Mr. Selwyn’s testimony addresses the Cross Petition filed by AT&T in the proceeding to review Verizon New Jersey’s ("Verizon" or "VNJ") Plan for Alternative Regulation ("PAR-2"). The Cross Petition asked the Board of Public Utilities ("Board") to adopt a plan for the structural separation of Verizon-New Jersey into separate "retail" and "wholesale" affiliates. The Division of Ratepayer Advocate ("Ratepayer Advocate") is in favor of structural separation as the solution that will best achieve the overarching goal of establishing an effectively competitive local telecommunications market in New Jersey.

Past state and federal legislation aimed at encouraging and facilitating the development of competition in New Jersey has proven futile because Competitive Local Exchange Carriers (CLECs) have succeeded in capturing only a small fraction of the local exchange market. Therefore, structural separation of VNJ’s wholesale and retail operations is required in order to achieve full parity of treatment for VNJ and CLEC competitive service activities as it relates to their access to underlying VNJ monopoly services, functions and resources. Structural separation can be implemented through "formal" structural separation which requires an actual separation of Verizon’s wholesale and retail operations, or "virtual" separation which does not require separate operations, but imposes stringent accounting standards and a strict code of conduct. If it is later shown, however, that VNJ’s treatment of competitors has not achieved full parity with its treatment of its own competitive business units, formal structural separation should be pursued by the Board.

The Board must focus on policy objectives rather than the process (i.e., the precise form of structural separation that would be pursued) in deciding how to implement structural separation. Two goals should guide the Board’s formulation of structural remedies. The solution should assure that: (1) VNJ is prevented from taking advantage of its monopoly status by favoring VNJ affiliate business segments in which competition is economically feasible and has the potential to develop for nonaffiliated competitors, and (2) VNJ is prevented from taking advantage of its monopoly control of the "last mile" and related essential facilities in order to thwart competition in the local telephone market. The monopoly status of Verizon in the local exchange market is largely attributable to its control of the "last mile," i.e., the wires that run between the customer’s home or business to the Incumbent Local Exchange Carrier (ILEC) "wire center" or "central office."

At the present time, VNJ’s wholesale and retail services are vertically integrated which affords Verizon both the incentives and opportunity to favor its own retail and other competitive businesses over CLECs. Competitors must therefore be allowed the same functional access to the underlying monopoly resources as is provided to the VNJ competitive business unit. This can only be achieved if there is true parity of treatment between VNJ andVNJ’s competitive business units and nonaffiliated competitors, which basically means that VNJ’s treatment of VNJ’s retail or competitive unit must be identical to the treatment given to CLECs. True parity of treatment is the only way competition can be expected to develop and flourish.

Once VNJ wholesale/retail interactions are brought into absolute parity, the Board must take steps to prevent VNJ’s retail unit from exploiting its incumbent status in ways not available to new service competitors. One such step is to implement a system of "balloting" where forms are mailed to retail local service customers in an affected area and they are asked to select a local phone service provider from a list of available local exchange carriers. This "balloting" process will enable CLECs to market its service, encouraging customers to select it as the customer’s local exchange carrier. Furthermore, VNJ’s retail unit should continue to be subject to alternative price-cap regulation until it is shown that Verizon’s market share in the local market has decreased to 60 percent. VNJ’s wholesale unit should also be subject to strict price cap regulation with periodic readjustments and reinitialization of rates so as to maintain prices of wholesale services and functions at "just and reasonable" levels. "Just and reasonable" rates, in this instance, are those rates that would roughly produce the level of earnings that would traditionally apply for regulated utilities.

The "virtual" structural separation plan is less ambitious than "formal" structural separation and can be implemented more rapidly. "Virtual" structural separation requires the financial tracking of all transactions between VNJ’s retail and wholesale divisions as well as the tracking of transactions between VNJ and nonaffiliated competitors. This tracking system will prevent VNJ’s retail division from obtaining "back door" access to Verizon’s network systems and functions while nonaffiliated competitors are forced to "wait in line" at the "customer service counter." Moreover, under "virtual" structural separation, Verizon is allowed to operate its wholesale network and retail activities under the same corporate umbrella, which will require more regulatory oversight by the Board than would be necessary under formal structural separation. The "virtual" structural separation construction, therefore requires an effective Code of Conduct to capture these additional requirements and safeguards. Code of Conduct issues are discussed in more detail in Scott Hempling’s testimony on structural separation.

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