Good morning, Commissioner Butler. I appreciate this opportunity to briefly outline the position of the Division of the Ratepayer Advocate concerning Verizon-New Jersey’s proposed Modified Plan for an Alternative Form of Regulation and its Proposal to Reclassify all Rate-Regulated Services as Competitive.

As you know, Verizon submitted and subsequently withdrew a plan for alternative regulation last year. We are now faced with a new plan, known as PAR-2, which was submitted earlier this year.

While the Verizon proposal maintains the $8.19 basic rate for residential service, Verizon’s plan does not move us forward to a competitive marketplace which promises a choice of suppliers and advanced services.

Moreover, The Ratepayer Advocate has specific concerns with the Verizon proposal.

(1) Even though Verizon does not propose changing its $8.19 monthly rate for basic residential service, the Company does not state how long that rate will remain in effect. There is no commitment to maintain the current rate for basic residential telephone service. We are recommending that Verizon’s basic service rate of $8.19 a month remain in effect for five years.

(2) Verizon seeks to reclassify two or more business lines as competitive. We recommend that the Board reject Verizon’s request because the company did not submit sufficient evidence to demonstrate the presence of competition for these business services. In the absence of competition for these services, Verizon would be free to behave as an unregulated monopoly, free to raise rates. Small businesses in our state, many of which operate on narrow margins, would be severely impacted.

(3) Verizon’s plan does not address how it plans to distribute its accumulation of overearnings and merger savings. Our analysis has identified over $225 million in overearnings and merger savings resulting from the mergers of Verizon New Jersey’s parent company with GTE and NYNEX. These overearnings and merger savings must be shared with ratepayers.

Returning to PAR-2, the Division of Ratepayer Advocate is proposing an alternative plan that properly balances the interests of Verizon New Jersey’s shareholders with benefits for New Jersey local telephone consumers, while ensuring a smooth transition to our common goal of a competitive marketplace. Please allow me to provide you with the highlights of our plan.

1) We all know that intra-LATA toll call charges are a hefty part of each local telephone bill. Our plan proposes consolidating the state’s 180 rate centers into 21 rating areas that roughly conform to county boundaries. The inclusion of additional exchanges in local calling areas would result in consumers paying for fewer in-state toll calls.

The real pocketbook benefit to ratepayers comes in the form of toll charge savings. We propose using some of the $175 million Verizon overearnings and ongoing merger savings to finance the expansion of local calling areas. This would reduce high toll call charges on monthly bills for New Jersey customers.

Reducing the number of local calling areas would also conserve telephone numbers, thereby reducing the need for new area codes in the future. It would also simplify toll charges. Drawing local calling areas to match our state’s clearly defined 21 counties will make it easier for consumers to understand the cost of an in-state phone call.

2) Our analysis identified another $53 million as a 50% share of the Verizon’s cumulative merger savings available for other ratepayer benefits. We propose these dollars be used to extend benefits for schools and libraries. We propose that Verizon continue the discounts from business tariff rates at which it offers wideband and broadband access to New Jersey schools and libraries under its Access New Jersey program. The availability of discounts should continue until there is a BPU determination that there is no longer a need for continued funding. In contrast, Verizon proposed to extend the availability of contracts for educational discounts only until 2004; the last of such contracts would expire in 2007.

3) I would like to highlight another proposal of particular concern to our office. In compliance with the mandate of the universal service goals of the federal Telecommunications Act of 1996, we are recommending that Verizon enhance its state Lifeline program to ensure that low-income consumers, who are defined as households with annual incomes at or below 175% of the federal poverty line, obtain the full extent of federal Lifeline telephone assistance. In addition, low-income households who participate in public benefit programs such as Medicaid and SSI should be automatically enrolled in the Lifeline program.

Additionally, the BPU should implement a Universal Service Fund to, among other things, encourage local exchange competition in high cost areas of New Jersey which would provide economic incentives for all service providers to serve the rural areas of the state.

4) To address the lack of competition in New Jersey, we are also proposing in our plan an incentive for the phase-in of local exchange competition. Under this plan, Verizon New Jersey’s rate regulated services would be placed in two "baskets."

Basket 1 would contain the local basic exchange service. Basket 2 would contain all other rate regulated services such as vertical services like call waiting, call forwarding, and caller ID. Caps would be placed on each basket in relation to a sliding scale based on Verizon New Jersey’s market share. In other words, as the market place becomes more competitive, Verizon would be increasingly deregulated.

Basket 2 rates would be deregulated once Verizon New Jersey has a market share of less than 70%. To put that in reverse, rates for all of the vertical services like call waiting, call forwarding, and caller ID , would be deregulated once Verizon loses 30% of its market to competitors. Basket 1 rates for basic monthly service would be deregulated once Verizon’s market share drops to 60%.

We propose that this plan remain in effect for five years.

5) In order to promote effective competition in the local exchange marketplace, we are also recommending that the Board adopt a code of conduct for Verizon. Specifically, the code of conduct would contain competitive safeguards and consumer protections that would provide a clear distinction between the activities of Verizon as the incumbent local service provider and those of any Verizon affiliate that competes with other competitive local exchange carriers.

In addition, we are proposing modifications to the current Service Quality Index that is used to measure Verizon’s performance record regarding installation and maintenance of service, network reliability and call center performance. The proposed code of conduct is modeled on rules already adopted by the BPU for electric and natural gas competition .

6) On Friday, we will be filing testimony on the issue of structural separation. As in the structural separation of the electric and natural gas monopolies, we consider this an important issue for Board consideration in meeting New Jersey’s goal of reaching a competitive marketplace.

We are at a critical juncture of accessing what has been called the information superhighway. The lack of competition in our local telephone market is looming as a serious roadblock for New Jerseyans to gain access to new technologies that are already arriving in other states. As science fiction writer William Gibson, who coined the term cyberspace, once remarked, "The future is already here. It’s just unevenly distributed." Creating a competitive market place that will bring affordable new services to all ratepayers will ensure that New Jersey gets its fair share of the future. To close with one of my favorite quotes, "When I look into the future, it’s so bright it burns my eyes."

Thank you.

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