Good afternoon, Commissioner Butler. I appreciate this opportunity to briefly outline the position of the Ratepayer Advocate concerning the Board of Public Utilities’ review of Unbundled Network Element Rates, Terms and Conditions of Verizon-New Jersey.

As I have stated on numerous occasions, my office fully supports the creation of a truly competitive marketplace for all telecommunications services and for all classes of consumers, including business, residential, and educational entities. As you know, dozens of prospective competitive local exchange carriers have lined up, eager to begin actively marketing and providing local exchange services in New Jersey. Despite their interest, these companies cannot yet afford to compete. One of the primary barriers to a competitive local exchange telecommunications marketplace in New Jersey is the high cost of Unbundled Network Elements. With current UNE rates priced so high, companies stand to lose money on every customer they sign up.

The Ratepayer Advocate believes that it is critical for UNE prices to be set at forward looking economic cost, since prices set above cost will result in competitors subsidizing the incumbent’s ability to compete against them. Moreover, since the price set for UNEs will necessarily establish the absolute floor price below which competing carriers cannot go in competing against the incumbent, setting the floor too high, as has previously been done in New Jersey, will result in large numbers of residential and small business customers having no choice in selecting a local exchange carrier, since no competing carrier will be able to justify the high cost in order to compete against the incumbent.

Perhaps the most important part of the network provided to competitors as a UNE is the local loop, since it simply would not be possible for competitors to replicate the local distribution network of incumbent carriers. In comments submitted to the Board in 1998, we enclosed a chart comparing local loop rates from two different vantage points. The left hand column showed the monthly cost of a local loop taken directly from the accounting records of the Bell operating companies across the country. It reveals New Jersey to be the eighth lowest cost jurisdiction in the country, with an embedded local loop cost of $16.26 per month. New Jersey should have such low costs as a small, eastern seaboard state with the highest population density of any state in the country. Yet, when we consider the similar ranking of states pursuant to the UNE rates established by state regulatory commissions for the local loop, which should reflect the cost incurred by an efficient carrier using the most cost-effective technologies and network designs available today, we find that New Jersey ranked 20th. Why, if New Jersey is a low-cost state for purposes of building local loop distribution facilities in a fully regulated utility environment, are we not likewise low-cost for purposes of building the same plant today using the most efficient methods and design strategies? The embedded cost of the loop is virtually identical to the UNE rate established by the Board, which is anomalous to the way almost all other state commissions have structured UNE prices -- significantly below embedded costs. The disparity is evident by comparing what our neighboring states of New York and Pennsylvania have done. New York, widely recognized as the state with the most vibrant competitive market for telecommunications, has a statewide average local loop UNE rate of $14.52. Pennsylvania imposed a local loop rate of $16.87 in 1997. In 1999, at the conclusion of a fully litigated proceeding before the Pennsylvania PUC, the Commission found that the statewide average for Bell Atlantic-Pennsylvania to be $14.50. The PUC also stated that in one year’s time, the local loop rate would be further reduced to $14.01 when now-Verizon-Pennsylvania is permitted to carry long distance traffic.

As the New Jersey Board of Public Utilities undertakes this vitally important review of UNE rates as ordered by the U.S. Federal District Court for the District of New Jersey, the Ratepayer Advocate recommends that the Board maintain its position that UNE prices be set according to Total Element Long Run Incremental Cost principles. No party has proposed that the Board adopt a different cost methodology.

The Ratepayer Advocate also urges the Board to base its decision on the most current cost data that is able to be provided by incumbent carriers and other intervening parties. Only by examining current data will the Board have the ability to set UNE prices at a level that accurately reflects the costs faced by carriers today, and only those UNE prices will foster the development of competition in New Jersey as envisioned in the Telecommunications Act of 1996.

In conclusion, I would like to say, and I don’t think I am overestimating the importance of this proceeding by making this statement, that nothing less than the future of local exchange competition in New Jersey is at stake here. This Board must decide what is right for New Jersey and its citizens by setting rates that reflect the inherent economics of building network infrastructure in the most densely populated state in the nation, and at a level that will promote the development of a truly competitive marketplace in our state.

Thank you.

SCHEDULE A

Comparison of NECA Embedded Average Loop Costs (1995)
to TELRIC Unbundled Loop Rates