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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

KRC TESTIFIES IN OPPOSITION TO PHONE DEREGULATION BILL  Posted: March 23, 2006
TESTIMONY BEFORE THE SENATE AGRICULTURE AND NATURAL RESOURCES
COMMITTEE CONCERNING HOUSE BILL 337

Mr. Chairman, members of the committee, thank you for this opportunity. As you know, since 1984 KRC has provided legal aid without charge to low- and fixed-income individuals, to community groups, and to local governments on environmental, utility and energy issues.

I’ve been asked, in the interests of time, to outline and summarize the concerns of a number of consumer and provider groups. The other speakers will explain in more depth some of these concerns from their unique vantage points.

HB 337 is not in the best interest of Kentucky consumers, particularly rural Kentuckians and those with limited means. There already exists in Kentucky law a method for telephone utilities to deregulate – KRS 278.512. It allows any utility to gain PSC approval for exemption from regulation in order to better compete with unregulated providers based on a demonstration that a reasonable level of competition in fact exists in the relevant market, and that the deregulation will not adversely affect the continued availability of high-quality services at just and reasonable rates. The telephone utilities have used this law and have been afforded relaxed regulatory controls when they have demonstrated the need. This bill seeks deregulation without comparable protections for consumers. This approach to deregulation differs from KRS 278.512 in that this bill assumes without proof that regulation is no longer needed anywhere in the state because a robust competitive marketplace exists everywhere in the state that will provide equal or better protection of your constituents against discrimination in costs and will assure comparable quality and availability of services.

Yet outside of the major urban areas in this state, there is not a robust competitive marketplace from wireless, cable or municipal telephone utilities. Two companies dominate the market, and there is a very real concern that they will price below cost in order to eliminate competition and, having been freed from prohibitions against unfair pricing, increase their profit margins at the consumer’s expense.

The bill allows an “electing utility” to opt out of the current regulatory framework for all but basic service. The utilities that drafted this bill want a deregulated environment without prior PSC approval and without having to first demonstrate that deregulating is in the public’s interest.

It is important, in a state where many received electricity only through federal intervention because they were not attractive as customers in a competitive marketplace, to bear in mind always that choice cuts both ways. Once you eliminate the obligation to serve at a fair price, those who are disadvantaged are those without options, and those who the utility may “choose” not to cater to because their consumption of services is small compared to the transaction costs of serving them. I know that for each of you, avoiding the imposition of higher costs for essential services to your constituents is an overriding concern, and unfortunately, given the many problems with this bill, there is no comfort to be found here.

Briefly, the major problems with the bill are these:

First, the bill assumes truly competitive markets exist across each community and each county when in fact most of the state’s markets outside of the major urban areas lack such robust competition. The proponents cite the number of competitors in most markets in the state, but that is not a sufficient indicator of whether real competition exists. In truth, as you will hear from the speakers that follow, the degree of market penetration by competitors outside of the urban areas is minimal. Wireless service is for most consumers an adjunct to landlines, not a replacement. Voice Over Internet Protocol is no threat to the phone companies either, since phone companies bundle voice with DSL and require that you purchase both, so that to use VOIP you would pay twice for voice service.

The lack of robust competition in rural markets will likely result in higher prices to offset lower prices offered in more competitive urban markets. In order to assure that real competition exists before a market is deregulated, as is required under KRS 278.512, KRC suggested, and the utilities rejected, a gatekeeper function for the PSC - allowing deregulation only where and for so long as the Commission finds that a sufficiently robust competitive marketplace in fact exists. The Commission would monitor the market and where competition ceased to exist could reimpose regulation, thus acting as a check on predatory pricing.

Second, despite the claim to the contrary, the bill does curtail the PSC’s jurisdiction over basic local exchange service obligations in several ways.

Third, as will be discussed by Ms. Sherwood, the PSC’s ability to monitor pricing and prevent predatory practices is severely restricted.

Fourth, discrimination in pricing and services based on economic status is not prohibited in the bill, and the lack of transparency in pricing invites just such a result. The use of “customer profiling” in a deregulated marketplace will result in increased focus on customers who provide higher value, while customers who are considered marginal will be given marginal services.

Unlike the deregulation model in which the cost of services are required to be made public so that the consumer can compare, this bill eliminates disclosure of pricing, so that the companies can price services among identically situated consumers very differently. This lack of transparency in pricing makes enforcement of fair business practices by the Commission all but impossible, and will likely lead to a two-tiered system where the less sophisticated consumer and the consumer in less-competitive markets will subsidize the prices for the competitive markets. For the natural tendency of a provider in a deregulated market is to focus resources on the high-end consumers whose demand is elastic (meaning that they have other options), so that the profit will be made from shifting costs to those who are less sophisticated consumers and those who live in areas where real competition is lacking.

Fifth, the bill would categorically deem rates established for nonregulated services to be “just and reasonable” even though the Commission would not review them.

Sixth, small electing utilities would be allowed to increase rates after one year by up to the CPI, regardless of whether the increase is justified based on the utility’s costs.

Seventh, customers terminating basic or nonbasic services are not adequately protected against termination charges or penalties.

Finally, the complete deregulation of VOIP is not consistent with the federal Communications Commission Order in the Vonage case, which assumes that states will continue to enforce consumer protection laws that this bill would exempt VOIP from.

In closing, I ask that you vote no on this bill. Existing Kentucky law already provides the mechanism, with appropriate safeguards, to allow deregulation where competitive markets truly exist, and under such conditions that protect all consumers.

The announcement recently that AT&T, the largest U.S. telephone company, has agreed to buy BellSouth Corp. for about $65 billion in order to gain control of their shared wireless company (Cingular Wireless LLC) heightens concern with the proposed elimination of regulatory controls over rates in a marketplace where mergers and acquisitions are diminishing effective competition.

Please take the time to study this matter with the same deliberation that you gave to electric utility deregulation. Absent a compelling case that has thus far not been made as to why the existing process provided under KRS 278.512 cannot continue to be used by the telephone utilities, a proposal as lacking in consumer protection and as fraught with potential risks for rural consumers as is this bill should not become law.


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