PA. PUC ORDERS FUNCTIONAL SEPARATION OF VERIZON, NOT FULL BREAKUP

PUC also proposed “strict” code of conduct to ensure wholesale division’s dealings with retail side were at arm’s length and on same terms as dealings with CLECs as well as timetable for compliance. Until new code is finalized, PUC said, 2 divisions will operate under interim code of conduct that agency adopted in Sept. 1999 Global Competition Order in which it determined that Verizon wholesale-retail separation was essential to development of effective local competition. PUC Thurs. also increased by 33% fine Verizon faces for service standard violations lasting 30 to 60 days and by 20% for violations uncorrected after 60 days. Agency ordered 4.4% reduction in unbundled loop rate in density zone 4, which covers most rural areas of state.

PUC Chmn. John Quain called order “workable compromise” between Verizon’s opposition to any separation and CLECs that sought full breakup of carrier. He said functional separation should deliver benefits of competition PUC intended in its 1999 order quicker than full structural separation and would avoid years of costly litigation certain to result from order for full breakup. “A strong code of conduct and increased penalties tied to Verizon’s performance should be enough to convince competitors that this commission will not tolerate any discriminatory actions by Verizon.” Quain stressed that if Verizon didn’t go along with functional separation and failed to meet PUC’s performance standards and conditions, agency stood ready to proceed with breakup of Verizon in pending Sec. 271 proceeding.

Quain had harsh words for Verizon’s lobbying efforts leading up to PUC decision, assailing company for trying to obstruct structural separation by “threatening the citizens and businesses [of Pa.] with negative outcomes and consequences far beyond the foreseeable scope of this proceeding [by] portraying structural separation as leading to lost jobs and broad-based negative economic impact.” Verizon, Quain said, “threatened to relegate Pennsylvania to virtual backwater status in the Information Age.”

Quain said Verizon in its pending appeal to the Pa. Supreme Court of the PUC’s 1999 order claimed heavy publicity surrounding existence of separation case itself was driving away business and confusing consumers. “Profound irony” of that allegation, he said, is that much of publicity resulted from Verizon’s own media campaign to head off separation.

Quain directed PUC Law Bureau to investigate Verizon’s antiseparation media and lobbying efforts and claims that company made. He said if it could be shown that Verizon went overboard, PUC would order sanctions including corrective ads plus contributions to special technology deployment fund. Agency directed Verizon within 30 days to itemize its advertising and lobbying expenses related to separations case and comparisons of its network investments in Pa. and its other states over last 3 years. Verizon’s reports to Pa. Ethics Commission showed company spent total $8.6 million on lobbying for all matters between July 1999 and Dec. 31, while rival AT&T reported it spent $5.2 million in same period. Other pro-separation and anti-separation interests combined spent less than $1 million.

PUC’s decision against actual breakup of Verizon may defuse efforts in state legislature to strip agency of any power to break up corporations. State Sen. Clarence Bell (R-Delaware) and state Rep. Frank LaGrotta (D-Lawrence) said they were promoting legislation to bar PUC from ordering structural separation of any telecom company. LaGrotts said Verizon breakup would be “lunacy.” Meanwhile, state Rep. Camille George (D-Clearfield) said she had attracted 84 co-sponsors to resolution urging PUC to back away from Verizon breakup because of potential costs to consumers and state’s economy.

Verizon Pa. CEO Daniel Whelan praised PUC for rejecting “unwarranted” breakup of company. He said there were “a number of provisions that could be troublesome” but declined to go into detail pending review of order. He also defended Verizon’s advertising and lobbying efforts, saying company was forced to respond to advertising and lobbying “blitz” by AT&T “designed to keep us out of long distance and limit customer choice.” He said that residential competition was strong, that Verizon in Pa. had lost 7% of residential lines to competitors and that it currently was switching 40,000 residential lines monthly to competitors. Whelan said public sentiment was strongly against Verizon breakup and cited recent Public Opinion Strategies poll showing residents opposed full separation by 2-1 margin.

“We're not surprised that Pennsylvania officials recognized, as we do, that structural separation of the Bells is a dumb idea which could well drive up costs to consumers,” said Ken Johnson, spokesman for House Commerce Committee Chmn. Tauzin (R-La.). “If we truly want to lower telephone and Internet costs, we need to complete the deregulation, not begin the reregulation, of telephony.” Referring to talk of CLECs’ pursuing federal structural separation legislation, Johnson said it was “highly unlikely that that type of legislation would be successful. It certainly won’t make it out of the Energy & Commerce Committee.”

USTA Interim Pres. Gary Lytle said PUC “made the right decision” in easing its requirements because “forcing local phone companies to split their operations is bad for consumers, bad public policy and bad economics.” Mandatory structural separation would result in higher costs and “delay the benefits of competition by diverting resources from network and service enhancements,” he said.

From other side, AT&T said it was disappointed that PUC didn’t break up Verizon, but called decision “a good order that confirms Verizon’s anticompetitive practices and puts Verizon on final warning to open its monopoly.” AT&T also praised PUC for investigating what it said was Verizon’s “unseemly, deceptive” campaign of “misinformation and intimidation.”

Assn. for Local Telecom Services (ALTS) called decision “a step in the right direction for competition, if it is strictly enforced.” ALTS said it was disappointed agency didn’t order breakup, but said it’s “heartened” by decision to impose strict code of conduct to ensure Verizon opened its local markets to competitors.

Indianapolis-based Consumers’ Voice Coalition called PUC action “landmark decision” that recognized Verizon’s behavior “is anticompetitive enough to require the functional division of its wholesale and retail operations.” However, group said PUC should have gone farther and broken Verizon in 2.

Sue Ashdown, exec. dir. of American ISP Assn., said ruling “was on the right track, but still did not go far enough.” She said her fear was that “given the choice between providing a competitor with access or paying a fine for noncompliance, Verizon will likely choose the latter every time.” Other states also are considering structural separation petitions, including Fla., Ill., Minn. and N.J., she said. “The problems that ISPs and local phone competitors experience are not exclusive to Pennsylvania,” Ashdown said.

CompTel said it was disappointed that PUC “didn’t hold firm” on earlier decision to separate company structurally “and abide by the PUC’s own administrative law judge’s recommendation.”