The Pennsylvania Public Utility Commission (http://puc.paonline.com) made a major move yesterday to break up the logjam in the state’s local market by adopting a plan for the “functional structural separation” of Verizon Communications Inc. (www.verizon.com) into wholesale and retail units in the state.
While this is excellent news for competitive carriers in Pennsylvania and elsewhere, the decision fell short of requiring full structural separation, observers noted.
“The Pennsylvania commission decision comes as close as may have been politically possible to the threshold of implementing full structural separation of Verizon’s wholesale and retail operations,” observed Dena Alo-Colbeck, director of public policy for Miller Isar Regulatory Consultants (www.millerisar.com).
And even though state regulators did not implement true structural separation, for the first time an incumbent has been required to treat its wholesale and retail operations at arm’s length, Alo-Colbeck said.
Verizon isn’t finished, however, in erecting obstacles for the implementation of this order between its pending appeal to the state’s Supreme Court and newly introduced legislation that would prohibit any form of structural separation, she said.
“We are hopeful, however, that the commission will prevail, and that its order will create a blueprint for action in other states and in Congress.”
The PUC’s functional structural separation plan will be accomplished, in part, by applying a strict code of conduct that would provide for non-discriminatory access to the phone system for Verizon's retail arm and for Verizon's competitors, according to the PUC.
The plan also contains provisions to reduce costs for competitors serving rural areas and to substantially increase the fines Verizon would have to pay for violating performance standards, the PUC said.
PUC Chairman John M. Quain said that the plan strikes a workable balance between Verizon and its competitors.
“A functional structural separation will be seamless for Verizon customers because they will never actually be moved to a new company,” Quain said. “At the same time, a strong code of conduct and increased penalties tied to Verizon's performance should be enough to convince competitors that this commission will not tolerate any discriminatory actions by Verizon.”
If Verizon doesn’t accept the PUC plan, it will face the possibility of full structural separation and the breakup of the company in its Section 271 proceeding that’s currently before the commission. The company was reviewing the PUC order at press time.
The PUC made clear that with a functional structural separation, Verizon would continue to operate as one company but with both divisions required to operate apart pursuant to a code of conduct.
In addition to several conditions and requirements imposed on Verizon, the PUC’s order also increases the fines Verizon would pay for failing to meet service standards for fulfilling orders.
The order also contains a provision to make it cheaper for competitors to serve rural areas, where competition is severely lacking, the PUC said. The cost to competitors to lease a standard loop will be lowered by 75 cents, or 4.4 percent, in Verizon's Density Cell 4, which encompasses most rural areas in the state.
Quain said that a functional structural separation approach should deliver the benefits of competition to customers sooner than a physical breakup because a physical breakup would be followed by years of costly lawsuits.
“After carefully reviewing the record in this case and examining all of the proposals, we believe this form of separation will enable us … to open the local telecommunications market to competition and to create more choices for Pennsylvania consumers," Quain said.
Immediately following the 5-0 vote, Quain also sharply criticized Verizon for deliberately obstructing the structural separation proceedings that led to the PUC’s decision and for trying to alarm the public with a campaign of misinformation.
Pointing to a blitz of advertising throughout most of this month, Quain said that Verizon "has threatened the citizens and businesses of the commonwealth with negative consequences and outcomes ... far beyond the foreseeable scope of the proceeding.”
"Verizon did this to portray structural separation as leading to lost jobs and broad-based negative economic impact, while Verizon threatened to relegate Pennsylvania to virtual 'backwater' status in the Information Age," he added.
Quain has requested that the PUC Law Bureau initiate an order requiring Verizon to justify why the commission should not fine the company for its conduct. If Verizon fails to prove its case, Quain said the PUC should order the company to run an ad campaign to cure the damage it has caused and to contribute to a technology deployment fund. The ad campaign would be equal in dollars to the one Verizon has been running to stop its separation, according to the PUC.
Quain and Commissioner Nora Mead Brownell, in a joint statement, also directed an inquiry into the scope of Verizon's assertions about potential job losses and the level of infrastructure investment in Pennsylvania.
On the side of competitors, John D. Windhausen Jr., president of the Association of Local Telecommunications Services (ALTS) (www.alts.org), says that a separate wholesale unit would treat all customers equally, including CLECs and Verizon’s retail company.
“The upshot would be an increase in competitive choice and increased revenue for Verizon from the very competitors that today they’re trying to thwart – CLECs,” Windhausen says.
“Verizon certainly has no business reason to oppose restructuring into wholesale and retail units, since both would be better off,” adds Kim Kirby, ALTS’s assistant general counsel. “The problem is an ingrained monopoly mindset and way of doing business. But once Verizon looks to the future instead of the past, it will see the benefits of the proposed restructuring.”
James Bradford Ramsay, general counsel for the states’ lobbyist, the National Association of Regulatory Utility Commissioners (NARUC) (www.naruc.org), says that if the Pennsylvania PUC's decision is not derailed by state legislative or, less likely, court action, it will be closely watched by other states during its implementation phase.
“CLECs pushing the idea at various commissions will get a boost once it is apparent that the anticipated benefits are being realized,” Ramsay said. “But the fact that this has gotten out of the Pennsylvania PUC despite Verizon’s intense lobbying efforts has already given AT&T and others … added impetus.”
A dozen or more states have at least informally discussed the idea of structural separation, Ramsay said.
The next big question, he adds, is will any court ‘stay’ the PUC’s action or will the state legislature step in?
Verizon currently is reviewing the PUC’s order, citing some of the requirements as being “troublesome.”
