Mr Hempling’s testimony outlines the Code of Conduct principles that should apply to any structural separation plan the Board of Public Utilities ("Board") ultimately decides to implement. The Code of Conduct principles proposed by the Division of Ratepayer Advocate ("Ratepayer Advocate") relate to the relationship between Verizon New Jersey ("VNJ" or "Verizon") and VNJ’s competitive business affiliates.

Effective competition is achieved in a market when: (1) there is no monopoly company present; (2) there is nondiscriminatory access to essential facilities and to information necessary to compete effectively; and (3) there is ease of market entry, e.g. low entry barriers. Resources such as brand name recognition, skilled employees, and intimate knowledge of service territory give monopoly utilities the competitive edge over newcomers to the market. Therefore, a monopoly utility that attempts to preserve and exploit its historic advantages can be detrimental to competition because it locks competitors out of the market.

1. Competitive Affiliate use of Corporate Name

A competitive affiliate should not be permitted to use the corporate name or in any way associate itself with the monopoly company if the competitive affiliate intends to sell services within the incumbent’s service territory. The alternative would be to require the competitive affiliate to pay a royalty to the incumbent utility for the use of the corporate name. This adjustment would place the competitive affiliate on equal footing with its new competitors in terms of name recognition with the public.

2. Competitive Affiliate’s Access to Incumbent’s Monthly Bill

The Board should preclude the incumbent from allowing its competitive affiliate preferential access to the billing process, or in the alternative, the Board can permit access to the billing envelopes if other competitors are offered the same access on the same terms and conditions.

3. Competitive Affiliate’s Access to Customer Information

The Board should require that the incumbent utility make 24 months of usage data available to competitors at no charge, with the customers consent. Alternatively, the Board could order the creation of a nonconfidential database which contains 12 months of important customer data. The customer information must be made available to VNJ affiliates and nonaffiliates alike and customer consent must be required for access by both groups.

4. Employee Transfer between Incumbent and Affiliate company

Board should not permit unlimited employee transfers between the incumbent and the competitive affiliate because such transfers would encourage the training of employees at the ratepayer’s expense.

5. Other Important Prerequisites for Effective Competition

a) Competitive Referrals - The Board should require the incumbent to provide objective information when customers ask them for a recommended provider of competitive service.

b) Joint Marketing - Board should allow no joint marketing by the incumbent and competitive affiliates.

c) Processing of requests - The Board should require the incumbent to process requests for nonaffiliate as quickly and thoroughly as it would for an affiliate.

d) Variations in price or quality - The Board should not permit the incumbent to charge a customer buying a competitive service from a nonaffiliate more than it would an affiliate.

Proposed sanctions fall into two categories: structural and financial. Structural sanctions address the features of corporate structure which facilitate improper behavior. Compliance with the affiliate rules should be a condition to maintaining the right to be a utility. Conversely, violation of a rule could bar the competitive affiliate’s entry into the retail competitive market. Financial sanctions assign to the wrongdoer the cost consequences of the behavior, plus a penalty. Cost consequences can include excess charges to consumers or loss in benefits resulting from a decline in competition, as well as lost profits which competitors suffer due to misbehavior of incumbent. These sanctions can serve to discourage improper behavior by the incumbent and the competitive affiliate.

The Board should have access to books and records of the competitive affiliate to ensure that the incumbent’s behavior is consistent with Board rules. Additionally, data on affiliate transfers must be available to the Board as soon as they occur, and include the details necessary to ensure compliance with the Board’s pricing rules. The Board should also require the utility to designate a senior official of the company who would be responsible for enforcing the Board’s interaffiliate rules and for certifying each year that the company has complied with the rules.

The Board must foster effective competition where competition has not previously existed. The purpose of regulation must now be to promote competition instead of assisting a particular competitor. The Board’s rules must therefore establish preventive measures against misappropriation of the incumbent’s present advantages, and must promise swift remedial actions, both structural and financial to support those measures.