under the message-rate option - consisting of a monthly access line charge plus a fee for each local call - both Verizon and Frontier have the option to increase the monthly access charge component by no more than $2 per year for two years. They are limited to one rate change each year for basic service, and each must file a tariff for approval before any change in rates becomes effective. According to the PSC, incumbents that don't face the same level of competitive pressures will be required to justify any proposed rate increases for basic service.

Verizon and Frontier also were granted unlimited pricing flexibility for almost all non-basic services, including three-way calling, voice mail and caller ID, but the non-basic service prices must be uniform throughout their operating territories. Smaller companies would be granted pricing flexibility if they can demonstrate that competitive forces in their service territories warrant such flexibility. The PSC, however, ruled that incumbent wholesale services to competitors are not sufficiently competitive to warrant the relaxation of continued price and service regulation, especially for monopoly bottleneck facilities.

Verizon spokesman Cliff Lee says the PSC may not gone far enough in recognizing the intensely competitive market in New York, but the framework "appears to be a step in the right direction.'' However, the decision garnered strong criticism concerning affordable basic service. "Where is the record that would support this?" says Ben Wiles, an attorney with the Public Utility Law Project advocacy group. "Where is the hard work that would be done? It's a big increase to go up 4 percent in the utility. These are increases that are 10 percent or above. These are not inconsequential." Some Democratic political figures in Albany also suggested the PSC is trying to deregulate the industry to benefit the providers and, while rate structures probably need to be adjusted, the PSC is putting residential users at the mercy of telecom monopolies.