Verizon Concessions Tip Balance In Favor of Pa. Broadband Law

Chief among the Verizon concessions was an agreement to allow Philadelphia to proceed with its plan to set up a citywide municipal network to offer all the residents within its 135-square-mile area low-priced high speed wireless Internet access. Verizon could have forced the city to abandon the project under the new law, but they reached an agreement late Tues. that will allow the city to proceed. The law prohibits municipalities from providing broadband or other advanced telecom services for a fee -- except on projects finished before 2006 or if the incumbent telco disclaims any intent to provide service soon. Verizon waived in writing its right to block the city’s project and disclaimed any intent to provide similar services there.

Rendell acknowledged the ban on municipal broadband service was a “problem.” But the provision barring municipal services isn’t absolute, he noted. Rendell said the state will “work with other municipalities on projects that they have established or propose to establish in order to ensure that, to the extent that they are now viable, they will also have the opportunity to succeed.”

But Verizon also made clear that its decision to allow the Philadelphia project to proceed doesn’t mean it supports municipal broadband service. During debate on this bill, Verizon said it would be unfair to hold incumbents to their accelerated deployment commitments if they faced competition from municipal broadband services that didn’t have to pay the same taxes, fees and capital costs as businesses. A Verizon spokesman acknowledged it made the agreement for Philadelphia to get the bill signed, and added that other municipalities’ offerings would be considered case by case.

Philadelphia’s plan had drawn national attention as the most ambitious program by any major city to bridge the digital divide for its residents. Though the municipal service restriction was inspired by a project in the borough of Kutztown, its threat to Philadelphia’s project quickly became a lightning rod for the national municipal telecom debate.

In another major concession, Verizon also promised Rendell that, regardless of what the federal jurisdiction may do with regard to unbundling, it will continue to offer unbundled services to competitors up to 40% off list. The specific services and other terms included in this pricing commitment will be announced later. The agreement addressed claims by the state Office of Consumer Advocate and competitor interests that HB-30 could hurt competition by impairing rivals’ ability to deliver advanced services at a profit. “These agreements will be available to any CLEC, at rates well below the existing rates for these services. These deep discounts will be a major factor in stimulating local telephone competition in Pennsylvania,” Rendell said.

The new law replaces one that established indexed price caps for all incumbents, but imposed on them the obligation of full broadband deployment by 2015. The cap formula allowed for annual rate increases equal to the inflation rate minus a 2.4% productivity offset (2.9% for Verizon). Under the new law, companies that agree to full deployment by 2013 will have their productivity factor reduced to just 0.5%. Carriers that commit to full deployment by 2008 will have the productivity factor eliminated. Rural carriers that commit to the 2008 deadline will be relieved of some other regulatory requirements. The result is that incumbents would be able to impose larger annual rate increases.

But there’s also a “clawback” provision that would require a carrier to refund to ratepayers the difference in rates between the new indexing formula and the old if they fail to meet their accelerated deployment commitments. This provision was included to address criticisms that incumbents would receive the incentives when they filed their deployment plans but before they built anything. Rendell said he'd have preferred stronger penalties for failure to meet goals, but said the clawback provision “affirms the principle that there must be a combination of rewards and penalties to ensure incumbents honor their promises.”

To protect affordable phone service for low-income households, the new law’s Lifeline provisions require that incumbents establish a process to automatically notify residents who apply for state public assistance that they are eligible to enroll in the Lifeline program, which provides an $8 discount on monthly phone bills and up to $100 toward installation charges. The bill also amends the Lifeline program to allow subscribers to buy vertical services such as caller ID or call waiting. Previously, Pa. Lifeline customers weren’t allowed to have these services, and this restriction was considered a significant impediment to Lifeline enrollment.

The bill requires Verizon and other incumbents to provide broadband service to K-12 schools at 30% off the market rate or, if it’s less, the actual incremental cost of providing service to the buildings. It also established a $10 million education technology fund, supported by contributions from incumbent telcos, to help schools pay for the equipment needed to take advantage of their broadband connections. The fund originally was to be $7 million annually, but Verizon made a formal promise to Rendell that it would ante up another $3 million a year through 2011.

In another pot-sweetener, Verizon promised to sell broadband equipment to schools at a discounted price equal to cost plus 5%. And it agreed to sell its managed network services to schools at a 20% discount from list. Rendell said the law’s discounts and Verizon’s commitments would represent at least $350 million in broadband savings to schools the next 10 years. “This far outstrips any commitment made by local telephone companies to any other state,” Rendell said.

The law also sets up a process by which the state Dept. of Community & Economic Development (DCED) can designate specific rural communities to go to the head of the deployment queue to serve local economic development projects. Under this provision, incumbents must provide broadband service to DCED-designated communities within 12 months of the request from that agency.

Rendell said the final version of HB-30 that he signed leaves the PUC significant authority over telephone services, quality standards and network modernization. Early versions of this bill would have removed the PUC from broadband oversight. Rendell said that while the law “streamlines and in some cases weakens the regulatory role of the PUC… it will allow the commission to determine when competitive services are available and approve network modernization plans.”

Verizon Pa. Pres. James O'Rourke hailed enactment of the law as “the right call for Pennsylvanians.” He noted a broad base of support from state educators, labor unions, economic development groups and industry: “We also were pleased to resolve the concerns of the Office of Consumer Advocate and the City of Philadelphia.”

Verizon Pa. CEO James O'Rourke said HB-30 “builds on the solid telecom foundation laid over the past decade.” He said the new law has received “a broad base of support” from the Pa. School Board Assn., the Pa. Assn. of Intermediate Units, CWA and AFL-CIO, economic development groups like the Pa. Chamber of Commerce and the Pa. League of Cities & Municipalities, and companies like Verizon and other members of the Pa. Telephone Assn.

James Baller, a telecom attorney representing local govts., said: “It’s a really unfortunate law.” But he added: “It’s not the end of the road. There are ways to address some details in [the law] and we need to understand how it’s going to be administered.” He said it was “hard to say” what impact the decision would have on local municipalities’ ability to provide broadband because “it’s not clear how the law is going to work. This law is not supposed to be as restrictive as some people claim and the governor is positive” about municipalities being able to continue to be involved in the network layout: “We just need to figure out how to do that.”

Baller said the law was “not ambitious enough.” Citing a report by Jupiter, he said by 2009, average households will need a bandwidth of 50 to 70 Mbps and high-tech ones will need up to 100 Mbps. Verizon has committed to providing a ubiquitous bandwidth of 1.5 Mbps by 2015, Baller said. “It’s very inadequate. We are talking about commitment of a very low bandwidth compared to where the leading nations are going.”

Consumer groups strongly criticized the new law. “What the governor did is give control over fundamental governmental function to a private corporation, which is outrageous,” said Consumer Federation of America Research Dir. Mark Cooper. He said Verizon already was paid through price caps to wire the state in the mid-90s, but it never did that. “Verizon has no commitment to make this service affordable and provide an open access,” he said: “It is taking the most important public function and turns it over in a greedy private corporation with no [public] responsibility.” Cooper said “poor neighborhoods will be the last” to be served by Verizon, because “Verizon always starts in the upscale neighborhoods.”

“The battle is on to restore public responsibility in the [public] communications,” Cooper said. He said while Philadelphia was going to move on with its project under the agreement it had reached with Verizon, the rest of the state would be left out. “It’s absurd,” he said: “Under the bill, every city and county in Pennsylvania should adopt a resolution declaring their intention to deploy a city-wide wireless network and demand that Verizon gets out of the way.” He said “the 2 side effects of this legislation” were: (1) “The community wireless movement will not let Verizon or any other telephone or cable company to slip this stuff through again.” (2) “In Pennsylvania, municipalities should force Verizon to get back the governmental function of deciding whether and how to deploy networks… Local municipalities should move quickly and start the process.”

The bill doesn’t directly affect the cable industry, said Broadband Cable Assn. of Pa. Pres. Dan Tunnell. However, he said “because the bill deals with traditional telco service, it affects us indirectly because it affects our competitor.” He said he wasn’t sure whether the legislation would affect cable competitive position in the long term. Tunnell said the bill passed without the provision that the cable industry had sought, which would have exempted VoIP providers from state regulation and clarified that local govts. can’t impose taxes and fees on VoIP service. “With that amendment, we would have certainty [that states are preempted], but now we are not certain,” he said: “Now, we'll probably have to litigate if any community decides to impose taxes on VoIP providers.”