EXECUTIVE SUMMARY OF INITIAL BRIEF ON BEHALF OF THE RATEPAYER ADVOCATE IN VERIZON

EXECUTIVE SUMMARY OF INITIAL BRIEF ON BEHALF OF THE RATEPAYER ADVOCATE IN VERIZON-NJ'S APPROVAL FOR ALTERNATIVE FORM OF REGULATION AND RECLASSIFICATION OF BUSINESS SERVICES AS COMPETITIVE SERVICES

Filed January 9, 2002, BPU Docket No. TO01002009

This proceeding requires the Board of Public Utilities ("Board") to make important decisions affecting the affordability of telecommunications service and the availability of competitive telecommunications choices for New Jersey ratepayers. Currently before the Board are competing proposals for a new plan of alternative regulation ("PAR-2"), one by Verizon-NJ and one by the Ratepayer Advocate including a request by Verizon-NJ to deregulate all multi-line business services and deem these services competitive.

The Ratepayer Advocate's initial brief begins by highlighting the state of telecommunications competition in New Jersey as the key to resolving each of the major issues before the Board because under the current regulatory scheme, competition should eventually replace regulation. However, although Verizon-NJ argues that sufficient competition has developed to merit deregulation, the Ratepayer Advocate sets forth facts to show that Verizon-NJ still controls a dominant share of the local exchange market in New Jersey, a position that is barely threatened by competitors. The initial brief states that until Verizon-NJ's control over the facilities necessary for effective competition is significantly loosened, the Board should establish a plan of alternative regulation ("PAR") that fully takes into account Verizon-NJ's dominant position.

The initial brief then draws a comparison between the Verizon-NJ and the Ratepayer Advocate PAR-2 proposals. Verizon-NJ's proposal seeks to eliminate the ratecap, as well as earnings sharing and the productivity offset provisions that are fundamental to the current plan. The practical effect of Verizon's proposal would be the retention of all cost savings, merger savings and excess earnings that it would be forced to share with ratepayers in a competitive market. In addition, Verizon-NJ proposes to eliminate the current plan's exogenous event and quarterly reporting provisions. In sum, the Ratepayer Advocate argues that Verizon-NJ's PAR-2 proposal fails to satisfy the statutory requirements for a PAR and it should be rejected by the Board.

In contrast to Verizon-NJ, the Ratepayer Advocate's PAR-2 plan includes revisions and updates within the framework of the current PAR to account for Verizon-NJ's dominant position and the possibility of future competition for Verizon-NJ. Features of the Ratepayer Advocate's plan include:

Five year rate cap that will protect consumers against Verizon-NJ rate increases.
Earnings sharing and a rate adjustment which will be calibrated to take into account the amount of competition facing Verizon-NJ.
Distribution of merger savings to ratepayers via a rate reduction of 148 million, along with a one-time refund of 43 million to account for merger savings already accrued.
Retention of existing provisions concerning exogenous events and quarterly reporting.
Enlargement of New Jersey's calling areas to reduce the cost of in-state toll calls.
Establishment of a state universal service fund that will include assistance to low-income consumers through automatic enrollment in the Lifeline program; advanced services to schools and libraries; and financial incentives for carriers to serve high cost areas in the state.
Service quality standards with adequate, self-effectuating penalties for deficient service in addition to metrics that are directly linked to the earnings allowed under the plan of alternative regulation.

In response to Verizon-NJ's request for reclassification of multi-line business services, the Ratepayer Advocate demonstrates that Verizon-NJ fails to satisfy the statutory standards for reclassification which requires the Board to find evidence of (1) ease of market entry; (2) presence of competitors; and (3) the availability of like or substitute services in the relevant geographic area before reclassification of services can be granted. The initial brief demonstrates that Verizon-NJ has (1) presented no reliable evidence on the actual state of competition in multi-line business services, (2) failed to present evidence on its claim that it holds no market power in the relevant services, and (3) otherwise fails the current statutory test for reclassification. As a result of these deficiencies in the filing, the Board should deny Verizon-NJ's petition for reclassification of business services.

The Ratepayer Advocate also recommends that, in addition to the three minimum criteria set forth above, the Board should put standards in place and require compliance with at least the following: (1) the presence of effective competition, including the ability of competitors to offer services at competitive prices, terms and conditions; (2) UNE rates that reflect economic cost; (3) compliance with section 271 checklist; (4) service-by service examination of any proposed reclassification; (5) a showing of the likely impact of reclassification on other services; (6) the availability of prompt and effective dispute resolution for competitors; and (7) the existence of "air tight" service quality measures. Furthermore, the Ratepayer Advocate submits that until Verizon-NJ presents cost and revenue information on the services it seeks to reclassify as competitive, the Board should not consider reclassification of any services.

Finally, the Ratepayer Advocate outlines a proposal to spur local exchange competition and prevent anti-competitive discrimination. This proposal is structural separation of Verizon-NJ's retail and wholesale business segments or, in the alternative, establishment of a code of conduct. The initial brief demonstrates that past regulatory efforts have not resulted in widespread, effective competition in New Jersey, and the dominant status of Verizon-NJ provides it with the incentive and ability to discourage competition by favoring its retail business units. Only through structural separation will these incentives and abilities be eliminated and the markets be finally open to competition.

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