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Virginia State Corporation Commission
eFiling CASE Document Cover Sheet
Case Number (if already assigned)
PUC-2007-00108
Case Name (if known)
Petition of Sprint Nextel for reductions in the intrastate
carrier access rates of Central Telephone Company of
Virginia and United Telephone-Southeast, Inc.
Document Type
CMMT
Document Description Summary
Petition of AT&T Communications of Virginia, LILC for
Reconsideration of May 29, 2009 Order on Intrastate
Access Charges .
Total Number of Pages
31
Submission ID
989
eFiling Date Stamp
6/15/2009 9:57 :06AM
aw
Mark A. Keffer
General Attorney &
Associate General Counsel
3033 Chain Bridge Road
3' Floor
Oakton, VA 22185
T: 703.272-0975
F: 832.213 .0131
mkeffer(cDatt .corn
June 15, 2009
Joel H. Peck, Clerk
Document Control Center
State Corporation Commission
1300 East Main Street
Richmond, VA 23219
Re:
Case No . PUC-2007-00108
Dear Mr. Peck,
Enclosed for filing, under seal, is the Proprietary Petition of AT&T
Communications of Virginia, LLC for Reconsideration of May 29, 2009 Order on
Intrastate Access Charges. The proprietary version is also being provided to Mr. Irby
and Ms. Cummings of the Telecommunications Division. The public version of this
testimony is being filed electronically .
Thank you for your attention to this matter.
Sincerely,
Mark A. Keffer
Enclosures
CC:
William Irby
Kathleen Cummings
BEFORE THE
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
PETITION OF SPRINT NEXTEL
Case No. PUC-2007-00108
For reductions in the intrastate carrier
access rates of Central Telephone Company
of Virginia and United Telephone-Southeast, Inc.
PETITION OF
AT&T COMMUNICATIONS OF VIRGINIA, LLC
FOR RECONSIDERATION OF THE
MAY 299 2009 ORDER ON INTRASTATE ACCESS CHARGES
PUBLIC VERSION
June 15,2009
TABLE OF CONTENTS
Page
1.
11.
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I
DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B.
C.
Ill.
The May 29 Order Provides No Net Consumer Benefits; Rather It Simply
Shifts Embarq's Costs Onto Other Consumers Across The Remainder of
Virginia In a Manner Contrary To The Commission's Established Policy Of
Swiftly Reducing Intrastate Switched Access Charges To Eliminate Implicit
Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The May 29 Order Is Also Contrary To The Law, The Record, And
The Recommendations Of The Hearing Examiner And Staff. ........... ....... . ... ...... 12
The May 29 Order Cannot Be Justified By Speculation That Leaving
Implicit Subsidies In Place Will "Ameliorate" The Purported
"Upward Pressure" On Embarq's Local Service Rates . ....... ................. . . . ..... . . . ... 16
There is no evidence that Embarq will need local rate increases .. . . . . . . 17
I.
2.
Embarq is planning to increase local rates anyway, regardless of what
the Commission does with its access rates . . . . . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.
The Commission already has given Embarq authority to increase
rates, but only to affordable levels that, according to Embarq, will be
below Verizon rates in most exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.
Rebalancing access and local rates is consistent with Commission
precedent and sound public policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 19
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 21
INTRODUCTION
1.
As this Commission has recognized on numerous occasions, access subsidies cannot be
sustained in a competitive market; it is simply not possible to keep imposing subsidy obligations
on interexchange carriers when wireless carriers, e-mail providers, Voll' providers, and others
employing new communications technologies do not incur access costs in the same way. Eight
years ago the Commission pledged to reform Embarq's access rates, but its initial stab at reforms
backfired and, over the intervening eight years, Embarq's effective per-minute access rate kept
going up, not down . Consequently, as the Staff testified and the Hearing Examiner found, over
the ensuing eight year period Embarq collected some $25 million more than the Commission
intended.' The unrebutted evidence in this case, acknowledged by the Hearing Examiner, shows
that Embarq's existing intrastate access rates are generating some $28 million per year above the
interstate rates Embarq charges for the exact same access functionality . Of that, nearly $23
million alone comes from the Carrier Common Line Charges, or "CCLC," which, even Embarq
concedes, is nothing but a subsidy rate element . Four years ago the Commission eliminated
Verizon's Carrier Common Line Charge in a one-year transition, finding that "the policy of
collecting a subsidy for local exchange services through access charges is no longer sustainable
in the competitive market that has developed in Virginia."2 At a minimum, the Commission
should require that Embarq eliminate its Carrier Common Line Charge in the same way Verizon
did .'
1 Case No. PUC-2007-00108, Report of Alexander F. Skirpan, Jr., Senior Hearing Examiner, January 28, 2009, at
P. 11
2 Petition of AT&T Communications of Virginia, LLC, For reductions in the intrastate carrier access
rates of Verizon Virginia Inc. and Yerizon South Inc., Case No. PUC-2003-00091, 2005 S.C.C. Ann. Rep.
201, at 5 ("Verizon Final Order").
3 This Petition is filed pursuant to 5 VAC 5-20-220 .
Embarq's high access rates are not just an AT&T problem, or a Sprint problem, or a
Verizon problem.
Rather, they are a problem for every consumer in Virginia who makes
traditional in-state long distance calls, no matter where they live, and no matter which carrier's
long distance service they use. The law requires that long distance rates be averaged statewide,
which means, simply, that every long distance provider must recover all of its access costs in its
statewide rates. Thus, when Embarq assesses $28 million too much in intrastate access charges,
those costs become engrained in the price of all long distance service in the Commonwealth, no
matter whether the call begins or ends in Embarq territory . Embarq's high access rates are just
as much a concern to the Verizon customer placing a call from Fairfax to Richmond as they are
to an Embarq customer calling from Charlottesville to Bristol . The plain fact is that, unless the
Commission modifies its May 29 Order, all Virginia consumers, including the more than 90%
outside of Embarq's territories, many of whom may never make a call to or receive a call from
any of Embarq's customers, will continue subsidizing Embarq by some $28 million in 2009 and,
under the Commission's Order, by tens of millions per year thereafter .
The Commission apparently is hoping that allowing Embarq to retain its access subsidies
will, somehow, preserve artificially low Embarq local exchange rates. But the Commission
already has given Embarq authority to increase its rates under its alternative regulation plan ; and
Embarq has readily conceded on the record "there is probably going to be a rate increase
4
anyway," whether or not the Commission reduces access rates. More to the point, even if
Embarq increases its local rates to offset access reductions, the Commission already has deemed
the new rates to be affordable under the law and comparable to what Verizon's customers
already pay .
4 May 29 Order, p. 9, n.30.
Even if the Order fully achieved the Commission's ostensible objective to keep Embarq's
local rates low - which is highly unlikely, given Embarq's admission -- all that would mean is
that all other consumers across Virginia would continue to be overcharged by tens of millions
per year to subsidize Embarq's operations, only so Embarq's end-user customers can pay less.
There is no net consumer benefit in this scheme. It simply overcharges more than 90% of
Virginia consumers to benefit the fewer than 10% that Embarq serves.
Verizon, of course, has the largest number of local service customers by far, and those
customers place the majority of in-state long distance calls, using long distance services they
obtain from AT&T, Sprint, Verizon, or some other long distance carrier.
Since Verizon
customers already pay higher local service rates as a result of Verizon's access reform rate
rebalancing, and since they make most of the long distance calls that generate Embarq's access
subsidy, they are the ones who will suffer most if the May 29 Order stands . Consider that, after
rate rebalancing, a Verizon residential customer in Appomattox pays $16.87 a month for basic
local service, a rate this Commission deemed affordable under Code § 56-235 .513 . In contrast,
Embarq's customers in nearby Dillwyn pay only $10 .65, thanks in large part to the access
subsidies Embarq receives mostly from Verizon customers. Similarly, a Verizon residential
customer in EMon pays $16.87, while heavily-subsidized Embarq customers in nearby
Shenandoah pay only $10 .65. This pattern is repeated throughout the Commonwealth .
Attachment I hereto.
See
Embarq customers undoubtedly enjoy being subsidized, but for the
Verizon customers contributing the bulk of the subsidy, the May 29 Order is an exceedingly bad
deal. They pay higher local rates resulting from Verizon's sensible access reforms, and also
must subsidize Embarq's customers. That is just not right.
Embarq is not some mom and pop telephone company that needs subsidy protection. It is
a $6 billion, Fortune 500 company soon to merge with Century Telephone, itself a Fortune 1000
company, to form an even larger company to be traded on the NYSE under the name
"CenturyLink ." The May 29 Order found (p. 9) that Embarq is reaping big profits from its
Virginia operations. On May 6, 2009, Embarq reported to its investors First Quarter 2009
"record cash flow" in First Quarter 2009 and "record earnings per share from continuing
operations," thanks in part to "significant year-over-year improvement in every operating
expense category." 5
As bad as the May 20 Order is for the majority of Virginians who will remain saddled
with Embarq's access subsidies, the long term consequences are even worse. High access rates
are driving consumers off the network, both for Embarq and other local exchange carriers . An
ever-increasing number of Virginia consumers are electing to communicate using cell phones, or
e-mail, or computer-to-computer Voice over Internet Protocol ("VoIP") service, because those
alternatives are not saddled with monopoly-era implicit subsidies .
Even after Embarq
implements the minimal reductions required by the May 29 order, in two years Embarq will still
have over $16 million in annual subsidies embedded in its rates. The presence of such subsidies,
of course, is a key reason why more and more consumers are disconnecting their traditional
wireline phones altogether -- they perceive access-laden traditional long distance calls as too
expensive, but wireless calls (which, for the most part, are not subject to access charges at all) as
"ftee ." AT&T welcomes fair competition with alternative technologies, but the May 29 Order
keeps the access anvil strapped to our backs while other technologies run free.
5 http~//investors .embarg .com/-p~-hoenix .zhtml?c=197829&Virol-presentations .
Far more insidious, high access charges are hindering the deployment of new technology
and new applications and will slow the expansion of broadband services to all comers of
Virginia, particularly the rural areas.
Embarq is ideally situated to be a major source of
innovation and investment in broadband, particularly once it merges to form "CenturyLink .1' But
so long as it derives massive subsidies from intrastate switched access charges, it will be
discouraged from fully investing in broadband, because broadband adoption reduces access
usage . Moreover, VoIP-based and other new entrants, unable to compete against Embarq's
subsidized services, will be discouraged from investing as well . Consumers and competitors
alike are the losers in this protectionist scheme. In a very real sense, the perpetuation of high
intrastate access rates is putting Virginia's broadband future at risk .
None of this is news to the Commission.
Indeed, Commission precedent on access
matters, at least until now, has been to meet the issues head on. The Commission eliminated
Verizon's Carrier Common Line Charge in 2005 and gave Verizon authority to implement
offsetting local rate increases, finding that "the policy of collecting a subsidy for local exchange
services through access charges is no longer sustainable in the competitive market that has
developed in Virginia."6 The Commission in 2007 directed the CLECs to reduce their intrastate
switched access rates to either interstate parity or to the ILECs' levels, and afforded them
additional retail pricing flexibility to make up the difference . These access reforms have served
to increase the competitiveness of the Virginia communications market and move prices closer to
underlying cost, a move which, economists agree, inures to the ultimate benefit of consumers .
This Commission itself acknowledged as much in its May 29 Order (p. 6) when it observed,
6 Petition of AT&T Communications of Virginia, LLC, For reductions in the intrastate carrier access
rates of Yerizon Virginia Inc. and Verizon South Inc., Case No. PUC-2003-00091, 2005 S.C.C. Ann. Rep.
201, at 5 ("Verizon Final Order").
correctly, that "[tlhe subsidies contained in intrastate access charges distort the true cost of
providing service, the true value of such service, and the development of the market for
telephone services." Those findings essentially affirm the Hearing Examiner's Report, which
likewise agrees that "a subsidy for local exchange services through access charges is no longer
sustainable."7
There is no defensible reason why the Commission's approach to Embarq access reform
should differ from its approach to Verizon and the CLECs .
As it did for Verizon, the
Commission should, at a minimum, eliminate Embarq's Carrier Common Line Charge
altogether . If there needs to be a transition period, then, as it did for Verizon, the Commission
should eliminate the Carrier Common Line Charge within a year -- immediately convert the
Carrier Common Line Charge to a per-minute rate reduced by at least one-half, and thereafter
eliminate the charge in two equal increments, one January 1, 20 10, and the last July 1, 20 10 .'
' Jan. 28, 2009 Hearing Examiner's Report, p. 27 .
8 VAile, ultimately, the Commission will also want to reduce Embarq's remaining traffic sensitive rates
to parity with its interstate rates as both AT&T and the Hearing Examiner recommended, it can
implement that fin-ther step for Embarq when it does the same for Verizon. The Commission indicated in
its 2007 decision approving Verizon alternative regulation plan that "as we move towards a more
competitive and deregulated telecommunications market in Virginia, the access charges levels of Verizon
and other ILECs in Virginia should be reviewed, and where and if found appropriate, access charges
should be adjusted, to promote increased competition."See Case No. PUC-2007-00008, Application of
Yerizon Virginia Inc. and Yerizon South, Inc.. for Determination that Retail Services Are Competitive and
Deregulation and Detariffing ofthe Same. Final Order dated Dec. 17, 2007, p . 59.
11.
DISCUSSION
A.
The May 29 Order Provides No Net Consumer Benefits; Rather It Simply
Shifts Embarq's Costs Onto Other Consumers Across The Remainder of
Virginia In a Manner Contrary To The Commission's Established Policy Of
Swiftly Reducing Intrastate Switched Access Charges To Eliminate Implicit
Subsidies.
The law, policy, precedent, and the record all support eliminating Embarq's Carrier
Common Line Charge, and the Hearing Examiner and the Staff recommended that it be done.
The May 29 Order, however, directs only that Embarq cut its Carrier Common Line Charge in
half, and then not until more than two years from now -- nearly four years after Sprint filed its
complaint to begin this case, and a full decade after this Commission told Embarq its access
charges would be reduced. And while the Order gives half a loaf on the Carrier Common Line
Charge, it leaves the other half (more than $11 million worth) untouched, and leaves intact the
remainder of the $5 million in subsidies in Embarq's traffic-sensitive access rates, with no
timetable for dealing with this remaining $16 million in annual subsidies . Ten years to do less
than half a job is certainly not consistent with this Commission's standards or precedent - or the
need to keep pace with technological change .
Embarq's intrastate access rates today "are more than five times higher than Embarq's
comparable interstate switched access rates,"9 even though there is indisputably no material
difference in function or cost in access for intrastate and interstate long-distance calls. There is
no legitimate reason to maintain this huge rate disparity, but the Commission's May 29 Order
certainly does not make much of a dent. If the Order stands, Embarq's intrastate access rates
would still be overfour times higher than its corresponding interstate rates.
9 May 29 Order, p. 4.
The May 29 Order "recognize[s]" (pp. 7-8) that it "does not completely eliminate the
[Carrier Common Line Charge] as recommended by the Hearing Examiner, the Staff, and the
parties ." Yet it never even confronts, much less resolves, the legal, evidentiary, and policy
implications of its decision to leave Embarq's subsidy glass more than half full. Moreover,
although the Hearing Examiner found there to be $5 million in additional subsidies embedded in
Embarq's access rates above and beyond the Carrier Common Line Charge, the May 29 Order
does not even acknowledge that those subsidies exist, much less establish a mechanism or
timetable for dealing with them . The Commission's decisions in this regard are wrong on every
level.
Let's start with the Commission's own policy and precedent.
The Commission has
correctly, consistently, and repeatedly acted against implicit subsidies, and has rejected proposals
to delay access reform.
In 2005 and 2007, the Commission adopted straightforward and
commendable reforms to reduce the implicit subsidies contained in the intrastate switched access
rates of Verizon and of competing local exchange carriers C'CLECs"), including AT&T's CLEC
operations, while giving those carriers the flexibility to increase rates for basic local service and
thus recover the reductions in their intrastate switched access revenues, or otherwise
competitively respond. As the Commission noted, "the policy of collecting a subsidy for local
exchange services through access charges is no longer sustainable in the competitive market that
has developed in Virginia."10
Delaying the implementation of reform and prolonging the harm of implicit subsidies as the May 29 Order does - is contrary to this Commission's established policies and, ultimately,
" Petition of AT&T Communications of Virginia, LLC, For reductions in the intrastate carrier access
rates of Verizon Virginia Inc. and Verizon South Inc., Case No. PUC-2003-00091, 2005 S.C.C. Ann. Rep.
201, at 5 ("Verizon Final Order") .
harmful to Virginia consumers, particularly those outside of Embarq's territory . With respect to
Verizon, the Commission called for Verizon to eliminate the Carrier Common Line Charge
component entirely, in less than one year, on a timetable even faster than what its Hearing
Examiner had recommended . 11
The Commission's February 9, 2005 Order demanded that
changes be made swiftly and fully : (1) by August 1, 2005, 50% of the Carrier Common Line
Charge would be removed; and (2) by February 1, 2006 - less than a year from the date of its
order - " the remainder of the [Carrier Common Line Charge] shall be removed from Verizon's
intrastate access rates." 12
The Commission flatly rejected Verizon's suggestion that "the
Commission should not set a date for access charge reductions until the magnitude of the
reduction has been measured and the corresponding increases in retail rates have been considered
and approved." 13
The Commission was even more aggressive with the CLECs. Its September 2007 Order
in Case No. PUC-2007-00033 required all CLECs to reduce their switched access rates to the
Is," or
lower of two levels : 14 (1) the CLEC's "comparable interstate switched access charge rates
(2) the blended average of the intrastate switched access rates of the ILEC in whose territory the
CLEC is providing service. 16 The Commission required full implementation within six months
of its September 27 order (i.e., by March 3 0, 2008 .)" 17
" See Verizon Final Order at 2-3 (citing June 2004 report's proposal that access charges be reduced on
January 1, 2006).
12 Verizon Final Order at 5.
13 Verizon Final Order at 5.
14 Case No. PUC-2007-00033, Ex Parte: Amendment of Rules Governing the Certification and
Regulation of Competitive Local Exchange Carriers, Final Order, Sept. 29, 2007.
15 Id. The FCC caps CLECs' interstate rates at the corresponding ILEC rates, so a state regulatory
requirement to cap intrastate rates at the CLECs' interstate levels equates to capping the rates at the ILEC
levels .
16 Id. A third Commission-approved benchmark is now obsolete . The Commission had approved a
Changing a consistent course of good policy is never advisable, but it is an especially bad
idea with respect to Embarq . The Commission has already tried partial reform with Embarq, and
it has already given Embarq eight years to prepare for more . At the time, the Commission made
clear that it did "not view this Amended Agreement as the last opportunity the parties may have
to address the issue of access charges set above cost."18 The Commission pledged to "revisit this
19
question" and "take this last step" of further reductions in Embarq's rates.
The Commission has since given Embarq ample reminders that the "last step" was
coming when it reduced Verizon's switched access rates in 2005, and reformed the CLECs' rates
in 2007.
More recently, in Case No. PUC-2007-00008 (the recent proceeding regarding
Verizon's alternative regulation plan), the Commission reiterated that "as we move towards a
more competitive and deregulated telecommunications market in Virginia, the access charges
levels of Verizon and other ILECs in Virginia should be reviewed, and where and if found
appropriate, access charges should be adjusted, to promote increased competition ."M
The
Commission stated that it would therefore "initiate an appropriate regulatory proceeding" to once
2
again review the Verizon's intrastate access charges . 1
And with respect to Embarq, the
transitional rate of 2.9 cents per minute, but the transition period expired April 1, 2008.
17 Case No. PUC-2007-00033, Ex Parte: Amendment of Rules Governing the Certification and
Regulation of Competitive Local Exchange Carriers, Final Order, dated Sept . 29, 2007, at 2-3 .
18 Case No . PUC-2000-00003, Order on Proposed Settlement dated May 9, 2001 ("Embarq Settlement
Ordeel) at 3 .
'9 Id. at 4.
20 Case No. PUC-2007-00008, Application of Yerizon Virginia Inc. and Yerizon South, Inc. . for
Determination that Retail Services Are Competitive and Deregulation and Detariffing of the Same . Final
Order dated Dec. 17, 2007, p. 59.
21
Id.
10
Commission expressly took notice of this proceeding - Case No. PUC-2007-00108 - and noted
22
that this proceeding would be the forum for a similar review of Embarq's access rates.
Coupled with its more-than-fair warning of the coming "last step" in access reform, the
Commission long ago gave Embarq the tools to prepare for that last step in advance . Embarq has
had pricing flexibility for local service for more than a decade . The Commission Staff testified
that it had been trying for more than ten years to get Embarq to prepare for access reform. As
Staff s witness Ms. Cummings testified:
[WIhat's particularly surprising to me is that Embarq is surprised by the
Staff s position in this case. We have been trying to work with Embarq
for well over ten years to try to get them ready for trying to deal with
access charges in Virginia, so.23I don't really think here should have been
any surprises in our testimony
Despite having pricing flexibility since 1998, Embarq has left its rates unchangedfor twenty
years .
Seeing as Embarq has not made any use of the lengthy preparation period that the
Commission began in 2001, or the tools that the Commission provided to smooth that
preparation, the last thing the Commission should do is give Embarq another break and even
more delay, particularly when any such delay only means that Embarq's costs will continue to be
foisted on the rest of Virginia for an extended period of time.
Worse, partial reform gave Embarq a massive windfall (approximately $25 million)
because the 2001 settlement did not reduce revenues as the Commission intended. As Staff
noted, the settlement was supposed to "produce a cumulative $45 million revenue reduction for
.,,24 However, Staff noted that the "actual
the Embarq companies for the period 2001 to 2005
12
Id. at 59.
" Hearing Transcript at 299.
24 Ex. 44 (Staff Comments, Public) at 10.
II
cumulative access revenue reduction over that period was only about $20 million ."2' Thus, as
the May 29 Order (p. 6) puts it - mildly - the Commission's attempt "to begin reducing
Embarq's intrastate access rates" through partial reform "was unsuccessful ." Having served
Embarq one massive windfall, the Commission should not give Embarq another helping . After
all, the Commission's 2001 order said that the next step in access reform would be a "last step" not another half-step.
Taking that "last step" is particularly important to the more than 90% of Virginia
consumers residing outside Embarq's footprint. It is, after all, those consumers who shoulder the
excess subsidy still embedded in Embarq's switched access rates. Both federal law and this
Commission require that long distance rates be averaged statewide, which means, simply, that
Embarq's excessive access rates find their way into the price of every intrastate long distance
call in Virginia. When, for example, a Verizon customer in Richmond places an AT&T or Sprint
(or another IXC) call to another Verizon customer in Blacksburg, the price charged for that call
necessarily reflects all of the access expenses that IXC incurs to serve Virginia consumers,
including those it must pay to Embarq .
Thus, insofar as the Commission's May 29 Order
attempts to preserve Embarq's access subsidies to help keep Embarq's local exchange rates low,
it is simply foisting Embarq's costs onto consumers across the remainder of Virginia, including
those who may never make a call to, or receive a call from, anyone Embarq serves . Embarq and
its customers may see that as a good deal, but to everyone else in Virginia, it is an exceedingly
bad one - they are being forced to subsidize Embarq just so Embarq's customers can pay lower
local service rates .
2' Ex. 44 (Staff Comments, Public) at 10.
12
B.
The May 29 Order Is Also Contrary To The Law, The Record, And The
Recommendations Of The Hearing Examiner And Staff.
There is no difference in facts or law that would justify the break from settled precedent
that the May 29 Order makes .
Quite the contrary :
as the Hearing Examiner and Staff
recognized, the record here compels the Commission to follow its own precedent. Indeed, the
factual findings and legal conclusions in the May 29 Order itself compel the same conclusion.
The underlying problem that drove reforms for Verizon and the CLECs (that intrastate
switched access rates include massive implicit subsidies for local service) is indisputably present
for Embarq. As the May 29 Order acknowledges (p. 5), "[t]he Hearing Examiner found that
Embarq's intrastate access charges collect a subsidy for local exchange service from all carrierS26
terminating calls to Embarq's Virginia customers," and "Embarq does not contest this finding."
Nor could Embarq seriously enter such a contest : its "intrastate access rates are more than five
times higher than Embarq's comparable interstate switched access rates."27 Moreover, Embarq
itself admitted that its intrastate switched access rates "act as a subsidy for local exchange
telephone service."28 Embarq even went so far as to "present[] a comprehensive study" that
confirmed that ... Embarq's current level of intrastate switched access rates not only recovers the
cost of switched access service but also helps recover the cost of basic local service ."'29
Likewise, the record confirms that implicit subsidies pose the exact same problems they
did when the Commission took action to reduce them for Verizon and the CLECs ; in fact, those
problems have gotten worse. Excessive switched access charges in Embarq's territories hit
26 Thus, even Verizon's flat-rate bundle customers pay a higher price for their bundle than they otherwise would if
Embarq's access rates were reformed .
21 May 29 Order, at 4.
21 Id. at 5.
2' Jan. 28, 2009 Hearing Examiner's Report, p. 9 (quoting Embarq Brief at 57).
13
consumers all over Virginia squarely in the wallet, by making them pay higher long-distance
prices to subsidize low prices for local service in Embarq's territories, regardless of whether they
ever call anyone Embarq serves . Moreover, as previously noted, the Commission found in 2005
that "the policy of collecting a subsidy for local exchange services through access charges is no
longer sustainable in the competitive market that has developed in Virginia."'O As the
Commission observed, "interexchange carriers face growing competition from wireless and
computer technologies that have the competitive advantage of not being required to provide the
same level of subsidy for local exchange service."3 1 That was four years ago. Yet under the
May 29 Order, the subsidy found "unsustainable" would persist . Why?
The Hearing Examiner was quite right when he reviewed the evidence here and found
that the Commission's conclusions "remain valid for this proceeding ."32 Competition has only
skyrocketed since the Commission's 2005 order in the Verizon proceeding.
Indeed, the
Commission just noted in Case No. PUC-2007-00008 that Virginia continues to "move towards a
.',33
more competitive and deregulated telecommunications market
Here, Staff has likewise
recognized that "[slignificant and historical differences in jurisdictional access charges are
becoming more difficult to sustain."34 The Hearing Examiner's Report concludes (p. 27) that
"the continued development of the competitive telecommunications market in Virginia . . .
30 Petition of AT&T Communications of Virginia, LLC, For reductions in the intrastate carrier access
rates of Verizon Virginia Inc. and Ferizon South Inc., Case No. PUC-2003-00091, 2005 S .C.C. Ann . Rep.
201, at 5 ("Verizon Final Order") .
31 Verizon Order at 8.
32 Jan. 28, 2009 Hearing Examiner's Report, p. 27 .
13 Case No. PUC-2007-00008, Application of Verizon Virginia Inc. and Verizon South, Inc.. for
Determination that Retail Services Are Competitive and Deregulation and Detariffing of the Same. Final
Order dated Dec. 14, 2007, p. 59 .
34 Ex. 44 (Staff Comments, Public) at 12 (emphasis supplied).
14
further supports the reduction or elimination of subsidies collected through intrastate access."
on the wireless front alone, the number of wireless subscribers in Virginia has more than
doubled since 2001, increasing from 3 million to over 6 million subscribers by the end of June
2007 .35 Undoubtedly because the implicit subsidies embedded in wireline rates adversely affect
consumer perceptions of value, an ever-increasing number of those customers are deciding to
"cut the cord" and forego wireline service altogether . The evidence includes a Nielsen Mobile
'36
prediction that 20% of American households would be wireless-only by the end of 2008 a
prediction confirmed by a recent May 6, 2009, report from the Center for Disease Control
observing that "than one of every five American homes (20.2%) had only wireless telephones
37 Technologies such as
during the second half of 2008 ;" and that the trend is accelerating .
broadband cable and VoIP have also exploded in demand and are challenging interexchange
carriers in the marketplace. In only two years from June 2005 (the year the Commission ordered
Verizon to eliminate its Carrier Common Line Charge) to June 2007, "the number of residential
high-speed lines grew by 58% to 1 .62 million lines."38 Consistent with the explosive growth of
these alternatives, Embarq's own witness testified that the corresponding decline in switchedvoice lines "indicates that consumers in Virginia are substituting wireless, cable, and VolP for
traditional POTS .""
35 Ex. 15 (Dippon Direct, Public) at 19.
36 Mediaweek, Nielsen: Wireless Households on the Rise, dated Sept . 17, 2008, available at
http ://www .mediaweek .com/mw/content display/news/digitaldownloads/mobile/e3i68 343da3c822c8241f
3aca86a9513e42 .
37131urnberg and Luke, Wireless Substitution, Early Release Estimatesfrom the Nation Health Interview
Survey, July -December, 2008, htti)://www .cdc .pov/nchs/data/nhis/earlyrelease/wireless2OO9O 5 .htm .
" Ex. 15 (Dippon Direct, Public) at 2 1 .
" Ex. 15 (Dippon Direct, Public) at 22 .
15
AT&T welcomes full and fair competition, an objective which the implicit subsidies in
Embarq's access rates render impossible.
The competitive race will never be fair if
interexchange carriers must carry the anvil of implicit subsidies while their competitors run free .
This is why the Commission determined access charges should be reduced in the first place, so
that interexchange carriers would have "an opportunity to advance their competitive offerings ."40
For true competition to exist, a carrier's success in the marketplace should be driven by the
underlying cost, efficiency, and quality of its service . However, under Embarq's present access
charge scheme, "artificial subsidies, rather than consumers, will be deciding market winners and
losers .,,41
Thus, the Hearing Examiner's Report acknowledges (p. 25) that "the subsidies
collected through intrastate access charges continue to limit or dampen competition in opposition
to the pro-competitive policies embodied in the Virginia Code § 56-235 .5:1 ." And the May 29
Order agrees (p. 6) that "[t]he subsidies contained in intrastate access charges distort the true cost
of providing service, the true value of such service, and the development of the market for
telephone services."
Just as there has been no change in the record to warrant the May 29 Order's break from
precedent, there has been no change in governing law.
Indeed, the Commission's legal
conclusions here are the same as those on which it based the elimination of Verizon's Carrier
Common Line Charge . There, the Commission found "that reducing the subsidies built into
access charges is consistent with subsection (ii) of the local competition policy set forth in § 56235 .5 :1 of the Code," which instructs the Commission to "promote competitive product
offerings, investments, and innovations from all providers of local exchange telephone services
40 Verizon Order at 8.
41 Ex. 32 (Nurse Direct, Public) at 15.
16
in all areas of the Commonwealth .',42 Here too, the May 29 Order finds (p. 6) that reducing
Embarq's subsidies "is consistent with the General Assembly's local exchange telephone service
competition policy as set forth in § 56-235 .5:1 of the Code." By contrast, leaving most of
Embarq's implicit subsidies in place does not "promote competitive product offerings,
investments, and innovations from all providers of local exchange telephone services in all areas
of the Commonwealth ."
Instead, it disadvantages all customers and providers (other than
Embarq) in all areas of the Commonwealth, and discourages innovation by wireline longdistance providers . Moreover, by making wireline switched access services the key to massive
subsidies, high switched access charges would continue to discourage Embarq innovation and
investment in broadband and other new technologies .
C.
The May 29 Order Cannot Be Justified By Speculation That Leaving
Implicit Subsidies In Place Will "Ameliorate" The Purported "Upward
Pressure" On Embarq's Local Service Rates.
Even though precedent, policy, the evidentiary record, the Hearing Examiner, Staff, and
the Commission's own factual findings and legal conclusions all favored meaningful reform, the
May 29 Order leaves intact most of Embarq's implicit subsidies, and defers their elimination to
some unspecified future date. Against the overwhelming weight of evidence and precedent
favoring elimination of access subsidies, all the Order can muster to support their continuation is
the sheer speculation (p. 8) that "a gradual approach to access reductions" would somehow
"ameliorate alleged upward pressure on retail rates" and "assist in monitoring the
implementation and impacts of such reductions." Those assertions fail on multiple grounds.
42 Verizon Final Order at 7-8.
17
1.
There is no evidence that Embarq will need local rate increases.
The record contains no factual basis for finding "upward pressure on retail rates." The
Commission itself recognized that "Embarq's assertions regarding concomitant retail rate
impacts appear questionable" because "Embarq is earning returns well above traditional cost of
service levels."43 Embarq's annualized returns for the last two years "ranged from 21 .08% to
24.580/o" - returns that are "well above traditional cost of service levels," and that few if any of
44
the Virginia consumers paying Embarq's implicit subsidies have seen for themselves.
Moreover, now that this Commission has given its blessing for Embarq to complete its merger
with CenturyTel, Embarq stands to save hundreds of millions nationally through merger
"synergies" (even considering integration expenses). Further, when Embarq partially reduced its
switched access rates as part of the 2001 Amended Agreement that the Commission approved in
Case No. 2000-00003, it made no increases in local service rates, even though it had flexibility to
do so under its alternative regulation plan .
2.
Embarq is planning to increase local rates anyway, regardless of what
the Commission does with its access rates.
Embarq itself has admitted that "the outcome of this proceeding" will have no direct
impact on its local service rates. "[Djuring oral argument," Embarq "admitted . . . that it
expects to raise retail rates . . . regardless of the outcome of this case"45 Whether or not the
Commission implements the full reform that precedent and the record compel, "there is probably
" May 29 Order, p. 9 (emphasis supplied) .
44 id.
45
id.
18
going to be a rate increase anyway."46 Given that consumers throughout Virginia have been
subsidizing Embarq's local phone services for decades, they should receive meaningful relief
from those subsidies before Embarq further stuffs its own, already-full wallet . The alternative letting Embarq increase its local service rates and keep the bulk of its subsidies from access
service, while consumers across the rest of Virginia continue to pay high access rates and higher
local service rates - would be perverse .
Embarq does not deserve another windfall.
And
consumers across the rest of Virginia deserve to be free of Embarq subsidies .
3.
The Commission already has given Embarq authority to increase
rates, but only to affordable levels that, according to Embarq, will be
below Verizon rates in most exchanges .
Even assuming for the sake of argument that the full reform urged by the Hearing
Examiner, Staff, and the Commission's own precedent would lead to some increase in Embarq's
local service rates, the increase would be irrelevant to this proceeding . This is not a proceeding
to examine Embarq's retail rates or to decide whether, when, or by how much they should be
increased . In the Commission's own words, "the instant proceeding will not determine the rates
that Embarq can charge to its retail customers."47 Rather, "those rates are currently governed by
Embarq's Modified Plan" for alternative regulation, which the Commission recently adopted
(and Embarq accepted) in Case No. PUC-2008-00008 .
Should the Commission feel it is
necessary or desirable to limit local rate increases, it can reopen the prior proceeding . But as the
Commission indicated, this access case was not the forum to address local rates.
46 Id. at 9 n.30 (quoting Embarq's counsel).
47 Id. at 4.
19
As part of Embarq's alternative regulation plan, the Commission has already authorized
rate increases for local service, and it has already decided on the appropriate limits for such
increases to protect consumers and ensure affordable rates. The Commission cannot find here just a few months later, in a proceeding that was not even supposed to consider retail rates, and
with absolutely zero evidence or analysis - that the already-approved increases have suddenly
become unreasonable . That would be a textbook illustration of arbitrary and capricious decisionmaking.
While an examination of retail rates is outside the scope of this proceeding, it bears
reaffirming that the increases authorized under Embarq's alternative regulation plan are
manifestly affordable. Embarq's basic local service rates have remained at the exact same
artificially low, subsidized levelsfor over twenty years without change (even though Embarq has
had authority to raise those rates since 1998). Embarq's own witness Mr. Schollmann showed
that [BEGIN EMBARQ PROPRIETARY]
[END EMBARQ PROPRIETARY] .48
4.
Rebalancing access and local rates is consistent with Commission
precedent and sound public policy.
More fundamentally, the speculation about local rate increases is no basis for the May 29
Order's result; indeed, it is equally contrary to precedent, policy, and evidence. Even of one
accepts the notion that leaving in place the lion's share of Embarq's implicit subsidies will result
4' Rebuttal Testimony of Richard L. Schollmann Attachment RLS-Reb I
20
in lower rates for local service, such speculation is nothing but a repeat of the repudiated notion
that inflated access charges are a sustainable and desirable way to subsidize lower local service
rates. Since the end of the monopoly era and the advent of competition, the Commission has
never endorsed the use of implicit subsidies for local service rates .
To the contrary, the
Commission has rejected "the policy of collecting a subsidy for local exchange services through
access charges" because that policy "is no longer sustainable in the competitive market that has
developed in Virginia .,,49 Likewise, the Commission has never consciously chosen to reject
reforms that were presented to it either by agreement (as was the case with the 2001 Embarq
settlement) or by a Hearing Examiner after the close of a contested proceeding (as was the case
with Verizon) . Indeed, the Commission has specifically rejected proposals to delay reforms
"until the magnitude of the reduction has been measured and the corresponding increases in retail
rates have been considered and approved"50 (as Verizon had asked in its proceeding) or to phase
in reforms over a long transition period (as the Hearing Examiner had proposed in the Verizon
proceeding) .
The May 29 Order provides only cold comfort with its statement (p. 8) that "the
Commission will conduct additional proceedings in this docket to determine what amount - if
any - of access charges remains appropriate in the competitive market." The proceeding thatjust
concluded was the "additional proceeding[] in this docket to determine what amount - if any - of
access charge subsidies remains appropriate ." It has been eight years since the Commission
pledged to conduct additional proceedings and take the "last step" of access reform with Embarq.
49 Petition of A T&T Communications of Virginia, LLC, For reductions in the intrastate carrier access
rates of Yerizon Virginia Inc. and Yerizon South Inc., Case No. PUC-2003-00091, 2005 S.C.C. Ann. Rep.
201, at 5 ("Verizon Final Order") .
50 Verizon Final Order at 5.
21
The Hearing Examiner properly applied the Commission's consistent precedent to the evidence
and made the straightforward recommendation that Embarq's CCLC be eliminated in its entirety,
and that Embarq's other intrastate switched access rates be reduced to interstate levels.
Rejecting the majority of those reforms, and putting off meaningful reform until another round of
proceedings at some indefinite future date, is no relief to the vast majority of Virginia consumers
who are being forced to subsidize the less than 10% who obtain service from Embarq.
III.
CONCLUSION
For the reasons discussed above, AT&T respectfully requests that this Commission
reconsider its May 29 Order and adopt the Hearing Examiner's recommendations, but accelerate
the Examiner's timetable so that access reductions are implemented immediately or, at the very
most, within one year.
In the alternative, and at an absolute minimum, the Commission should eliminate
Embarq's Carrier Common Line Charge in the same way it eliminated Verizon's Carrier
Common Line Charge . Eight years have elapsed since Embarq was put on notice access reform
was coming, so it is eminently reasonable for the Commission to eliminate Embarq's Carrier
Common Line Charge immediately . If there is to be a transition period, however, it should be no
longer than the one implemented for Verizon.
Specifically, if the Commission follows the
Verizon model, it should immediately implement a per-minute Embarq Carrier Common Line
Charge reduced by one half (i.e., use the same approach from the May 29 Order to divide
Embarq's Carrier Common Line revenues by 2007 switched access minutes, but cut the resulting
per-minute rate by 50% and implement it without delay) . Thereafter, the Commission should
eliminate the remaining Carrier Common Line Charge in two equal increments, one January 1,
22
2010, and the last July 1, 2010. Anything less would force consumers across the rest of Virginia
to subsidize Embarq by too much and for too long.
Respectfully submitted,
AT&T Communications of Virginia, LLC
Mark A. Keffer
Virginia Bar No. 27355
General Attorney & Associate General Counsel
3033 Chain Bridge Road
Oakton, VA 22185
(703) 272-0975
mkefferAatt .com
June 15, 2009
CERTIFICATE OF SERVICE
VIRGINIA CASE NO. PUC-2007-00108
I hereby certify that a copy of AT&T's Petition for Reconsideration was sent via Email
and US Mail, postage prepaid, on this 15th day of June, 2009, to the following:
Edward Phillips, Esquire
Embarq
Mailstop NCWKFR0313
141 11 Capital Blvd .
Wake Forest, NC 27587-5900
edward.phillipsa,embarci .com
C. Meade Browder, Jr.
Senior Assistant Attorney General
Division of Consumer Counsel
Office of the Attorney General
900 East Main Street, 2nd Floor
Richmond, VA 23219
mbrowder0d,oag.state .va.us
Douglas C. Nelson, Esquire
Sprint Nextel
State Regulatory Affairs
233 Peachtree Street, NE, Suite 2200
Atlanta, GA 30303
douglas.c.nelson(&,sprint .com
Bill Atkinson, Esquire
Sprint Nextel
State Regulatory Affairs
233 Peachtree Street, NW, Suite 2200
Atlanta, GA 30303
bill .atkinson(Z~sprintxom
David Anderson, Esquire
Advantus Law Group, PLLC
10 11 East Main Street, Suite 410
Richmond, VA 23219
danderson(i~advantuslawgroun .com
Eric M. Page, Esquire
LeClairRyan, a Professional Corporation
Riverfront Plaza, East Tower
951 East Byrd Street, 8th Floor
Richmond, VA 23218-2499
epage@leclain-van .com
Ashley B. Macko
Office of the Attorney General
900 East Main Street, 2d Floor
Richmond, VA 23219
amacko6b,oag .state .va.us
Alexander F. Skirpan, Jr.
Hearing Examiner
State Corporation Commission
1300 East Main Street, I Vh Floor
Richmond, VA 23219
Alexander.Skiri)ankscc .virginia.gov
Robert M. Gillespie
Office of General Counsel
State Corporation Commission
1300 East Main Street
Richmond, VA 23219
Robert.Gillest)iea,scc .Virizinia.gov
Joel H . Peck, Clerk
Document Control Center
State Corporation Commission
1300 East Main Street
Richmond, VA 23219
Mark A. Keffer
24
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