Good evening, Commissioner Butler. Thank you for giving the Ratepayer Advocate this opportunity to appear at the Board of Public Utilities’ public hearing on Verizon-New Jersey’s proposed New Plan for an Alternative Form of Regulation and its Proposal to Reclassify all Multi-Line Rate-Regulated Business Services as Competitive. Public participation is critical to formulating good public policy. As you know the Ratepayer Advocate represents the interest of all classes of ratepayers, residential, small business, and large industrial customers. We also have special concern for low income ratepayers and senior citizens, especially for telecommunications service, a lifeline service for these constituencies.

Last year, Verizon submitted and subsequently withdrew a modified plan for alternative regulation. We are now faced with a new plan, known as PAR-2, which was submitted earlier this year. Put simply, the Division of the Ratepayer Advocate maintains that Verizon’s new plan does not adequately provide ratepayer benefits to either the residential or business customers.

On February 8, 1996 President Bill Clinton signed the Telecommunications Act of 1996 announcing, "We will help to create an open marketplace, where competition and innovation can move quick as light." Five years later New Jersey consumers are still waiting for competition and innovation. All efforts to date to facilitate the development of that competition in New Jersey’s local telephone exchange market have proven futile. Verizon’s competitors have captured only a small and insignificant fraction of the local exchange market. Right now, ratepayers have no choice. I ask those today who are here to testify - How many times has your dinner been interrupted with a sales call from an alternative provider for local telephone service? How many of you here today buy local service from a company other than Verizon NJ? How many of you receive a monthly bill for only $8.19? How many of you would save money if all of your calls within the county were included in your $8.19 basic charge?

The local New Jersey telephone market remains a Verizon monopoly. While competition is developing in our neighboring state of New York - with competition capturing 20% of the local marketplace, even in New York where the local marketplace is open to competition, most of those beneficiaries are the corporate business world and not the residential or small business customers.

So what’s a regulator to do - should we be tweaking a 10 year old Alternative Regulation Plan - or should we be looking for new directions and new incentives for bringing competitors to the marketplace. The Ratepayer Advocate’s recommendation is to reject the Verizon proposal and, instead, adopt the Ratepayer Advocate proposal as the template for action, to create a road map for competition with choice for all classes of consumers including opportunities for affordable technology.

Let’s first quickly discuss the Verizon New Jersey proposal:

(1) Even though Verizon does not propose changing its $8.19 monthly rate for basic residential service, the Company in its proposal does not state how long that rate will remain in effect. There is no commitment , promise, or guarantee 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 also seeks to reclassify two or more business lines as competitive. We need to be clear about what that means. If Verizon’s petition is approved, rates for all business customers with more than one line are at risk the next day following approval. Two business lines could mean a Mom and Pop Grocery Store with one telephone line, a second line for credit cards - or for a fax machine, or a lottery machine. We recommend that the Board reject Verizon’s request because it has not submitted sufficient evidence to demonstrate the existence of competition for these business services. That’s because New Jersey, as yet, does not have a competitive marketplace. In the absence of competition for these services, Verizon would be free to operate as an unregulated monopoly, free to raise rates. Small businesses in our state, many of which work on narrow margins, would be severely impacted.

(3) Verizon’s plan does not address how it would distribute its accumulation of overearnings and merger savings. In contrast, our analysis has identified over $225 million in overearnings and merger savings resulting from the mergers of Verizon New Jersey’s parent company with NYNEX and then GTE. Our position is that these overearnings and merger savings must be shared with ratepayers. The BPU has adopted this position to share merger savings with ratepayers in recent merger cases and should not depart from that policy here. I refer to the recent Board decisions in the Rockland Electric/Con Ed merger, the Atlantic Electric/Delmarva merger, andthe First Energy/GPU merger decided last week.

In our testimony filed in this case, 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. That is our goal. We would like to see Verizon enter the long-distance telephone market, while its competitors, AT&T, MCI WorldCom, Sprint, and many small startup companies also enter the local telephone market.

Please allow me to provide you with the highlights of our plan.

1) With the goal of bringing true competition to New Jersey’s telecommunications market, we are asking the BPU to impose a separation of the Verizon operations. In that way, Verizon’s wholesale operation would interact with the retail operation as if it were any other unaffiliated company seeking to provide local telephone service. Under our proposal, structural separation could be implemented by means of an actual separation of the wholesale and retail operations, or it could be implemented through virtual structural separation featuring stringent accounting safeguards and a strict "code of conduct" that would be enforced by the Board, with severe financial penalties for noncompliance. A code of conduct is crucial to promoting effective competition in the local exchange marketplace. Additionally, 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 other Verizon affiliate that competes with other competitive local exchange carriers.

That proposal for structural separation is the underpinning for the level playing field, and our ability to successfully achieve a truly competitive local telecommunications market in our state, bringing to consumers more choice in price, advanced services, improved quality of services, and all the rest of the benefits that competition brings to market. Over the last nine years competition has not materialized, and will not unless aggressive steps are taken to end the monopoly over local service. The plan proposed by the Ratepayer Advocate provides the road map required to achieve that goal. Guidance can be found from the Electric Discount and Energy Competition Act. See N.J.S.A. 48:3-56 (f) (1), (h); N.J.S.A. 48:3-58 (k) (1); N.J.S.A. 48:3-59 (a) (1). Jobs have not been lost because of electric structural separation of wholesale and retail operation. While mergers cause job loss - structural separation can, in fact, spur job creation. The "Code of Conduct" issued in November 2000 by the National Association of Regulatory Utility Commissoners on "Governing Competitive Market Developments in the Energy Industry" specifically states that utility operating personnel and the operating personnel of an affiliate may not be shared and must function independently of each other.

Please allow me to repeat this important point: Structural separation does not cost jobs. Mergers can and often do lead to job losses. Structural separation can, in fact, spur job creation because it will require a company to hire additional employees for the separate retail and wholesale operations, such as accountants, operations managers, technical support personnel, etc.

2) We all know that intra-LATA toll call charges are a hefty part of each local telephone bill. New Jersey suffers from some of the smallest calling areas. We know that calling grandma, two towns over in the same county is a regional toll call in many areas. 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, because these calls would then be included in basic service.

The real pocketbook benefit to ratepayers comes in the form of toll charge savings. We propose using some of the $175 million of 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.

We believe that 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. Today, many consumers do not know if they are making a toll call when they call the next town or two towns over.

3) Our analysis identified another $53 million as a 50% share of 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 both continue and expand the discounts which it offers for wideband and broadband access to New Jersey schools and libraries under its Access New Jersey program. Verizon proposes to extend the availability of contracts for educational discounts only until 2004. That means the last of such contracts will expire in 2007. We propose that the availability of discounts should continue until there is a BPU determination that there is no longer a need for continued funding.

4) 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, which translates into a benefit of $10.50 each month, instead of the current benefit of $7.00. Low income ratepayers are now being deprived of the full benefits available under all available Lifeline service. In addition, low-income households who participate in public benefit programs such as Medicaid and SSI should be automatically enrolled in the Lifeline program. This is what is done in the State of Ohio, not relaxation of procedures - not through self certification - but automatic enrollment for ratepayers enrolled in Medicaid or SSI or the equivalent with the option to opt-out. The privacy concerns raised by Verizon are a red herring; the New Jersey Department of Human Services, which administers the LIHEAP dollars could in fact administer the Lifeline recipients by merely transferring the eligible names from the LIHEAP enrollment list to a Lifeline list. No ratepayer in New Jersey has ever refused LIHEAP dollars in the name of confidentiality. Verizon currently offers Lifeline services to 40,000 recipients. The most current LIHEAP report lists recipients at 164,918.

Additionally, the BPU should implement a state 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.

5) 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," and rate regulation would end once prescribed levels of market share are gained by competition.

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.

Basket 1 rates for basic monthly service would be deregulated once Verizon’s market share drops to 60%. Basket 2 rates would be deregulated once Verizon New Jersey has a market share of less than 70%. In other words, 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 share to competitors. We propose that this plan remain in effect for five years.

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.

New Jerseyans 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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