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Verizon, Cable Companies Call For Reform of ‘Outdated’ Telecom Rules

Companies argue regulatory reform would foster New Jersey’s economic development and lead to lower prices for consumers.

Verizon New Jersey chalked up a small victory recently in its crusade to persuade New Jersey to update its telecommunications regulations and laws, some of which date back to the 19th century.

The state’s Board of Public Utilities (BPU) granted Verizon’s request to stop providing its White Pages directory to customers unless they specifically request the weighty tome or a CD-ROM version of it.

The telecom giant has been publishing about 4.5 million copies of the White Pages a year and believes most of them ended up in the garbage bin

That is just one of the requirements placed on Verizon, as the incumbent phone carrier, that its competitors do not have to comply with. Verizon wants the state to overhaul laws that regulate telecommunications services, saying they are seriously outmoded in relation to the industry’s technological and competitive change. State regulations directed at just one competitor create an unlevel playing field that’s against the public interest, says the carrier. An even playing field fosters competition, promotes spending by those companies and can drive down prices for consumers, Verizon argues.

State legislators are starting to listen and say they expect to take up the issue in the spring, when they will review the various regulations imposed on telecom, cable, Internet and satellite providers, as well as tax policy.

A number of consumer advocates and the state Division of Rate Counsel are expected to oppose some of the changes, arguing that consumers still need the protection of these regulations -- especially for crucial services like the phone.

Major Telecom Reform

About 25 states have enacted major telecom regulatory reform in the past five years. Most telecom regulations were set up before widespread competition among phone companies, cable TV operators and wireless phone services and before the Internet and its applications became ubiquitous. Telecom and cable providers say the regulations they are forced to adhere to are outmoded, expensive and counterproductive to economic growth.

“Outdated rules that are remnants of the monopoly era have no place in a competitive environment,” said Dennis Bone, president of Verizon New Jersey, when he addressed the state Assembly Telecommunications and Utilities Committee in June.

The Jersey Cable Telecommunications Association (NJCTA) – which represents Comcast, Cablevision and Time Warner Cable -- registered a similar complaint in a hearing in March before Gov. Chris Christie’s Red Tape Review Group.

An overhaul of the laws, say the providers, could mean additional investment in New Jersey and greater economic development. It could also mean a change in the taxes applied to communications services, such as video programming, and franchise fees paid to municipalities.

The Indiana Experience

Bone points to the experience of Indiana, one of the first states to create a comprehensive package of changes to its telephone and video laws in 2006.

Indiana commissioned a follow-up economic impact study that determined that within a year of reform, telecom companies had invested an additional $400 million and created thousands of new jobs in the state.

New Jersey’s most recent major telecom change was also in 2006, when it allowed TV providers to obtain statewide franchises for video services, rather than going to each municipality. The BPU gave Verizon the first statewide franchise, and the telco says that New Jersey benefited as a result of that reform.

Bone notes that the video market now has competition between cable companies and Verizon, which has hired 3,000 people and invested over $500 million in the past three years to deploy its FiOS service in New Jersey.

“Telecom companies can be a key industry to New Jersey,” Bone says, citing the state’s legacy as the original home of Bell Labs and AT&T. “And if you look around and say what kind of public policy should we change or tweak in order to make it more attractive, wouldn’t one of the first things you would look at is regulatory policy and make sure it matches the marketplace?”

“New Jersey should be a thought leader…. New Jersey should be out front,” Bone says. “We shouldn’t be lagging states all across the country in terms of reforming their laws."

Verizon is pushing hard for deregulation of its basic landline business, so it doesn’t have to spend money to comply with what it claims are burdensome regulations for that ailing service. It also wants to do away with unnecessary filings that duplicate information readily available online, burdensome state reporting requirements already imposed by the Federal Communications Commission and costly and inefficient records retention rules.

Complying with these regulations is costly, and the money would be better spent being invested in equipment and services for customers, Verizon argues.

Cable providers have their complaints about state regulations, too. They oppose rules that prevent them from easily relocating walk-in offices and also gripe about the amount of data they're legally required to keep for the BPU. And both want to see an end to uneven franchise levies (an issue NJ Spotlight will address in a second story), complaining that satellite companies such as DirecTV and Dish Network don’t have to pay any franchise fees to the state.

Landline Loss

Verizon's basic voice service faces serious challenges, and the telco would like flexibility in how it can offer voice. Verizon is losing 30,000 to 35,000 landline customers a month in New Jersey, according to Bone.

In 2001 the incumbent carrier had 6.7 million landlines in the Garden State. This year that number has dropped to 2.8 million, as consumers switch to cellphones or Internet phone service, Bone says.

Bone points out that Verizon is still required by law to offer a basic exchange line to all customers, while its cable competition is not bound by the same constraint. Cable operators can bundle TV, Internet and phone services at a discounted price to attract consumers. Verizon can also package these so-called Triple Play services, but it must still provide landlines as a standalone service for those who want it.

When Comcast and Cablevision started offering telephone service, Bone says, they did not come under the same regulations.

“Their equivalent to Verizon’s landline service has never been touched by regulation, period,” he adds, noting that he’s not advocating that the state start regulating cable’s phone service.

But Stefanie Brand, director of the state Division of Rate Counsel, doesn’t buy the argument and thinks those statistics may be deceiving.

“I can tell you my mother has a cellphone and it is never charged,” she says.

Brand continues, “There is a still a segment of the population that uses telephones. And that’s where I think Verizon’s arguments fall flat.”

To support her point, Brand recalls when a man showed up at a hearing in 2008 when Verizon was petitioning for major deregulation of local phone services, including residential landlines.

“He was an elderly gentleman,” she says. “He lived in Trenton. He didn’t want cable. He didn’t want a bundle. He didn’t want the triple play. All he wanted was to be able to call his kids and the pizza parlor around the corner. And nobody is competing for his business.”

Watchdog Group

The watchdog group, New Jersey Citizen Action, is equally unmoved by Verizon’s arguments.

“Many in New Jersey, particularly senior citizens and other vulnerable residents, rely heavily on affordable basic telephone services,” says Evelyn Liebman, director of Organizing and Advocacy for New Jersey Citizen Action.

“In 2008,Verizon made this same claim of robust competition but could not provide real evidence that a competitive market for these services actually exists in New Jersey,” she says. “They have also failed to provide any substantial evidence that such competition exists in 2010 or that regulation protecting consumers harms their business operations and/or shareholder profits.”

Verizon also cites another unfair requirement on its landline business. Verizon is required by law to discount its basic landline for customers who are part of the state’s Lifeline program, where those whose income falls under a prescribed threshold pay less than $2 a month for their phone service. Verizon has 100,000 Lifeline customers now, according to Bone.

Although Verizon says it has no objection to the program, the telco does object to the fact that newly qualifying Verizon customers are automatically enrolled each quarter, whether or not they ask for it. And it is yet another program that does not apply to its competitors.

When many urban customers are abandoning landlines in favor of wireless phones, Verizon questions the necessity of the auto-enrollment,

The Rate Counsel’s position is that Verizon inherited the obligation as a public utility to serve the public in terms of basic phone service

Walk-In Offices

Verizon is not alone in its displeasure with current telecom rules. Cable providers are also unhappy -- but for different reasons.

One big complaint they have is that if they have an expiring lease for a walk-in office or want to consolidate operation, they must first obtain BPU approval, a lengthy process that can more than a year, according to the NJCTA.

“This rule dates back to a time when customer reliance on local offices was high -- before operators had 24-hour phone service or other electronic alternatives for paying bills and exchanging equipment by mail,” the NJCTA says. “In 2010, however, the rule saddles operators with costs -- such as the expense of maintaining two leases while the BPU request for relocation is pending -- and leads to expensive legal and administrative expenses and delay.”

Jorge Reina Schement, dean of Rutgers University’s School of Communication and Information, is a member of Verizon’s consumer advisory board, and receives a small stipend in that role. But he believes that the communications company has a social obligation, and a legal one, to have walk-in offices.

“As to closing offices, regardless of who it is, they have contractual franchises with those cities,” Schement says. “They have local monopolies. They say they have competition. They do have competition, but it’s not a kind of free and open competition…. in return for that limited rather than wide-open competition, cable companies have agreed contractually to do things like maintain offices.”

Watchdog groups and the state Division of Rate Counsel, who oppose loosening of BPU rules on Verizon and cable operators, echo that sentiment.

“You need some regulation to make sure that there are offices that people can go to pay their bill or exchange their equipment or to get whatever service they need,” Brand says. “We’re not at the point where everybody in the world says they don’t need a landline or everyone in the world says I don’t need protection to make sure that the cable company or the phone company is doing right by me.”

Data Dumps

What also unites Verizon and the cable companies is the requirement to keep reams of data for the state Board of Public Utilities.

Cable providers, for example, have to keep voluminous records on their video service. One provider filed 35,000 pages of data in a single year.

Verizon claims it is required to collect reams of data on 21 service-quality metrics that Bone contends are really not important to the marketplace and are “not how we manage our service quality within the company.”

“This is something that is really onerous on us,” Bone says.

Here again, Schement disagrees, explaining that keeping data is crucial for Verizon.

“Without record keeping, we don’t know how well we’re doing or how well we’re not doing,” Schement says. “And it may be a burden, but I don’t think it’s a big burden for a telecommunications firms to keep records. Brand comes at the issue from another angle.

“That’s all that’s really regulated for them right now,” Brand says. “Just about everything else has been deregulated… and I guess I hear them talk and it’s almost like, ‘Well, we don’t want to do that anymore [keep state-mandated data] because it’s not the most profitable part of our business.’ And yet they benefited for many, many years from being a monopoly. So I don’t have a lot of sympathy.”

Regulatory Reform

Assemblyman Upendra Chivukula (D-Somerset) the chairman of the Assembly committee, and Sen. Raymond Lesniak (D-Union), chairman of the Senate Economic Growth Committee, are both backers of regulatory reform. Both also believe that effective change will be the result of slow, deliberate progress.

Telecommunications, Chivukula says is a complicated and ever-changing industry, and it will take careful study to decide what reform is necessary.

“The industry has evolved and you have various factors that are coming in, like Internet-based voice over IP, that is really taking over,” he states.

"If you don’t update the law, what happens is eventually these companies are not going to maintain those lines, and they’re not going to invest money because it’s not a growing business,” Chivukula says.

“This type of reform is not going to happen overnight,” Chivukula says. “We have to tweak it and we have to get the various stakeholders to buy into this concept.”

Lesniak thinks telecom reform could spur additional investment by companies like Verizon in the state, transforming New Jersey into a more enticing venue for telecom companies considering entering the state or expanding services here, creating jobs.

“So I think we need to change those laws,” he says. “It’s always difficult taking from one that has the competitive advantage. They want to fight to retain it, but I think we have to fight against that and do what’s right for all parties, and mostly what’s important for the economy of New Jersey and our consumers.”

New Jersey’s well-publicized economic problems have taken the front burner with Gov. Chris Christie’s new administration this year. But Lesniak says that telecom reform could get some traction in 2011.

“Obviously, we’re not going to be able to get anything this year,” he says. “But I would hope that in the first half of next year we would take some actions to not only level the playing field but reduce the unnecessary regulatory burdens that are no longer needed to protect the consumer.”

Linda Moss is a veteran business reporter and freelance journalist who has worked for Crain's New York Business and Multichannel News, a cable trade publication.

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