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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

Broad-based Coalition Opposes Telecom Deregulation Bill  Posted: April 6, 2006
What do AARP, the Kentucky Catholic Conference, Southeast Telephone, the Municipal Electric Power Association of Kentucky, the Kentucky Resources Council, Time Warner Telecom, the Kentucky Internet Service Providers Association, US LEC, the Southeastern Competitive Carriers Association and “CompSouth” Competitive Carriers of the South have in common?

They ALL know that HB 337 will be costly for many Kentucky consumers. Below is the text of a joint letter sent by these organizations explaining their concerns with the anti-competitive, anti-consumer effects of enacting House Bill 337, which could voted on by the Kentucky Senate on April 10th through 12th. To express your views to the Kentucky Senate on HB 337, call 1-800-372-7181.

Please Oppose or Amend HB 337: Telephone Deregulation

What does the bill do?

HB 337 removes Public Service Commission oversight for an “electing” telephone utility of all telephone services except for basic service, defined as a single local line with no other features such as call waiting or caller ID or services such as long distance.

Is the legislation needed?

No. KRS 278.512 already does what this bill intends. The PSC can and has deregulated in geographic areas where the agency has found that there is actual competition. This legislation is not needed, and undercuts existing law by allowing the major companies to deregulate without proving that actual competition exists.

How will HB 337 hurt consumers?

Proponents say basic local exchange service remains regulated and the price is capped for 5 years. But the definition of basic local exchange service excludes any additional features or services [Section 1(1)], so that adding even one feature such as caller ID, call waiting, or long distance, puts basic local exchange service in the nonbasic, deregulated domain. Any customer with these extras will have no price capping for 5 years and will have no recourse to the PSC for any complaints as to pricing, investigation, or enforcement of service obligations.

BellSouth has an almost 60% penetration in the long distance market, so most of its customers will be in the deregulated domain as soon as BellSouth files its alternative regulation plan. HB 337, Section 4(3) and (4) say that only the terms of the agreement and the marketplace govern nonbasic service and no other law is applicable including a wide array of consumer protection laws that are swept aside with the “notwithstanding” language. One example of terms and conditions that could be imposed is BellSouth's standard agreement for deregulated long distance, which would require Kentucky residential customers to pay filing fees for mandatory arbitration and submit to GEORGIA law for all disputes, and GEORGIA courts for any dispute not subject to arbitration.

Sections 3(6) and 4(4) eliminate a dozen core consumer protections in Kentucky law. For example, KRS 278.170(1) is intended to require that all customers buying the same service in the same geographic area pay the same rate. Removing this requirement allows significant discrimination against less sophisticated consumers.

HB 337 allows below-cost pricing without a showing of actual competition or PSC oversight, as required under current law. The dominant carriers can shift losses across their large territory. Where there is no competition, which is much of Kentucky, rural consumers will likely subsidize competition in metropolitan areas where the dominant carriers will take losses on products and services sold below-cost.

How will HB 337 hurt other providers?

Only the dominant carriers can sustain predatory pricing because of their large service territories. They also have a large range of services that they can combine in below-cost package deals, including broadband and wireless telephone. By “bundling” telephone and broadband in package deals, the dominant carriers can crush both telephone and broadband providers.

Predatory pricing allows the dominant carriers to target a specific area or a small provider, such as a small independent or municipal provider, by selling below-cost in the small provider’s area and making it impossible for the small provider to compete. Present law gives the PSC authority to monitor anti-competitive practices, but the only so-called remedy for predatory pricing in HB 337 is litigation, which is no remedy at all for small providers that would face the overwhelming legal resources of the corporate giants that dominate the telephone industry.

Some of the new companies coming into Kentucky and several municipalities are deploying fiber optic, state of the art broadband technology that makes Kentucky globally competitive. Fiber optic is far superior to DSL broadband. Kentucky needs these providers to stay in business.

The fact is that there are many providers capable of deploying broadband across Kentucky. The General Assembly does not need to bargain away consumer protections and a competitive environment in return for promises by the Bell companies to provide rural broadband.

Is there an unlevel playing field?

No. All telephone service is regulated, regardless of who provides it or whether it is provided by line or cable. Only wireless is unregulated as exemplified by Cingular wireless, which is owned by BellSouth and AT&T, who have announced their intent to merge.

Is there competition in Kentucky?

In some metropolitan areas of Kentucky there is actual competition. But much of rural Kentucky is served by only one carrier according to mapping by the Public Service Commission (enclosed).

What don’t we know about HB 337?

There are many questions about the intended and unintended consequences of HB 337. What is the effect of exempting telephone utilities from more than a dozen statutes relating to PSC authority, particularly in light of the announced merger of AT&T and BellSouth? What protections for in-state interests are we giving up?

For example, KRS 278.255 authorizes the PSC to hire outside, independent firms to conduct management and operations audits. KRS 278.300 involves the issuance or assumption of securities, which is what often happens in a merger. KRS 278.230(3) authorizes the PSC to take reports under oath. How do these changes affect PSC authority as the representative of public interests in a major merger case? What is the standard for basic line rate increases after the five year cap ends?

It is clear for small telephone utilities that rate increases are based on the Consumer Price Index for urban consumers after the expiration of the one year cap [Section3(9)]. But it is unclear what standard is to be used for large carrier rate increases in Section 3(2).

Are the Bell companies really feeling the pinch?

The Bells agreed under the 1996 Telecommunications Act to open the local telephone market to competition in exchange for entering the profitable long distance market. Latest figures for BellSouth show that it has a long distance penetration of 57.7% of residential customers and 61.7% in business accounts with a 36% increase in 2005 4th quarter profits over the 4th quarter of 2004, despite a decrease in local market share.

What action should the Kentucky Senate take on HB 337?

Both the PSC and the Attorney General’s Rate Intervention Division testified in the House committee about concerns with HB 337 that have not been resolved in the current version of the bill. The Senate received HB 337 late in the session. Without knowing the full consequence of this legislation, the legislation should not pass and a full study should be conducted during the interim, which should include a thorough review of the problems arising in other states after passage of deregulation legislation. At a minimum, two amendments are needed: a rural carve-out amendment and a prohibition on predatory pricing. Both have been filed.


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