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Pretty Good ISDN Cost Study (fwd)
- To: isdn@tap.org
- Subject: Pretty Good ISDN Cost Study (fwd)
- From: James Love <love@tap.org>
- Date: Fri, 15 Mar 1996 18:18:27 -0500 (EST)
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INFORMATION POLICY NOTE - ISDN Cost Study
March 15, 1996
- Below is the expert testimony of Dr. Scott Rafferty
regarding how ISDN tariffs should be in set in Delaware.
The testimony was filed on March 13, 1996, on behalf of the
Delaware "Public Advocate" (Patricia Stowell, Voice: 302/
577-3087). Some of the highlights of the testimony are:
- Bell Atlantic should be required to offer a second
residential line with 100 hours of ISDN data service at the
SAME PRICE as a second analog telephone line. (Note, at
present, Bell Atlantic charges from $120 to $240 of usage
charges for 100 hours of residential ISDN service).
- Additional minutes of use should be priced at TRUE
incremental cost and CAPPED at the marginal cost of a
dedicated ISDN circuit.
- The true incremental cost of ISDN is between $4 and $9 and
falling.
- 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.
- 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.
jamie (love@tap.org, 202/387-8030)
Here is Scott's testimony:
Date: Wed, 13 Mar 1996
DIRECT TESTIMONY OF SCOTT RAFFERTY
AerieGroup@aol.com
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 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
State (Company) 100 hr 2B+D Full Access
BELL ATLANTIC 198.00 1206.48
Alabama (BellSouth) 68.60 68.60
Arkansas (NATCO) 17.90 17.90
California (PacBell) 63.62 268.32
Florida (BellSouth) 57.15 57.15
Georgia (BellSouth) 63.75 63.75
Illinois (Ameritech) 33.05 28.05
Indiana (Ameritech) 314.83 1828.59
Kansas (SBC) 104.30 104.30
Kentucky (BellSouth) 60.05 60.05
Louisiana (BellSouth) 71.66 71.66
Massachusetts-E (NYNEX) 226.39 1419.41
MassachusettsW (NYNEX) 159.19 911.65
Michigan (Ameritech) 36.61 33.51
Mississippi (BellSouth) 65.61 65.51
Missouri (SBC) 69.00 104.30
New York (NYNEX) 153.58 890.98
No Carolina (BellSouth) 75.10 75.10
Ohio (Ameritech) 26.00 26.00
[CPT Note: the Ohio numbers were incorrectly reported
in the Version 1.0 version of the CPT study. The
correct number should have been $32.20]
Oregon (USWest) 68.00 1949.64
So Carolina (BellSouth) 60.40 60.40
Tennessee (BellSouth) 29.50 29.50
Utah (USWest) 173.88 184.00
Wisconsin (Ameritech) 36.56 30.90
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, 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 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,
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.
[redaction]
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
[redaction]
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.
[redaction]
In the second study,
[redaction]
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.
[redaction]
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
[redaction]
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
[redaction]
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.
[redaction]
Usage costs, which are generally insignificant, depend to
some extent on elements of switch capacity which must be
engineered to peak.
[redaction]
There are time inconsistencies.
[redaction]
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?
A. Yes.
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," love@essential.org to
isdn@essential.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"
11 http://www.microsoft.com/isapi/windows/provider.exe
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
14 Http://alumni.caltech.edu/~dank.isdn/adsl.htm
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.
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