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Qwest’s Proposal to Deregulate Local Telephone Service for Residences and Small Businesses


The Common Interest Briefings:
Qwest’s Proposal to Deregulate Local Telephone Service for Residences and Small Businesses

Results

105 randomly assigned members of The Common Interest read the briefing materials that follow and then answered the questionnaire.

Because the vast majority of these members—92%—oppose the Qwest proposal to deregulate the price of local telephone service, the position of The Common Interest is to oppose this proposal. Even more of our members—96%— oppose deregulating the price of telephone service specifically for small businesses. 88% of our members believe that effective competition does not exist for Qwest’s local landline service.

CLICK HERE TO SEE A FULL REPORT OF THE RESULTS

Executive Summary

Should Qwest be able to raise or lower the price it charges for basic local telephone service for residences and small businesses without approval of the state Public Utilities Commission (PUC)? Qwest argues that it should because cell phones provide enough competition now to control its prices. If the Qwest proposal passes, other telephone companies that provide basic local telephone service in areas of Idaho where Qwest does not, such as Verizon in northern Idaho, will be able to avail themselves of this legislation as well. This proposal concerns our entire state.

The main question before us is fairly simple. If Qwest increases its prices, would cell phones be a viable alternative for Idaho consumers to turn to? If cell phones are a viable alternative, then the Qwest proposal probably serves the interests of Idaho consumers. If cell phones are not a viable alternative, then the Qwest proposal probably does not serve the interests of Idahoans.

These briefing materials review the existing laws, the changes proposed, and the evidence of whether cell phones effectively compete with landlines. The most credible evidence we find comes from national studies that show that about 5.5% to 6% of American households have found cell phones a sufficiently viable alternative that they have “cut the cord” on their landline phone and now rely exclusively on their cell phones. That is up from about 1% to 1.5% of households in 2001. Eighty-nine percent of households have chosen to maintain their landline service, including 52% of American households that have chosen to use cell phones as a supplement to their landline phones and 37% of households that have chosen to rely exclusively on their landline phones.

I: Introduction

As you review these briefing materials, it will be helpful if you keep in mind the simple question of whether you think cell phones are a viable alternative to landlines for Idaho consumers. Since all of us are Idaho consumers, no one is better qualified to answer this question than we are. If Qwest raised residential service prices, would “cutting the cord” of the phones you plug into the wall at home be a viable option for you? Could you rely soley on your cell phone for your home phone use? If Qwest raised prices for phone service to small businesses, could your small business or the small business owners you know rely exclusively on cell phones?

It will also be helpful to recognize that you’re about to wade into a very complicated discussion of regulation of the telecommunications industry. We’ve made this as straightforward as we’re able, but the materials will certainly demand your full attention. It’s worth it: All of us will be affected by this policy decision.

You might find it helpful to review the questionnaire questions before reading the briefing materials. CLICK HERE TO GO TO QUESTIONNAIRE.

II. Review of Existing Policy and the Proposed Change

Public policy in the United States has generally assumed that consumers are better served when free market forces, rather than government regulation, determine the price and quality of goods and services. In the absence of competition, it is generally assumed that government regulation is needed.

As telephone technology emerged in the early 20th Century, everyone recognized the significant benefits that affordable universal service would bring to the public. The government felt that companies needed assurance of a return on their investment to willingly make the enormous initial capital expenditures required to extend phone lines to homes and businesses. Accordingly, the government granted companies exclusive, or monopoly, access to certain geographic areas, and saw regulation of these companies as a necessity.

Over time, public policy shifted to recognize and encourage free markets in the telecommunication industry. And, as free markets emerged, government regulation was no longer seen as necessary. In 1988, Idaho became an early mover in this trend when the legislature deregulated the telephone industry except for the price of basic local telephone service for residences and small businesses. The legislature felt that regulation of the price of basic local telephone service was still needed because of insufficient competition in that market.

In 1996, Congress passed a telecommunications act to facilitate the emergence of free markets for basic local telephone service. This act required previously monopolistic telephone companies to facilitate competition by providing other companies with access to their networks at wholesale prices. In 1997, the Idaho legislature responded to this federal act by creating provisions for the deregulation of prices charged for local telephone service should sufficient competition be established.

The provisions for deregulation of local telephone service are outlined in Title 62, Chapter 6 of the Idaho Code. This is where the legislature spells out the standards for judging whether consumers have viable alternatives to their existing landline service. The legislature expressed its intent regarding the competition necessary to result in deregulation in 62-602(2):

It is the intent of this legislature that effective competition throughout a local exchange calling area will involve a significant number of customers having both service provider and service option choices and that actual competition means more than the mere presence of a competitor. Instead, for there to be actual and effective competition there needs to be substantive and meaningful competition throughout the incumbent telephone corporation’s local exchange calling area.

In 62-622(3)(b), the legislature offered an exact definition of the “actual and effective competition” that must be present in order for the Public Utilities Commission (PUC) to deregulate prices of local telephone service:

There are functionally equivalent, competitively priced local services reasonably available to both residential and small business customers from a telephone corporation unaffiliated with the incumbent telephone corporation.

Idaho Code also provided a procedure by which deregulation could occur. The Statutes require the PUC to stop regulating basic local telephone rates when evidence is presented to the Commission that establishes the existence of effective competition.

In 2003, Qwest filed an application with the PUC requesting the deregulation of its basic local telephone rates for residences and small businesses (defined as less than five telephone lines) in the Boise, Caldwell, Idaho Falls, Meridian, Nampa, Pocatello, and Twin Falls exchanges due to the existence of effective competition in the form of cell phones. After reviewing the evidence, the PUC denied Qwest’s application in October 2003.

Dissatisfied with the PUC’s decision and convinced that deregulation is a policy question that ought to be handled by policy makers, Qwest put forward a proposal to the 2004 Idaho legislature to deregulate basic local telephone rates for residences and small businesses throughout the entire state due to the existence of competition in the form of cell phones, other landline service providers, and new technologies such as Voice over Internet Protocol (VoIP). This proposal was defeated by a single vote in the Senate.

Opposition cited two major concerns. First, legislators who voted against Qwest’s proposal argued that deregulating basic local telephone service throughout the entire state disadvantaged rural customers. Legislators felt that rural residents did not benefit from the level of competition that existed in urban local telephone service markets. Second, many legislators who voted against Qwest’s proposal felt that the company was likely to raise rates significantly.

Qwest returned to the Idaho legislature this year with a revised proposal. This proposal, which asks for the deregulation of basic local telephone service throughout the entire state, addresses the two major concerns of the last legislative session. Qwest has agreed to link rural rates to urban rates indefinitely so that Idaho’s rural residents will benefit from the competition available to its urban residents. Qwest has also agreed to 10% price caps on rate raises for up to five years following deregulation. Under their proposal, basic local telephone services for residents, currently capped at $17.50, could increase to as much as $26.25 by 2010. Basic local telephone services for small businesses, currently capped at $32.50 for the first line, could rise to as much as $48.75 for the first line by 2010.

Our responsibility as Idahoans and as members of The Common Interest is to inform ourselves regarding Qwest’s proposal to deregulate basic local telephone service for residences and small businesses throughout the state of Idaho and to decide whether to endorse or reject that proposal for deregulation.

As mentioned above, the primary consideration is whether cell phones are a viable substitute for their landline service if Qwest raises prices. In the words of Idaho Code, are cell phones “effective competition” for landlines?

We have been struck by how anecdotal the evidence presented on this question during the last two legislative sessions has been. Even some of those who have vocally supported or opposed Qwest’s legislative proposals have failed to substantively address the most fundamental and important consideration of the existence of effective competition. Although we will include a list of supporters and opponents to Qwest’s legislative proposals at the conclusion of these briefing materials, our study of the issue suggests that the most substantive evidence offered to date comes from two sources.

The first and, we believe, the most useful source of evidence includes four national scientific surveys of consumer behavior in the telephone industry over the last several years. These surveys have not yet been examined for their relevance to the question of deregulation here in Idaho. Are cell phones a viable substitute for landlines? Millions of consumers in the US vote on this question as they decide whether or not to “cut the cord” of their landline service and rely solely on cell phones. These national surveys tell us just how many Americans are making this choice.

The second source of substantive evidence is Qwest’s experience before the PUC in 2003. Although the evidence presented before the PUC is certainly the most substantive that has been offered to date in the discussion here in Idaho, we found it rather complicated and of somewhat limited usefulness, partly because it is now dated. Accordingly, we provide only a brief summary of the proceedings here. We do provide links to the Commission’s ruling and to important testimony as well as a link to our analysis of the most critical evidence. If you are interested in examining this evidence more closely, we recommend that you do so.

III: Summary of Evidence of Effective Competition from National Studies of Consumer Behavior

There are millions of American consumers. How many of them have decided to “cut the cord” on their landline phones because they feel that cell phones are a viable substitute?

A number of sophisticated national studies examine this question. In 2003, Qwest cited such evidence in the PUC proceedings. They referred to an FCC report showing that 3% - 5% of wireless phone subscribers relied solely on their wireless service. There are now studies available that provide more compelling evidence. The four most useful studies we found provide particularly valuable information because they are recent, they use the most rigorous research methods available, and their sample sizes range from 5,000 to 32,000.

Below we offer a brief description of the results of each of these four studies in addition to a fifth study that used less obviously rigorous methods, but which provides interesting projections for the future. We have provided links that allow you to find out more about these studies if you wish.

Here are the findings for each of those five studies:

  1. SAC: The Survey of the American Consumer found that the percentage of US households relying exclusively on cell phones had risen from 1.5% in 2001 to 5.5% in 2004.
  2. CPS: The Current Population Survey found that 6% of US households relied exclusively on cell phones in 2004.
  3. CEIS: The Consumer Expenditure Interview Survey found that the percentage of households that had “cut the cord” to rely exclusively on their cell phones had risen from barely more the 0% in 1994 to 4.2 % in 2003.
  4. NHIS: The National Health Interview Survey found that 3.6% of households used only cell phones in 2003.
  5. Yankee Group: The Yankee Group has projected a rise from 2.7% of households relying exclusively on cell phones in 2003 to 13.6% in 2009.
These findings are represented graphically in Figure 1.

Figure 1
Percentage of US Households Using Only Wireless Phones According to Five Studies


Adapted from MRI (2004); Tucker, Brick, Meekins, & Morgenstein (2004) citing the CEIS and the CPS; the NHIS (2003); and the Yankee Group (2004)

The Current Population Survey and Consumer Expenditure Interview Survey provide additional useful insight. In addition to identifying the percentage of households that only use cell phones, they identify the percentage of households that use landline only, the percentage that use landline and cell phones, and the percentage that have no phone at all. The Current Population survey results capture the 2004 telephone service market:

  • 89% of households have chosen to maintain their landline service. That includes:
  • 52% of American households that have chosen to use cell phones as a supplement to their landline phones
  • 37% of households that have chosen to rely exclusively on their landline phones
  • 6% of households have chosen to rely on cell phones only, as indicated above
  • 5% of households have no telephone service
Figure 2 graphically illustrates these findings and also shows how American consumers’ telephone choices have changed over the last decade. The figure illustrates three facts:
  1. ”Cutting the cord” of landline service to rely only on cell phones is increasing
  2. The vast majority of US consumers have chosen not to “cut the cord”
  3. The majority of cell phones are used as supplements to, not replacements for, landlines

Figure 2
The Percentage of US Households using Cell & Landline phone service, landline phone service only, cell phone service only, or no phone service


Adapted from Tucker, Brick, Meekins, & Morgenstein (2004) citing the Consumer Expenditure Interview Survey for the 1994 – 2003 percentages and the Current Population Survey for the 2004 percentages.

The question remains of how similar or different Idaho is compared to the nation at large. The Current Population Survey breaks down its national findings by various demographic categories, providing suggestive answers to this question. Perhaps most usefully, the CPS looked at the percentage of households that relied solely on cell phones in areas outside the 100 largest metropolitan areas in the country. In those areas, they found that 5.3% of the households relied only cell phones, compared to the 6% national average. Since none of the 100 largest metropolitan areas are in Idaho, it appears that the percentage of Idaho households that only use cell phones is lower than the national average. Unfortunately, we have not been able to find any similar studies of the choices of small business owners. In the absence of similar studies on small businesses, please ask yourself whether small businesses would be more or less likely than households to “cut the cord”? CLICK HERE TO READ MORE ABOUT THESE STUDIES.

IV: Summary of Evidence of Effective Competition Presented before the PUC

The purpose of the PUC proceedings was to determine whether Idahoans would be able to “cut the cord” if a deregulated Qwest raised the prices of its landline local phone service.

In its argument that Idahoans could “cut the cord,” Qwest offered two primary sources of evidence. First, Qwest offered the results of a study of consumer perceptions conducted by Dr. Douglas J. Lincoln, Professor of Marketing in the College of Business and Economics at Boise State University. In Lincoln’s study, 800 residential and small business landline telephone customers in the seven exchange areas were surveyed about their perceptions of the local telephone service market. Lincoln argued that consumer perceptions are important evidence because “perceptions will drive [consumer] behavior” (PUC 13). Second, Qwest compared Qwest’s basic local telephone services and pricing with cell phone services and price offerings.

According to Idaho law, Qwest’s evidence had to convince the PUC of the existence of “actual and effective competition.” This is defined as existing when “there are functionally equivalent, competitively priced local services reasonably available to both residential and small business customers.” PUC Staff had the opportunity to analyze Qwest’s evidence and supplement this analysis with evidence of their own. Intervenor witnesses—interested individuals affiliated with neither Qwest nor the PUC—also presented evidence. The PUC commissioners Paul Kjellander, Marsha H. Smith, and Dennis S. Hansen—political appointees of Governors Phil Batt and Dirk Kempthorne—considered all evidence and then ruled against Qwest’s petition.

Functionally Equivalent Local Services

Although Qwest argued that functionally equivalent local services do exist for both residences and small businesses, PUC Staff and intervenor witnesses argued that they do not. As evidence for Qwest’s argument, Lincoln testified that 50 percent of residential consumers and 31 percent of business customers surveyed in Lincoln’s study answered “yes” to the question: “For the purpose of making and receiving local calls, could your household/business rely solely on cell phone service?” PUC Staff and intervenor witnesses dismissed this evidence. First, they disagreed with Qwest’s narrow definition of “local services” as “making and receiving local calls.” Wayne Hart, on behalf of PUC Staff, testified that legislatures intended the statute’s reference to “local services” to include such services as faxing, Internet connection, hunting, rollover, etc. Intervenor witnesses insisted that these services are critical to small businesses and, as a result, cell phones are not functionally equivalent. In its ruling against Qwest, the Commission agreed that Qwest’s definition of “local services” was too narrow and contradicted the intent of Idaho law, and that, as a result, Qwest’s evidence did not prove that cell phones were functionally equivalent to Qwest wireline local service.

Competitively Priced Local Services

Although Qwest argued that competitively priced local services do exist for both residences and small businesses, PUC Staff argued that they do not. As evidence for Qwest’s argument, Lincoln testified that, in response to the consumer perception survey question, “Do you think the monthly price of using cell phone service for your household/business is about the same, more than, or less than the price of using traditional phone service?” more customers thought cell phone service cost “about the same” or “less than” traditional landline service than those who thought it cost “more” (Lincoln 32/36). Lincoln also testified that his analysis of Qwest’s comparative study of its own landline service with cell phone services revealed that “wireless service providers have clearly priced their services in a comparable range with Qwest’s basic local exchange service” (Lincoln 16). On behalf of PUC Staff, Hart testified that “Dr. Lincoln’s [comparative] analysis did not accurately reflect the actual amount of usage of the majority of Qwest’s customers” (Hart 8). Hart said that when he added “appropriate amounts of usage” into the comparison, cell phone plans ranged from $13 to $91.49 more per month than Qwest’s comparable service plans (Hart 9-10). Hart also testified that, for businesses, “wireless rates are higher than the Qwest rates for more than 80% of the usage categories” (Hart 11-12). In its ruling against Qwest, the Commission concluded, with PUC Staff, that Qwest’s “price comparison exhibits show significant disparity between prices for wireless and wireline service” (PUC 14). The Commission also expressed its dissatisfaction with consumer perception as a measure of effective competition: “The Commission must base its decisions on reality, knowing that customers some day will learn that reality may be different than their perceptions (PUC 13).

Reasonably Available Local Services

Qwest argued that reasonably available local services do exist for residences and small businesses and PUC Staff concurred that this was true “for the most part” (Hart 27). As evidence for Qwest’s argument, Lincoln testified that 87 percent of residential respondents and 94 percent of business respondents said “yes” to the question: “Do you think it is easy to get cell phone service in your area.” Lincoln testified that similarly high percentages of respondents said “yes” to the question: “Do you think there is a choice of cell phone service in your area?” On behalf of PUC Staff, Hart agreed that wireless services were reasonably available except for customers “located in the interior of a brick building, or in a basement, or the shadow of a brick building, [who] may not be able to get a strong enough signal to communicate effectively” (Hart 27).

On two of three standards defining the existence of effective competition—functional equivalency and competitive pricing—the PUC found that effective competition did not exist and that, as a result, regulation of Qwest prices for basic local phone service should continue.

Actual Consumer Behavior

In ruling against Qwest, the Commission suggested that Idahoans’ actual decisions to “cut the cord” could be analyzed to establish the existence of effective competition. However, the Commission stopped short of establishing a specific standard (a number or percentage of Idahoans who “cut the cord” that would demonstrate effective competition.) In the proceedings, Qwest testified that landline contracts were decreasing and that cell phone subscriptions were increasing. Qwest now demonstrates that between December 2001 and December 2004, its landline contracts decreased from 540,321 to 476,345 while, during this same period, total cell phone subscribers increased from 444,864 to 680,860. In the proceedings, Hart, on behalf of PUC Staff, testified that he thought Qwest had lost landlines to cell phone competition: “We do not dispute that for a narrow niche market, wireless may substitute for wireline service. The 3 to 5% penetration identified by the FCC in FCC 02-179, Section II.A.1(e)(i) may be reasonably accurate” (Hart 29).

You might ask yourself whether you find Qwest’s evidence before the PUC or the PUC Staff’s critique of that evidence more compelling.

You might ask yourself how many Idahoans would have to “cut the cord” for you to feel that effective competition had been definitively established and whether such a standard might be fairly established at all.

More Information on PUC Proceedings

  1. CLICK HERE TO READ THE PUC’S PRESS RELEASE SUMMARIZING IT’S DECISION
  2. CLICK HERE TO READ THE FINAL PUC ORDER
  3. CLICK HERE TO READ THE TESTIMONY OF THE MAIN PUC STAFF WITNESS
  4. CLICK HERE TO READ THE TESTIMONY OF THE MAIN QWEST WITNESS
Go to this PUC webpage to access the full record of the PUC proceedings:
http://www.puc.state.id.us/internet/cases/summary/QWET0225.html

V: Supporters and Opponents of Qwest’s 2004 and Current Legislative Proposals for Deregulation.

It is important to note that because Qwest’s current legislative proposal addresses the two primary concerns raised regarding its 2004 legislative proposal, individuals and institutions who opposed the earlier proposal are now neutral or supportive. This listing includes all individuals and institutions we identified as supporting or opposing Qwest’s proposals. There may be additional individuals and institutions who should appear on this list, but do not.

We would urge members of the Common Interest to consider these individuals’ and institutions’ arguments regarding the most fundamental and important issue of establishing whether or not effective competition exists in the basic local telephone service market for residences and small businesses.

Supporters of Qwest’s 2004 Legislative Proposal

  • Governor Dirk Kempthorne

Opponents of Qwest’s 2004 Legislative Proposal

  • The American Association of Retired Persons

Supporters of Qwest’s Current Legislative Proposal

  • Governor Dirk Kempthorne
  • State Affairs Committee of the House
  • The Twin Falls Times-News Editorial Board

Opponents of Qwest’s Current Legislative Proposal

  • The Idaho Community Action Network (ICAN)
  • The Idaho Farm Bureau
CLICK HERE TO READ A STATEMENT QWEST MADE TO OUR MEMBERS AT OUR INVITATION.

More about Qwest’s Perspective

More About Supporters’ and Opponents’ Arguments

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