REMARKS OF BLOSSOM A. PERETZ, ESQ.
DIRECTOR, DIVISION OF THE RATEPAYER ADVOCATE

BEFORE THE NEW JERSEY STATE LEGISLATURE
SENATE COMMERCE COMMITTEE
STATE HOUSE ANNEX
TRENTON, NJ 08625

On the Status of Local Exchange Competition in New Jersey
September 27, 1999

The Division of the Ratepayer Advocate had the privilege of appearing before this Committee in May of this year, when the membership first considered issues related to the development of vigorous competition in local exchange telecommunications in New Jersey and realizing the promises of the federal Telecommunications Act of 1996 for the benefit of all residents of the state. On that occasion the Committee heard from a broad cross-section of the industry portraying various assessments of both the current status of competition as well as reasons for the prevailing level of competitive entry.

This Committee, and the entire Legislature are properly interested in this issue, as the creation of vibrant telecommunications competition in New Jersey will be vital for the economic health of the State in the information age. If New Jersey proves to be less attractive to competitive carriers than our adjacent and neighboring states, the multi-million dollar investments that carriers and companies will make in telecommunications over the next several years, will instead be directed to those other states. The loss to New Jersey’s economy, vitality and attractiveness for all other forms of economic development, will be immeasurable. Accordingly, it is an absolute necessity that this Committee, and other arms of State government conduct periodic reviews of where New Jersey stands in telecommunications competition, particularly as compared to other major industrialized states of the Northeast.

For purposes of the present review, the Division of the Ratepayer Advocate believes that relevant data from various sources are readily available that should assist the Committee in this effort. The Ratepayer Advocate would like to focus your attention on two authoritative assessments of competition, one completed by the Board of Public Utilities (Board) in July 1998, entitled "Status of Local Telephone Competition: Report and Action Plan," and the report released by the Federal Communications Commission (FCC) just three weeks ago, titled "Local Competition: August 1999." The Board’s report provides a revealing portrait of local exchange competition as it existed fourteen months ago, whereas the FCC’s report provides snapshots of the level of competitive entry in each of the States at specific points in time, with the most recent review being December 31, 1998. By comparing the results reported by the Board with those reached by the FCC, it is also possible to make judgments about not only the level of competition currently, but, more importantly, to gauge the speed with which competitors are making headway both in New Jersey as well as other states of the nation. To assist the Committee in that effort, the Ratepayer Advocate would like to highlight what we believe to be the salient points and offer some conclusions respecting the vitally important issues being considered by the Committee.

Addressing initially the evaluation made by the Board in its report of July 1998, the Board made some interesting observations about the then prevailing market for telecommunications services. The Report noted that at the time of the report, some 2 ½ years following enactment of the federal Telecommunications Act of 1996 competitive carriers were still not providing "significant statewide . . . local land line residential or small business telephone offerings to . . . customers . . . in New Jersey." Recognizing that there are primarily two methods by which potential competitors will enter the market against the incumbent local exchange carrier, the Report focused on (1) the resale of the exchange carrier services provided by the incumbent, Bell Atlantic-New Jersey, and (2) purchase of local distribution facilities from the incumbent Bell Atlantic-New Jersey as unbundled network elements (UNEs), to which the competitive carrier would attach its own facilities. The Report provides analysis comparing New Jersey with the country at large on both of these competitive strategies. As on July 1998, the Board’s report concluded that competitors in New Jersey were providing telephone service through resale to less than 1/4 of one percent of residential customers, and less than 1/10 of one percent of businesses. Using facilities of the incumbent in conjunction with networks and plant owned by competitors (the use of UNEs), the Board concluded that in New Jersey, would be competitors were providing facilities based competition to no residential customers, and less than ½ of one percent of business customers. As a comparison to competitive activity throughout the country, the level of national competition through resale was found by the Board to be less than ½ of one percent for residential customers, and less than 1/10 of one percent for businesses. With regard to facilities based competition through the use of UNEs, the Board found that nationally less than 1/10 of one percent of residential customers were served by competitive carriers, and approximately 7/10 of one percent of business customers. Thus, using the Board’s own statistics, it seems clear that as of July 1998, the level of local exchange competition in New Jersey was approximately one-half of that being experienced by the rest of the country, as a broad national average.

With the results reported by the Board in July 1998 as background and a benchmark, it may be useful to now compare the most recent data respecting local competition, which is contained in the FCC’s report of August 31, 1999. The FCC concluded that in December 1998 the percentage of local lines provided by Bell Atlantic-New Jersey to competitive carriers for resale in New Jersey was 0.9 percent. The national average for the same measurement was 1.7 percent. When the FCC looked at the percentage of customers served by competitors using total service resale of incumbent carriers’ facilities, the Commission determined that in December 1998 the percentage was 0.9% in New Jersey and 1.9% nationally. The FCC also looked into the number of local lines provided by incumbent carriers to competitors as UNEs. With regard to the same December 1998 time period, the FCC found that in New Jersey only 1,000 of Bell Atlantic-New Jersey’s 6,356,000 lines were provided as UNEs, whereas nationally the number was 361,000. As a percentage of all switched access lines, the data constituted 16/1000 of one percent in New Jersey, while being approximately 2/10 of one percent nationally. Not only does the FCC’s report reflect the undeniable fact that New Jersey lags far behind the nation on an average basis, but comparing the results obtained by the FCC for December with those reported by the Board in July 1998, there appears to be limited progress in the development of competition in New Jersey. When the FCC’s reported results for New Jersey are compared with similar data reported for other Northeastern industrialized states such as New York, Connecticut, Massachusetts and Pennsylvania, the lack of competition in New Jersey is striking, with the results in New Jersey being generally less than half, and often less than one third of percentages measuring levels of competition using the previously noted parameters.

The FCC Report states that competitive carriers are entering the largest and densest markets first, since it is axiomatic that such states would offer the greatest opportunities for growth and profits. However, the results reported for New Jersey -- by both the Board and the FCC -- do not evidence that dynamic. Since New Jersey is a small state and the most densely populated of all the states, one would expect that New Jersey should be a particularly attractive marketplace for competitive carriers to pursue their competitive strategies. But the data reported by both the Board and the FCC point to the converse conclusion: low levels of competitive entry and no indication that competitors are making major inroads. This Committee should ask itself "why?" and respond with meaningful legislation to address those aspects of the telecommunications marketplace which are not permitting competitive carriers to pursue economic opportunities in this State.

Bemoaning the lack of meaningful competition in New Jersey, the Board set forth in its July 1998 report a detailed "Action Plan" for "jump starting" competition. The Board first identified two "major barriers" to competition and then proceeded to delineate an exacting plan for removing both barriers and thereby promoting competition. The Board found that the lack of standardized operational support systems (OSS) was the "most significant barrier to competition." OSS are the computer systems and programs that incumbent carriers such as Bell Atlantic-New Jersey use to process customer service orders, maintain customer billing records, report troubles, and respond to consumer inquiries about their service. In order for competitive carriers to be able to compete, they must be able to access those OSS functions electronically and seamlessly, and provide the same level of customer support that Bell Atlantic provides to its own subscribers.

The other major impediment to competitive entry is the ability of competitive carriers to obtain "unbundled network elements" (UNEs) from incumbent carriers such as Bell Atlantic-New Jersey. One of the primary UNEs which competitors will require is the unbundled local loop, or the pair of wires connecting the customer’s premises to Bell Atlantic-New Jersey’s local switching office. Competitors have to be able to purchase the local loop from Bell Atlantic-New Jersey since the economic opportunity provided by most subscribers, and almost all residential subscribers, would not justify the enormous expense of a competitor stringing its own wires to the customer’s location.

Having identified what the Board believed to be the two most significant roadblocks to full competition, the Board next described a detailed process for resolution of both issues. The Board initially constituted a Technical Services Facilitation Team (TSFT) to be the forum for promptly resolving all issues related to OSS and UNEs. The Board’s ambitious schedule contemplated that all issues initially considered by the TSFT would be resolved within twelve months, either as a matter of consensus among the industry or decided by the Board on a contested basis. We are now some two months past that deadline. At the present moment, we are advised that issues related to OSS functionality may be placed on the agenda of the Board at its next meeting of September 29, 1999, though what issues the Board will consider and what actions it may take are unknown. The Board has chosen KPMG to be the outside contractor to test Bell Atlantic-New Jersey’s OSS. We are told that Staff is still working on obtaining the requisite approvals in order to contract with KPMG. As of the present date, there is no indication when the testing would start or how long it would take.

With regard to the other issue of UNEs, the Board’s Plan set forth a schedule by which the Board would resolve within 105 days of the report two central issues: the authority of the Board to order incumbent exchange carriers such as Bell Atlantic-New Jersey to provide combined UNEs as a platform (UNE-P); and service quality and performance measurements. The Board also directed its TSFT to resolve within nine months, questions related to: 1) two-way trunking and traffic measurement; 2) reciprocal compensation; 3) collocation of competitors’ facilities in Bell Atlantic’s central offices; and 4) OSS issues. Reciprocal compensation continues to be a matter of heated controversy with carriers having filed formal complaints with the Board and the courts alleging breach of interconnection agreements by Bell Atlantic-New Jersey for failure to pay reciprocal compensation. We are advised that the issue of collocation may be among the issues to be addressed by the Board at its upcoming agenda meeting. Although the Board has ruled that it does have the jurisdiction to order Bell Atlantic-New Jersey to provide UNE combinations to its competitors, the Board has yet to delineate precisely which piece parts of the network must be provided to competitors as unbundled elements. Perhaps the Board is awaiting the release of the FCC’s written Decision and Order delineating which UNEs must be provided as a matter of federal telecommunications regulatory policy. Advance notice of the Commission’s action on UNEs was released on September 15, 1999.

The third TSFT convened by the Board addressed issues of performance measurement. After a series of industry wide meetings, the various competing positions were submitted to the Board. We are told that Board Staff is working on a draft position for the Board to consider at an upcoming agenda meeting, though we have not been advised when that meeting may take place.

If we are to realize a competitive marketplace for local telecommunications in New Jersey, it is important that this Committee not only make its own evaluation of the state of competition in New Jersey, but also look at regulatory models throughout the country that have had greater success in stimulating market development in telecommunications. One such model which the Committee may wish to consider is to be found in our neighboring State of Pennsylvania. The Pennsylvania PUC just recently issued an order which materially changed the competitive landscape. The Pennsylvanic Commission, in one bold move, reduced substantially the rates Bell Atlantic-Pennsylvania charges for UNEs including the all-important local loop; reduced the charges Bell Atlantic-Pennsylvania imposes on interexchange carriers for the use of Bell’s network to originate and terminate calls (access charges); ordered Bell Atlantic-Pennsylvania to restructure the company into two segments, one providing service to the public and the other providing network services to competitive carriers, and a variety of other provisions intended to stimulate the competitive entry of carriers to Pennsylvania. Were the Board of Public Utilities in New Jersey, or the New Jersey Legislature to effect similar changes in the New Jersey marketplace, the effects of competition of all kinds would, we believe, be striking. Similarly, New Jersey should build on the fruits of the regulatory process employed by the New York Public Service Commission to pave the way for competitive carriers to be able to compete in New York, which is widely perceived to be furthest along in meeting the competitive checklist requirements for local exchange carrier entry into long distance. There is no reason for New Jersey to lag behind other states in implementing policies which will promote competitive entry by a variety of carriers.

It is important to stress, in this regard, that advanced telecommunications is a strategic asset. Companies considering expansion or relocation from one jurisdiction to another will carefully consider the state of the telecommunications infrastructure available in various States as either a positive or negative in influencing the ultimate decision. In today’s broadband information age society, time and distance are no longer barriers since the information superhighway knows no boundaries or borders. A company could locate anywhere, and through the miracle of modern telecommunications, serve its client base throughout the world. If the latest innovations in modern, efficient, high speed telecommunications are not offered in New Jersey because of a burdensome regulatory environment, are priced higher in New Jersey than in surrounding States, or other causes make New Jersey a less favored location than, say New York, Pennsylvania or other States, particularly in the Northeast, the new corporate headquarters or plant expansion will not be made here and New Jersey will lose out. The Governor has declared New Jersey to be open to business and has provided the vision of New Jersey being the Telecommunications Mecca. There is a great deal that this Committee could do to advance both worthy goals.

We realize that telecommunications is a highly technical field, with unique regulatory requirements at both the state and federal levels, and replete with its own jargon. The creation of policy in this area can be a truly daunting task, that can easily intimidate even the most adventuresome legislator. The Division of the Ratepayer Advocate has provided technical and policy guidance to various arms of state government in other highly technical matters such as energy deregulation, and stands ready to provide its expertise in telecommunications as well.

Thank you.

HOME