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of my public testimony on residential ISDN in Delaware
DIRECT TESTIMONY OF SCOTT RAFFERTY
Q. PLEASE STATE YOUR NAME AND ADDRESS.
A. My name is Scott J. Rafferty. My business address is 4730 Massachusetts Avenue, Washington DC 20016.
Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE DELAWARE PUBLIC SERVICE COMMISSION?
A. Yes. I presented testimony and prepared comments on behalf of the Public Advocate in Regulation Dockets No. 33, 41, and 42 (alternative regulation) and Case No. 92-47, the most recent Bell Atlantic rate case.
I. BACKGROUND AND SUMMARY
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. My testimony proposes that residential ISDN be tariffed on a revenue neutral basis. This is required by the terms of the Telecommunications Technology and Investment Act and by the rules that Staff has proposed to implement the statute. Universal ISDN was one of the principle goals of the statute. Unlimited local usage for a modest price, indexed to inflation, was one of the principal benefits of price cap regulation for Delaware consumers.
Q. WHAT IS AN APPROPRIATE PRICE FOR ISDN?
A. Bell Atlantic should offer a second residential line with 100 hours of ISDN data service at the same price as a second analog line with unlimited local usage. Additional minutes of use should be priced at true incremental cost (which I cannot determine with current data) and capped at the marginal cost of a dedicated ISDN circuit. Additional revenues from usage should be tracked and used to reduce other rates through a revenue neutral restructure. These prices will provide the predictability and affordability that consumers need to make the significant initial investment that ISDN requires.
Q. DO THESE RATES RECOVER BELL ATLANTIC'S COSTS?
A. Yes. Demand for residential ISDN has been for second lines, and it should be tariffed as such. Second lines generate significant excess contribution. Since Bell Atlantic equips residential installations with at least one spare pair, in most cases second lines can be provisioned with no additional trenching. Bell Atlantic includes all loop costs in the incremental cost of ordinary access lines, so any extraordinary growth in second lines - which ISDN creates - creates a windfall for Bell Atlantic. This windfall is more than sufficient to cover the actual incremental costs of an ISDN connection (e.g., the difference between an analog line card and an ISDN card plus the U-repeater).
The price for unlimited local usage was established when Bell Atlantic elected price cap regulation. The growth in usage for data transmissions was clearly foreseen. The consumer's adoption of a more efficient technology, which reduces transmission time, should not forfeit the entitlement to low-cost, flat-rate local service. Such a policy would be intensely discriminatory, since Bell Atlantic promotes Centrex ISDN for business customers to "nail up" virtual connections on a full-time basis - without any charge whatsoever.
Based on public sources, the true incremental cost of ISDN is between $4 and $9 and falling. Bell Atlantic claims that its cost studies, which have produced inconsistent results, are proprietary and cannot be disclosed publicly. The claim of proprietary treatment ignores the fact that ISDN is a monopoly service that cannot currently be replicated by any competitor. The inadequacies and inconsistencies of the cost studies are discussed in the restricted version of this testimony.
Q. SHOULD ISDN SUBSCRIBERS BE REQUIRED TO LOSE THEIR INTRASTATE VOICE PLAN?
A. No. The residential ISDN tariff provides that "the customer must subscribe to residence individual line per call service" and "local measured rate usage charges" apply to voice calls. Section 10A, Orig. Sheet 14, 2.d(1) and (2). The business tariff does not have this provision. This restrictions discriminates against residential customers and should be eliminated.
Q. DO YOU HAVE OTHER RECOMMENDATIONS?
A. Yes. The residential rate should be made available to schools, as has been done in Tennessee. The installation charge should be the same as for analog service.
II. TECHNICAL CHARACTERISTICS OF ISDN
Q. WHAT IS ISDN?
A. Integrated Services Digital Network is an architecture that allows people access to higher data speeds using existing telephone lines. It has been capable of implementation since about 1988 and is in use in a number of foreign countries. The purpose of the standard is to provide a gradual shifting of analog communications networks to digital transmission.
There are two levels of ISDN. The basic rate interface (or BRI) includes two bearer channels and one delta channel and is often abbreviated as "2B+D." Each of the bearer channels provides a circuit for digitized voice or data at a speed of 64 kilobits per second (kbps). The delta channel, which has a speed of 16 kbps, is generally used for signaling, but can transmit packetized data.
The primary rate interface includes a delta channel and either 23 or 30 bearer channels. Because this capacity exceeds most currently foreseeable residential applications, I do not recommend that it be tariffed as a residential service at this time.
Q. CAN ISDN-BRI CARRY TWO CONVERSATIONS AT ONCE?
A. Yes. In theory, each of the two bearer channels can carry an independent voice, data, or facsimile transmission, although the line has only one phone number. However, the most frequent application of residential ISDN may be for high-speed internet access. Most users will want to combine their two bearer channels (through bonding or the use of the multilink point-to-point protocol) to achieve a speed of 128 kpbs.
Q. HOW DOES THIS SPEED COMPARE TO ANALOG TRANSMISSION?
A. Because of Bell Atlantic's advanced network, computer users are often able to connect at the highest speed now capable of an analog modem, which is 28.8 kbps. However, the modem often steps down to lower speeds. In addition, the analog conversion makes the transmission particularly vulnerable to voltage drops and other interruptions. Most experts believe that 28.8 kbps is the practical maximum that modulated data will ever be able to travel over copper wire.
By contrast, 128 kbps service is almost five times faster than the highest attainable speed using modem technology. Furthermore, algorithms for digital compression are being introduced that will boost effective throughput even higher.
Q. HOW USEFUL IS THIS ADDITIONAL SPEED?
A. In recent years, a number of consumers and businesses have placed information on an internet-based network known as the "World Wide Web." The Web uses a graphical interface to permit users to view and download text, photographs, sound and video files through the use of "browser" software. The government published a free browser known as "Mosaic," while Microsoft bundled its "Explorer" browser into Windows 95. An even more popular browser is "Netscape," which has additional capabilities for transactions and database applications. Web sites are distinguished by addresses that begin with "http://." By connecting your computer to my Web site ("http://www.concentric.net/~Rafferty"), for example, you can search the new telecommunications act, track a Federal Express package, find a zip code or 800 number, download President Clinton's speeches or Bell Atlantic's press releases, connect to the Library of Congress, to the Idaho Public Service Commission, or the Japanese telephone company. The Web provides the ability to transfer from site to site through the use of Hyper-Text Mark-up Language, which creates "links" or "clickable maps" that the user can select with a mouse. Sites readily accessible from most personal computers may actually be located on servers throughout the world.
Web browsing can be almost intolerably slow at analog speeds, even with the best modems. For example, a high-resolution full-screen picture could contain a 1.5 megabit of data. Simply to view such a single frame would take 45 seconds under the best possible conditions attainable with analog technology. With ISDN, the image can be transmitted in about 12 seconds. Analog technology is incapable of transmitting quality voice and video files in real time.
Q. HOW BROADLY IS ISDN AVAILABLE?
A. According to TelSoft International, 90 million access lines in the United States were ISDN-capable at the end of 1995.1 At least 29 states have tariffs for residential ISDN. As of October 1994, Bell Atlantic had 16.6 million ISDN-capable lines - more than any other Bell operating company.2
Q. IS ISDN SUITABLE FOR PRIMARY RESIDENTIAL SERVICE?
A. Ordinary telephones are line powered. Since they draw necessary electricity from the telephone line, they continue to operate when electrical lines are cut. This is an important safety feature, since it enables essential communications to continue during power outages.
Although ISDN service is ordinarily more reliable, particularly for data calls, it involves more components. The network interface, the protocol converter, and the adapter may be combined in a single device. However, this device is often internal to a personal computer. If any component fails to work, or if the computer malfunctions, voice telephone communications may not be possible. In this respect, an analog line with multiple telephone instruments is more reliable.
A final limitation of ISDN as primary service involves the cost of wiring extensions. Generally, every room in which a telephone is located must be connected with 8-line wire. Each location requires an adapter and network interface, which costs about $300 even with the minimum functionality to connect a voice instrument. For these reasons, most residential subscribers would do well to retain their primary analog service.
III. IMPACT OF MONOPOLY PRICING
Q. WHAT IS THE IMPACT OF PRICING ISDN SERVICE OVER COST?
A. According to Bell Atlantic, consumer demand for ISDN is highly price sensitive. In February 1995, Bell Atlantic filed an "emergency petition for waiver" from a Federal Communication Commission ruling that would have required two subscriber line charges of $3.50 per month for BRI service. Bell Atlantic claimed that a $3.50 price increase would have these dire consequences:
[C]onsumers are underrepresented on the "net." . . . The Commission's order requiring multiple subscriber line charges for ISDN lines will seriously clog this on-ramp. The resultant [$3.50] price increase will cause fully 60 percent of the expected ISDN consumer base to stay with traditional telephone lines. This will perpetuate the existing under-representation of consumers on the internet and retard continued construction of the Superhighway. It will also curtail internet and other information service access to a large number of educators, health care professionals, government agencies, and businessmen. The order will have an even greater longer-term effect, because it will dry up demand for - and investment in developing - future services that make efficient use of the local loop. . . . Without a waiver [establishing a single $3.50 federal surcharge per ISDN line], the Commission's recent order . . . will deprive residential and business ratepayers of a new, innovative information superhighway service that provides high quality digital access to advanced services, such as the internet and on-line information services.
ISDN alone affords consumers and businessmen alike high-quality digital access to the Internet, a multiplicity of database services, videophone capabilities, digital data at a range of speeds, and a burgeoning host of voice and data features. . . . An increase in the SLC charge, however, is likely to price the service above most consumers [sic] willingness to pay, reducing the potential consumer demand by 60 percent or 100,000 customers over the next three years. . . . It is also likely to cause 10-25 percent of current ISDN customers, who have already invested in expensive ISDN [terminal equipment] to terminate service. Most significantly, as shown above, it will substantially curtail the number of residential subscribers who will find ISDN a cost-effective way of entering the Information Superhighway. Instead, they are likely to retain their existing traditional analog local service and lose the Information Superhighway benefits of ISDN. In the Matter of Bell Atlantic Telephone Companies, Emergency Petition for Waiver, Feb. 10, 1995 [emphasis supplied].
If a $3.50 federal surcharge will have these dramatic effects on residential demand, there will be a devastating impact if the Commission allows Bell Atlantic to price 100 hours of internet usage at more than $150 over the price charged by telephone companies in other jurisdictions.
Q. HOW MUCH DOES ISDN COST ELSEWHERE?
A. On March 8, 1996, the Consumer Project on Technology published a survey of residential ISDN tariffs. Bell Atlantic's proposed prices were the second highest for 100 hours of usage and the fourth highest for full access. The latter rate is 67 times higher than the price paid by consumers in Whitewater, Arkansas.3
100 hr 2B+D
New York (NYNEX)
No Carolina (BellSouth)
So Carolina (BellSouth)
Q. WHAT ADDITIONAL COSTS MUST A RESIDENTIAL CONSUMER INCUR?
A. For each room in which the subscriber wants to use ISDN, he must buy an adapter. These cannot be obtained from most phone and computer stores or even mail order houses. In this region, Bell Atlantic is one of the only suppliers to the retail market. Most of these adapters cost between $275 and $600. Bell Atlantic recommends the Bitsurfer Pro, which costs $374.
In addition, the subscriber must order a new line installation, even if he already has two lines. He must also install new 8-line wire in his house and new RJ-45 jacks. Bell Atlantic bundles these elements. The company will provide a $5 discount if the adapter is ordered with service, plus a $150 if, in addition to service, the customer allows Bell Atlantic to install the software and inside wire. Bell Atlantic charges $160 for the line installation, $100 for wire installation and from $75 for software installation ($125 if it must open the computer).4 For a typical installation, the initial costs of ISDN are over $700, less the bundling discount of $155, but not including the cost of any telephones or computer equipment. A second jack and adapter would cost about $450.
Q. WILL THESE PRICES FALL?
A. In a rate case in Maryland during 1992, Bell Atlantic's expert witness stated:
My feeling is that those prices will remain high until the ISDN market really starts taking off, and then they will fall fairly rapidly until they end up with like a slight premium over current top of the line phones. Case No. 8462 before the Public Service Commission of Maryland, July 8, 1992, Transcript at 371.
I agree that prices for terminal equipment will fall only when the market for the service "takes off." Eventually, states like Ohio, Tennessee, and Arkansas will move beyond Delaware. However, because Bell Atlantic has more ISDN capable lines than any other telephone company in the country, its policy of overpricing residential ISDN has a significant impact on delaying the development and cost reduction of ISDN-compatible equipment for the mass market.
Q. ARE THERE OTHER ADVERSE ECONOMIC EFFECTS?
A. Yes. American jobs are at stake. ISDN adapters are made by Motorola, US Robotics, IBM, 3Com, and Cisco. There are enormous export opportunities for the first country that can mass produce the electronics required by this technology. If regulators allow telephone companies to price ISDN at artificially high levels, America's lead will be lost and emerging economies may adopt the competing European standard for ISDN. As Compaq and Intel observed before the California Public Service Commission:
Reasonable pricing of ISDN services and the development of a mass market for such services are essential for the growth of the high technology industry in California and the U.S., and for the public's need for improved Internet, on-line services, remote LAN access, and video conferencing. Complaint on Grounds of Pacific Bell's Unjust and Unreasonable Rates and Charges and Practices and Inadequate Service for its ISDN Services, Before the California Public Utilities Commission, Feb. 1, 1996, Â¶ 21.
Compaq and Intel were challenging the residential rate for full internet connections in California, which is one-fifth the level that Bell Atlantic proposes to charge. In New Mexico, Intel's witness testified:
USWest's proposed pricing for ISDN will severely retard, if not entirely preclude, the development of a mass market for the service in New Mexico, with adverse consequential effects outside the state as well. This will retard the growth of the high-technology industry in New Mexico and the productivity and competitive of the state. Docket No. 95-769-TC, New Mexico Public Service Commission, Testimony of Ted Hetu.
The rate being challenged in New Mexico was $184 for a full-time connection - less than one-sixth of Bell Atlantic's residential tariff in Delaware.
Q. DOES THE SOFTWARE INDUSTRY REGARD ISDN AS AN IMPORTANT TECHNOLOGY?
A. Yes. Bill Gates has underscored the basic fact that ISDN is critical to reach a mass market for data communications.
"[T]he PC will drive explosive demand [for ISDN]. . . . The line costs vary by location but are generally about $50 per month in the United States. I expect this will drop to less than $20, not much more than a regular phone connection. We are among companies working to convince phone companies all over the world to lower these charges in order to encourage PC owners to connect, using ISDN. . . .
"The companies providing local [telephone] service have been slowly introducing advanced digital transmission capabilities into their networks. They haven't felt the pressure to hurry, because until now it seemed they were protected from competition by large financial barriers to market entry. . . . The opportunity to provide ISDN to PC users will provide new revenues to phone companies that want to bring the price levels down to establish a mass market. I expect ISDN adoption to get off to a faster start than cable mode[m]s." Bill Gates, The Road Ahead 101, 240-41 (1995).
Q. WHEN DID BELL ATLANTIC BEGIN OFFERING ISDN?
A. Bell Atlantic began offering ISDN with Centrex in May 1992. At this time, Bell Atlantic stated that it would offer ISDN to non-Centrex based customer by the end of 1992.5 The Telecommunications Technology and Investment Act required Bell Atlantic to make ISDN available to all ratepayers in the state by March 1997. 26 Del. Code Â§711(3). In March 1994, however, Bell Atlantic committed to make ISDN available "from every central office" by 1996.6 In addition, the company stated that it would make ISDN available "immediately" to all subscribers (using foreign exchange links when necessary). However, Bell Atlantic did not even file a tariff to provide residential ISDN anywhere in Delaware for more than a year and a half.
Q. IS REGION-WIDE PRICING OF ISDN REASONABLE?
A. No. It may be appropriate to price ISDN at a premium if rates for other monopoly services can be reduced. This can occur in states that use a form of rate of return regulation, such as Maryland. Usage charges in Maryland may offset the total revenue requirement and make lower rates for other services possible. Since Delaware's rates for other basic services can escalate automatically under price caps, there is no basis for pricing a monopoly service above its cost.
Furthermore, almost all switches in Delaware are ISDN capable. Average loop distances are shorter than any other Bell Atlantic jurisdictions except the District of Columbia. Uniform region-wide rates subsidize subscribers in other states. Instead, Delaware's prices should be determined on the basis required by the statute that implemented regulatory reform in Delaware. Under price cap regulation, it is important that the Commission establish a just and reasonable rate in the first instance, since there are no opportunities to require significant rate reductions later.
Q. IS THE COST OF IMPLEMENTING ISDN "EXOGENOUS" FOR PURPOSES OF THE TELECOMMUNICATIONS TECHNOLOGY AND INVESTMENT ACT?
A. No. Bell Atlantic clearly foresaw the need to implement ISDN at the time it elected price cap regulation under Delaware's Telecommunication Technology and Investment Act. Indeed, the promise to implement ISDN was one of the explicit promises that Bell Atlantic made to the legislature and to the Commission. The statute specifically provides that ISDN is a "basic service." Under price cap regulation, rate restructures of basic services must be revenue neutral. Therefore, to the extent that residential dial tone is enhanced with the promised ISDN capability, any new rate elements must be offset by rate reductions and approved by the Commission. Delaware's tariffs have never distinguished dial tone line by technology, even though digital switches make available features that are not offered to customers of analog offices. Therefore, it would not be appropriate to classify residential dial tone as a wholly "new" service simply because it uses a new technology (ISDN). Even if this was the case, however, staff's proposed rules require revenue neutrality. Staff Proposed Rules, April 26, 1994, Â§ 6.1.5.
Q. WHAT DOES REVENUE NEUTRALITY MEAN?
A. Revenue neutrality means that Bell Atlantic absorbs the incremental costs of providing the new functionality. Residential dial tone lines with ISDN is cross-elastic with "regular" dial tone. Bell Atlantic should recover (in the rates for ISDN lines) the revenues lost from the "regular" lines that they displace. Since the additional costs of implementing ISDN were foreseen at the time that Bell Atlantic elected price cap regulation, they cannot be recovered from ratepayers except through a revenue neutral rate restructuring.
Q. ARE THE REVENUE LOSSES LOWER IN DELAWARE THAN IN OTHER JURISDICTIONS?
A. Yes. According to Bell Atlantic, every single Delaware subscriber has retained an analog line. Public Hearing Transcript, Jan. 16, 1996, at 42. Some have added ISDN as a new second line, while others have replaced an existing second line. The penetration of second residential lines in Delaware is unusually low, so ISDN lines generate substantial new revenues.
Q. DOES ISDN MEAN AN INCREASE IN USAGE?
A. No. Usage is increasing because of internet traffic, not because of ISDN. For the equivalent number of bits, ISDN will decrease minutes of use - since it is so much faster than analog transmission. In the public comment hearing, Bell Atlantic conceded that there was "no difference" between subscribers making longer calls with a modem and with ISDN. "[E]nough people did that through our voice network with an analog modem, which we are starting to see more and more of these days because of on-line and internet services . . ., that assumptions about usage are being, for lack of a better phrase, blown out of the water. . . . So we are having to expand the capacity of those switches for the analog side, not just the ISDN." Public Hearing Transcript, Jan. 16, 1996, at 42.
Bell Atlantic admits that there "has not been sufficient experience" to predict any net impact on local usage from offering ISDN.7 The only conceivable increase in minutes of use would result if analog technology was so slow that users chose not to reduce the amount of data that they transmit. Otherwise, these data sessions will be completed with one-fourth the minutes of use. Consumers should not be penalized for using a more efficient technology that saves the phone company money.
Q. ARE THE COSTS OF INCREASED SWITCH CAPACITY RECOVERABLE UNDER PRICE CAPS?
A. No. The maintenance of a low-price unlimited usage was the major accomplishment of price cap reform for residential subscribers. In May 1992, the Public Advocate stated that the Commission should continue flat-rate dial tone in order to maximize local usage. Initial Comments of the Office of Public Advocate on Staff's Proposal for Incentive Regulation, Docket No. 33, filed May 26, 1992. Dramatic increases in local usage were clearly foreseeable, and therefore cannot be recovered as an "exogenous cost."
Q. WHAT INCENTIVES DOES BELL ATLANTIC HAVE TO PRICE ISDN OVER COST?
A. There are several incentives. The first is to realize monopoly profits, particularly in the short term. According to one source, Chairman Ray Smith of Bell Atlantic has told the trade press that "ISDN is going to be a major revenue source in 1996, 1997, and 1998." Hetu Testimony, supra. Beyond this period, additional technologies may eventually limit the ability of telephone companies to price ISDN at monopoly levels.
Bell Atlantic may hope to advantage its own information service by pricing monopoly components at a high level. This may account for the delay in introducing residential ISDN at any price level until the eve of the new federal Telecommunications Act, which authorized Bell Atlantic's entry in this market. Bell Atlantic has announced plans to become a "full service internet provider" by midsummer.8 It is also considering offering ISDN as part of a larger information service.9
Alternatively, Bell Atlantic may form a partnership with an information provider on terms that are more favorable than the public tariff. When asked if it had already discussed providing ISDN to particular information providers on an "individual case basis," Bell Atlantic claimed that its answer was proprietary. Response to OPA Request 10, dated Jan. 26, 1996. On March 12, 1996, Pacific Bell entered an alliance with Microsoft Corporation to provision ISDN in California.10 On its information service, Microsoft will accept orders for Bell Atlantic ISDN service in Delaware for an installation charge of $35.96, monthly charge of $28.90 and no additional usage charges (although these prices may be in error).11
Q. WILL BELL ATLANTIC DEVELOP ALTERNATIVE TECHNOLOGIES?
A. Bell Atlantic may also wish to delay ISDN pending the development of a proprietary architecture for residential data transmission. On February 22, 1996, Bell Atlantic told the Washington Post that it would offer asymmetrical digital subscriber line (ADSL) for data within a year.12 USWest will offer service by November 1996.13 ADSL will initially operate at 1.5 megabits per second (or 12 times the speed of ISDN), but could increase to 10 megabits per second. Installation costs run from $500 to $1000 a line. Bell Atlantic has suggested pricing at the $30 level, plus possible usage, while US West suggests $150. Though a joint venture with NYNEX and Pacific Telesis, Bell Atlantic may try to dominate the market for proprietary ADSL set-top boxes. Unlike ISDN, ADSL will not provide a standard that can eventually be used on wireless systems.
ADSL is not a practical substitute for ISDN in the near future. ADSL modems cost $2500, although one manufacturer claims that a home version will be available for $995 "real soon."14 There are conflicting ADSL standards that may impede reductions in equipment prices. Motorola is pursuing discrete multitone (DMT), while AT&T has developed carrierless amplitude and modulation (CAP). Not all DMT modems are compatible, but this technologies may work better over longer loops. When these technical problems are resolved, ADSL may provide superior data access as prices comparable to ISDN. Bell Atlantic has not performed any studies of the cross-elasticity between ADSL and ISDN.15 Its director of technology states that ISDN plans will continue "unabated," because "I believe ISDN truly meets most people's data requirements in the home right now."16 Therefore, the future prospect of ADSL should not delay timely implementation of residential ISDN at revenue-neutral rates.
Q. DO CABLE MODEMS PROVIDE A POTENTIALLY COMPETITIVE ALTERNATIVE TO ISDN.
A. Cable modems are not available to consumers in Delaware at the present time. The cable industry has announced 24 trials of their own asymmetric technology. Potentially, cable modems can operate at 500 kbps to 27 Megabits per second - 4 to 50 times the speed of basic rate ISDN. Many of the trials involve unusually sophisticated network architectures, such as Continental's facilities in Eastern Massachusetts; none are in Delaware.
The unswitched architecture of most cable systems reflects their principal function of transmitting uniform content downstream. Cable modem technology dynamically reallocates bandwidth to dedicate channels to specific users. Upstream links are vulnerable to voltage surges and outside interference from radios or lights.17 Because of the star configuration, line pollution can accumulate upstream and threaten a large number of subscribers. If demand progresses at a predictable rate, the network can be subdivided with additional headend facilities. However, there are serious technical challenges, particularly at high penetration levels. By contrast, the telephone network can provide near universal access to switched data circuits with relatively little alteration to the basic network architecture. For these reasons, cable operators will be unable to offer a competitive product to most residential subscribers in Delaware for several years. During this time, there is a substantial risk of monopoly pricing and delays in the provision of affordable data service.
IV. ISDN COSTS
Q. WHAT HAS BELL ATLANTIC SAID PUBLICLY ABOUT ISDN COSTS?
A. At the public comment hearing, Ms. Gaghan of Bell Atlantic stated that the costs of "overutilizing the analog facilities" with data calls "are far in excess of what you're actually paying for" because the "price you pay for an analog circuit today is based on primarily voice traffic assumptions which have very short connect times." Public Comment Hearing at 51. She stated: "People are always trying to get around the rules." (Since unlimited local usage for a flat rate is provided by tariff, it is difficult to understand why Bell Atlantic views intensive use of analog facilities as an evasion.) According to Ms. Gaghan, however, the 4 cent per peak minute usage charges "reflect the actual cost of the facilities." Id. As discussed below, this claim is not consistent with any of the public literature about usage costs.
Even if Bell Atlantic was entitled to recover costs of increases in local usage associated with internet access, which it is not, it has not made public any data that would support a claim that usage charges of this magnitude can be cost-justified. All studies produced by Bell Atlantic have been proprietary.
Q. HOW MUCH DID BELL ATLANTIC SAY IN 1993 THAT BUSINESS ISDN SERVICE COSTS?
A. In February 1993, Bell Atlantic produced cost studies for individual line business ISDN, but these are under a protective order.
Q. HOW MUCH DID BELL ATLANTIC SAY THAT RESIDENTIAL ISDN COSTS IN OCTOBER 1995?
A. Bell Atlantic claimed proprietary treatment for this study.
[redaction] The study understates the contribution impact for a number of reasons.
There is no showing that Residential ISDN will increase Bell Atlantic's investment in land and buildings, so none of these costs are incremental. [redaction] fiber and cable investments that are not incremental to ISDN.
Q. HOW MUCH DID BELL ATLANTIC SAY THAT RESIDENTIAL ISDN COSTS IN NOVEMBER 1995?
A. A month later, Bell Atlantic announced that its demand projections had changed dramatically, purportedly because
Undated fax, Smith to Citrolo, "Bell Atlantic - Delaware Residence ISDN - Filing Details," submitted circa Oct. 20, 1995. In fact, America OnLine began providing ISDN access (through intermediary providers) in February 1996. It is difficult to understand how the delay by a single on-line company of access for five months could have a material impact on a five-year demand forecast.
In the second study,
Undated facsimile, Smith to Citrolo, circa Oct. 20, 1995.
Q. HOW MUCH DID BELL ATLANTIC SAY THAT RESIDENTIAL ISDN COSTS IN FEBRUARY 1996?
A. Bell Atlantic's third study is a more conventional incremental cost study. Instead of a highly aggregated present-value analysis of total revenues and costs, the study purports to analyze the direct cost of components of the service. Bell Atlantic uses the Capcost Plus Cost Model.
These costs are not additive and need to be analyzed separately. For example, Bell Atlantic later admitted that the analog line card is not used for ISDN and its cost should be deducted from an incremental cost study.18
ISDN set-ups complete almost four times more quickly than analog calls. Although the study claims that circuit switched data costs more than [redaction] an hour, Bell Atlantic gives away on-net data calls to Centrex customers and promotes their use for 24-hour nailed-up connections.
In other respects, the study is not adequately documented. [redaction] - even though the costs of ISDN equipment is falling quickly.
[redaction] even though Bell Atlantic later admitted that software licenses are part of a "buyout option and are not separately developed for the ISDN feature."19
20 The [redaction] surcharge to provide foreign exchange service to customers of non-equipped offices is not supported, and could not last beyond the conversion of these switches, which will occur early in the study period.
Generally, cost allocations have no place in an incremental cost study.
Usage costs, which are generally insignificant, depend to some extent on elements of switch capacity which must be engineered to peak.
There are time inconsistencies.
As Bell Atlantic has conceded, analog internet usage has blown historical studies "out of the water." Any attempt to determine a unit cost for set-up or minutes of use would have to be redone for substantially increased call volumes. For this purpose, circuit switched data usage from residential ISDN would need to be combined with on-net Centrex data usage (which is provided free) to generate a lower average cost (peak and off-peak).
Q. WHAT INFORMATION IS PUBLIC ABOUT ISDN COSTS?
A. The most detailed public analysis is the studies by the Tennessee Public Service Commission and by South Central Bell, which were reviewed by the fellows of the National Regulatory Research Institute (NRRI). The Tennessee Commission did not provide proprietary treatment for ISDN costs. Its staff found an incremental cost of $9.77, while South Central claimed $66.13. NRRI found that ISDN plus loop costs cost about $24.00. Based on these studies, the Tennessee Commission ordered flat rate service for $21.40 to $26.00 depending on density group. The Commission waived all installation charges for the first year.
There are a number of reasons why ISDN costs in Tennessee are higher than Delaware. Average loop length is much longer and switching is not as advanced. Thirty percent of loops in South Central's territory are loaded and must be deloaded (at a cost of up to $2000 per loop) to provide digital service. The cost of money used by South Central is significantly higher than that faced by Bell Atlantic.
The Tennessee staff and NRRI share many of my concerns about improper costing. NRRI criticized South Central for including "practically every nut and bolt in the loop plant, buildings and land," since these cost elements are not "marginal or addition to providing ISDN services." "NRRI's Review of Tennessee's ISDN Cost Studies," NRRI Quarterly Bulletin, 125, 127. The staff properly excluded costs of loop plant (except pair gain equipment), as well as land, buildings, and administrative cost. Because of downsizing, the authors specifically questioned increasing administrative costs in proportion to investment.
Q. DID THE NRRI EXPERTS MAKE OTHER RECOMMENDATIONS?
A. Yes. The NRRI paper recommended that "residential customer[s] choosing ISDN should not lose any preferential advantage available using POTS service." Id. At 130. Specifically, lifeline should be extended and flat rate service for circuit switching maintained. Indeed, they concluded that "considerations of promoting ISDN services may justify a lower rate [for usage]." id. at 131. They suggested that a charge might be made for packet usage on the D channel (but the Commission ordered this charge waived this charge for the first year). The NRRI study also proposed requiring a marketing plan to assure than 4 percent of all residential lines elect ISDN within three years. The study also recommended that the residential rate be made available to schools.
Q. ARE THE PROPOSED RATES FOR RESIDENTIAL ISDN JUST AND REASONABLE?
A. No. The getting started costs of ISDN, which are not a significant part of Bell Atlantic' total costs, were incurred to serve business customers, who have had ISDN for more than three years. Universal availability of ISDN was a promise that Bell Atlantic made to the legislature in return for price cap regulation. A technology deployment plan was required by the legislature as a condition of electing price cap regulation. Although this plan promised "immediate" availability of ISDN, no steps were taken to tariff the service for 18 months. The proposed rates reflect region-wide tariffs that subsidize jurisdictions with higher costs or the ability to use premium charges to offset basic rates under rate-of-return regulation. They are not appropriate for Delaware and retard a technology that is important for the economic and educational development of the state.
Q. SHOULD INSTALLATION, LINE AND USAGE CHARGES BE HIGHER FOR ISDN THAN FOR ANALOG SERVICE?
A. No. The costs that are truly incremental to ISDN service can be covered by current rates, particularly since the marginal costs of second lines is below the existing tariff. I would support a surcharge, however, on the use of ISDN for exclusive service. Since this has economic and safety disadvantages for the subscriber, it is unlikely to be sought (especially at current adapter prices). Although there may be some short-term costs in training and materials, over the life cycle of the product, ISDN installation should not be significantly more expensive than plain old telephone service. The consumers who pioneer this technology should be rewarded, not penalized and required to pay for installers to learn the new technology.
I would accept a cap on switched data usage of 100 hours a month to distinguish dedicated lines. Even a full-time connection should be priced at its marginal cost, to ensure against the windfall that above-cost usage charges would create.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
1 Summers and Dunetz, ISDN: How to Get a High-Speed Connection to the Internet at 5 (1996)
2 id., at 32, citing Bellcore.
3 Source: "CPT Survey of ISDN Tariffs," email@example.com to firstname.lastname@example.org, 11 Mar 1996, 11:37. The 100 hour assumptions are: 100 calls, 30% from 8am-5pm, 10% from 5pm-7pm, 35% from 7pm to 11pm, 25% weekends and 11pm-7am.
4 Prices from Bell Atlantic, 800-204-7332, as of March 12, 1996.
5 PR Newswire, May 6, 1992, Wednesday, Financial News, BELL ATLANTIC FILES ISDN TARIFFS AS AN OPTION TO CENTREX.
6 Notice of Election, March 24, 1996, Tab D: Telecommunications Deployment Plan, at 11.
7 Response to OPA Request 7, Dated Jan. 26, 1996.
8 Mills, "Making Copper a Bit Faster," Washington Post, Feb. 22, 1996, at D-1.
9 Response to OPA Request 14, Dated Jan. 26, 1996.
10 Business Wire, March 11, 1996, "Pacific Bell Joins with Microsoft to Make ISDN Access Just a Few Keystrokes Away"
12 Mills, "Making Copper a Bit Faster," supra.
13 Telechoice Report on ADSL, March 9, 1996, "US !nterprise [sic] Group Commits to Late October/Early November Deployment" http://www.telechoice.com/xdslnewz
15 Response to OPA Request 13, dated Jan. 23, 1996.
16 Mills, "Making Copper a Bit Faster," supra.
17 Robichaux, "Cable Modems are Tested and Found to Be Addictive," Wall Street Journal, Dec. 27, 1995.
18 Response to OPA Request 17, dated Jan. 26, 1996.
19 Response to OPA Request 9, dated Jan. 26, 1996.
20 The current mix is [redaction] 5ESS. Conversation with Virginia Leonetti, Bell Atlantic, March 13, 1996.