20031020Final Order No 29360.pdf

Office of the Secretary
Service Date
October 20, 2003
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
QWEST CORPORATION FOR
DEREGULATION OF BASIC LOCAL
EXCHANGE RATES IN ITS BOISE, NAMPA
CALDWELL, MERIDIAN, TWIN FALLS,
IDAHO FALLS, AND POCATELLO
EXCHANGES.
CASE NO. QWE- T -02-
ORDER NO. 29360
Idaho Law requires that the Idaho Public Utilities Commission cease regulating basic
local telephone rates in a local calling area when evidence presented to the Commission
establishes that "effective competition exists for basic local exchange service throughout the
local exchange calling area.Idaho Code 9 62-622(3).On December 17, 2002, Qwest
Corporation filed an application asking the Commission for an order "deregulating Qwest's basic
local exchange service rates for the Boise, Caldwell, Idaho Falls, Meridian, Nampa, Pocatello
and Twin Falls exchanges based upon the fact that effective competition exists in those seven
exchanges.Qwest Application, p. 9. Qwest's Application was premised on its belief that
effective competition exists from a multitude of unaffiliated wireless ( cellular) service providers
in the seven exchanges." Qwest Application, p. 2. After a review of the evidence presented by
Qwest, the Commission denies Qwest's Application, and also denies a motion to re-open the
record filed by Qwest four weeks after the case was fully submitted. The Commission approves
in part, a request for intervenor funding filed by private party intervenors.
PROCEDURAL HISTORY
Following the filing of Qwest's Application , the Commission on December 18, 2002
issued a Notice of Application and Notice of Right to Intervene. Petitions to intervene were filed
by the Idaho Telephone Association, Time Warner Telecom, WorldCom, Inc., Verizon
Northwest, Inc., and six individuals represented by one attorney. WorldCom subsequently
withdrew from the case, and none of the other industry intervenors participated in the case. Only
the private party intervenors, usually identified in the pleadings by the name of the first
individual listed, Sidney Meirerotto, participated in the hearing. Accordingly, in this order the
term "Intervenors" refers only to the private party intervenors.
ORDER NO. 29360
On February 10, 2003 , the Commission issued an order establishing a procedural
schedule and a hearing date for April 29-, 2003. The Commission also on February 24 2003
issued a Notice of Public Workshops. The public workshops were convened by the Commission
Staff to "provide an opportunity for members of the public to ask questions of Staff and the
Company, and to provide written comments regarding Qwest's Application." Public workshops
subsequently were held in Pocatello, Twin Falls, and Boise. On April 22, 2003, the Staff filed a
Motion to Strike or In the Alternative to Vacate Hearing Date. Staff contended Qwest filed late
testimony and exhibits that were "voluminous and contained substantial information not
responsive to the direct testimony filed by Staff witnesses on March 19, 2003." Staff Motion to
Strike, p. 1. On April 24, 2003, the day before the oral argument scheduled on Staffs Motion to
Strike, the parties filed a Stipulation to Vacate the Hearing and Oral Argument Hearing Date.
The Stipulation allowed an opportunity for additional discovery on the testimony and exhibits
filed by Qwest and rescheduled the hearing date. The Commission subsequently issued Order
No. 29233 approving the Stipulation filed by the parties, vacating the hearing date and
rescheduling it for June 4-2003.
On April 30, 2003 , the Commission Staff filed a Petition for Declaratory Ruling and a
Memorandum in Support of the Petition.Staff contended in its Petition that the parties
substantially disagreed on the interpretation of Idaho Code 9 62-622(3)(b), the section under
which Qwest filed its Application. According to Staff s Petition
, "
each party filed its evidence
and exhibits based on its own interpretation of the statute, leading to confusion and inconsistency
that would be resolved by the Commission providing a ruling on the interpretation of Section
62-622(3)." Staff Petition for Declaratory Ruling, p. 1. Responses to Staffs Petition were filed
by Qwest and the intervenors, and Qwest also filed a Cross-Petition for Declaratory Ruling. The
Commission convened an oral argument hearing on May 22 , 2003. At the oral argument hearing
on the Petitions, the Commission declined to issue a declaratory ruling and determined to
proceed to hearing on June 4, 2003. The hearing concluded on June 5 , and post-hearing briefs, at
the request of the parties, were filed on June 27 2003 and July 2003.
On July 9, 2003, the Intervenors Meirerotto filed a request for intervenor funding
pursuant to the Commission s Rules of Procedure and Idaho Code 9 61-617 A. Qwest filed a
Motion in Opposition to Request for Intervenor Funding on July 23 2003.
ORDER NO. 29360
On August 14, 2003 , Qwest filed a Motion to Re-open the Record, which had been
closed and fully submitted as of July 11 , 2003. Qwest requested permission to file supplemental
testimony of James Schmit that accompanied its Motion. The Commission Staff filed a
Response on August 22 2003, objecting to the re-opening of the closed record. Staff argued that
Qwest does not state a valid reason to re-open, and seeks an opportunity to fundamentally
change the case, without benefit of evidence or hearing, from a deregulation case to a price cap
case that should have been filed under Section 62-622(1)(a).Staff Response to Motion to Re-
open, p. 7. The Intervenors also filed an Objection to Qwest's Motion to Re-open on August 26
2003 , and on the same date Qwest filed a reply to Staffs Response to Qwest's Motion to Re-
open.
QWEST'MOTION TO RE-OPEN
The Commission will first address Qwest's Motion to Re-open the Record filed
August 14, 2003. Qwest requested permission to re-open the record in order to file additional
testimony of James Schmit, a Qwest witness who initially filed testimony in Qwest's rebuttal
filing. Qwest did not ask for a hearing to spread the testimony and allow parties an opportunity
to cross-examine the witness on the new testimony, although it recognized "that the Commission
and parties had not had the opportunity to question Mr. Schmit on the matters contained in his
proposed testimony." Instead, Qwest stated "it will promptly respond to any questions
concerning Mr. Schmit's testimony in writing and will make no objection should the parties wish
to file affidavits or written comments in response to the supplemental testimony.
Motion, p. 1-
Qwest
Qwest in its Motion to Re-open provided little justification for the request. The
Motion states: "Having attended the hearings, heard the questions and statements of the
Commissioners and parties and their representatives and having read the legal briefs and
analysis, Qwest is aware that the other parties remain hesitant to support Qwest's request for
price deregulation in the seven exchanges primarily out of a concern that competition will not
adequately constrain Qwest's pricing.Qwest's Motion to Re-open, p. 2. The Motion also
states that "Qwest is sensitive to the other parties' continuing concerns." Motion to Re-open
, p.
3. Because of its awareness of the other parties' continuing concerns , Qwest in its proposed
supplemental testimony "now proposes that the Commission approve Qwest's Application in the
ORDER NO. 29360
form of a provisional Pilot Project, the terms of which are more fully set out in Mr. Schmit's
proposed testimony." Motion to Re-open, p. 3.
In its response to Qwest's Motion, Staff argued that Qwest's request that the
Commission approve a provisional pilot project is inconsistent with issues formulated by
Qwest's Application , and presents issues not previously addressed by any party. Also, according
to Staff, Qwest's Motion does not provide a legitimate reason to re-open the record, and is
merely an attempt by Qwest to obtain an opportunity for an additional response to the evidence
presented by the Staff and Intervenors. Staff also argued that Qwest's Motion to Re-open and its
proposed supplemental testimony do not address issues relevant to a case filed under Section 62-
622(3)(b ).
The Intervenors also filed a response objecting to Qwest's Motion. The Intervenors
argued that Qwest "has not cited any rule or legal basis for making this unusual motion " and that
Qwest "has asked that the relief sought in the original complaint be changed or essentially
amended' at a very late date without citing any new decision, statute or other change in
circumstances." Intervenors' Response to Motion , p. 1. In light of the fact that Qwest proposed
to submit the supplemental testimony without a hearing, Intervenors argued that "admission of
the proposed testimony is not supported by any rule of procedure and raises serious due process
issues which cannot be resolved without a new hearing and a new discovery and briefing
schedule." Intervenors ' Response to Motion , p. 3.
Qwest filed a reply to Staffs response to Qwest's Motion to Re-open on August 26
2003. Qwest characterized Staff s response as an attempt "to convince the Commission that
Qwest has failed to meet some standard of justification for re-opening the record.Qwest's
Reply, p. 4. Qwest refers to Commission Rule of Procedure No. 13 , which provides that the
Commission s rules "will be liberally construed to secure just, speedy and economical
determination of all issues presented to the Commission. Unless prohibited by statute, the
Commission may permit deviation from these rules when it finds compliance with them is
impracticable, unnecessary or not in the public interest." Commission Rule of Procedure 13
IDAPA 31.01.01.013. Qwest stated it "is unaware of any Commission rule or precedent that
justifies narrowing the range of possible solutions to a difficult case or cutting off potentially
fruitful discussion, simply because the record has been 'closed'" Qwest's Reply, pp. 4-
ORDER NO. 29360
The Commission s Rules of Procedure do not specifically address a motion to re-
open, and thus a particular standard for re-opening a closed record is not provided by rule. The
decision to re-open a closed record is within the discretion of the Commission. Nonetheless, re-
opening the record once a case is fully submitted is an unusual procedure and will not be granted
by the Commission without some substantial justification provided by the moving party.
In this case, Qwest does not identify in its Motion a significant reason to re-open the
record. Qwest does not contend it did not have a full and fair opportunity to present its case to
the Commission, nor does Qwest argue any unfairness or deficiency in the hearing process that
could be corrected by re-opening the record.In addition, Qwest's proposed supplemental
testimony introduces new issues not identified by Qwest's original application. Accordingly,
rather than securing a just, speedy and economical determination of the issues presented in this
case, granting Qwest's Motion to Re-open would unnecessarily delay resolution of the issues
presented by the Application. In order to develop the new issues presented by Qwest and afford
the other parties an opportunity to cross-examine the witness, a new round of litigation including
a new hearing would be required for Qwest to present its new issues.
Finally, Qwest's proposed supplemental testimony does not address the standards for
approving price deregulation set forth in Section 62-622(3)(b) and Qwest concedes that "Mr.
Schmit's testimony is not directed at meeting the requirements of Section 62-622(3)." Qwest'
Reply, p. 3. Qwest's proposed supplemental testimony may be relevant to public interest issues
which the Commission is directed to consider when reviewing an application for price
deregulation. The Commission concludes that Qwest failed in this case to present evidence
establishing that the standards for price deregulation set forth in Section 62-622(3) are met, and
thus the new testimony Qwest proposes on public interest issues does not affect the
Commission s consideration of Qwest's Application. For these reasons the Commission denies
Qwest's Motion to Re-open the Record.
THE STATUTORY STANDARDS FOR PRICE DEREGULATION
The statute under which Qwest filed its Application provides the standards for the
Commission to discontinue price regulation of basic local telephone service.Section 62-
622(3)(b) states:
(3) The commission shall cease regulating basic local exchange rates in a
local exchange calling area upon a showing by an incumbent telephone
corporation that effective competition exists for basic local exchange
ORDER NO. 29360
service throughout the local exchange calling area. Effective
competition exists throughout a local exchange calling area when either:
(a)... or
(b)There are functionally equivalent, competitively priced local services
reasonably available to both residential and small business customers
from a telephone corporation unaffiliated with the incumbent telephone
corporation.
The legislature provided additional clarification and guidance for the Commission s review of
the evidence presented in a deregulation case filed under Section 62-622(3). At Idaho Code
62-602, the legislature codified its express intent regarding deregulation of local telephone
service rates:
(1)The legislature of the state of Idaho hereby finds that universally
available telecommunications services are essential to the health
welfare and economic well-being of the citizens of the state ofIdaho and
there is a need for establishing legislation to protect and maintain high-
quality universal telecommunications at just and reasonable rates for all
classes of customers and to encourage innovation within the industry by
a balanced program of regulation and competition.
(2)It is the intent of this legislature that effective competition throughout a
local exchange calling area will involve a significant number of
customers having both service provider and service option choices and
that actual competition means more than the mere presence of a
competitor. Instead, for there to be actual and effective competition
there needs to be substantive and meaningful competition throughout the
incumbent telephone corporation s local exchange calling area. (italics
added).
(3)It is the further intent of the legislature that the commISSIOn, in its
deliberation of deregulation of the incumbent telephone corporations
will examine the impact such deregulation will have on the public
interest in accordance with the general grant of authority given to the
commission by the legislature and that all parties be allowed to comment
thereon in such proceeding.
In addition to the statutory standards and legislative intent, the Commission
previously decided a case filed under Section 62-622(3) by U S WEST, Qwest's predecessor.
US WEST's Application in Case No. USW-99-15 was filed under paragraph (a) rather than
paragraph (b), but parts of the Commission s review of the evidence required by the legislature
ORDER NO. 29360
should have guided Qwest's preparation of this case. For one thing, the Commission concluded
in final Order No. 28369 entered in the earlier case that the legislature s specific intent expressed
in Section 62-602 will be used to guide the Commission and is not to be ignored. U S WEST had
argued "that the Commission should disregard the legislature s expressly stated intent because
when applying a statute that is clear on its face, a reviewing body should not look elsewhere for
the legislature s intent in using particular language.'" Order No. 28369, p. 5. U S WEST also
asserted that "Idaho law does not allow for cross-statute modification of Section 62-622(3)
because the statute is plain and unambiguous on its face.Id. The Commission rejected U S
WEST's argument because "the primary purpose in agency construction of a statute is to
determine legislative intent and give effect thereto.'" Order No. 28369, p. 5. In accomplishing
that goal
, "
clearly then an agency should be guided by the expressly stated intent of the
legislature in order to give effect to that intent.Order No. 28369, p. 5-6. Using the words
adopted by the legislature for its specific intent, the Commission concluded it must "review the
evidence presented to determine whether it shows a level of competition that is effective, actual
substantive, meaningful, involving a significant number of customers, and is not just a mere
presence.Order No. 28369, p. 8.Thus, Order No. 28369 clearly established that the
Commission will give effect to the legislature s stated intent and that substantive effective
competition must actually exist throughout a local exchange calling area in order to satisfy the
statutory standards for price deregulation.
Qwest's witnesses declared throughout their testimony that the Company s evidence
meets the statutory standards for deregulation. One witness stated, for example, that the
Company "strongly believes the evidence it is presenting in this docket satisfies the requirements
of subsection 622(3)(b) and that, as a result, the Commission should enter an order ceasing
regulation of local exchange service rates in the seven exchanges." Tr. p. 54. Qwest's belief in
the strength of its evidence, however, was premised on its interpretation of the statutory
requirements for price deregulation. Qwest prepared and presented its case to satisfy a narrow
interpretation of the statute, but nonetheless also maintains that its evidence demonstrates that
cellular service does actually compete for customers with Qwest's basic local service. We thus
review the evidence Qwest presented to determine whether the record demonstrates that cellular
service provides effective competition to Qwest's basic local service , and that cellular service is
functionally equivalent to and competitively priced with Qwest's local service.
ORDER NO. 29360
THERE IS LITTLE OR NO EVIDENCE THAT CELLULAR SERVICE
COMPETES EFFECTIVELY WITH QWEST'S BASIC LOCAL SERVICE
Beyond bare assertions by Qwest witnesses that "there is little doubt that customers
have embraced wireless technology as a competitive alternative to traditionallandline service
there is scant evidence in the record to support the statement. Tr. p. 69. Qwest presented
evidence showing that the number of cellular customers in Idaho significantly increased in the
last five years and that Qwest's basic service access lines declined in six ofthe seven exchanges
from December 2000 through September 2002. In addition, Qwest presented the results of a
customer survey the Company commissioned. A Qwest witness offered his beliefthat "it's both
reasonable and obvious in light of Dr. Lincoln s survey as well as numerous articles and
interviews from various media that many customers are choosing wireless service over
traditional landline service.Id. The witness accordingly asserted that "wireless service is
effectively competing with landline service to fulfill customers' basic local exchange service
needs." Tr. p. 94. We thus turn to Dr. Lincoln s survey and the other evidence offered by Qwest
to determine whether the evidence demonstrates it is reasonable and obvious to conclude that
many customers are choosing wireless service as a replacement for Qwest's landline service
thereby effectively competing with Qwest's basic service in each of the seven exchanges.
We note first that Qwest presented very little evidence specific to each exchange
because as explained by Qwest's survey witness
, "
Qwest is applying for deregulation of all
exchanges in total, not an exchange-by-exchange deregulation process.Tr. p. 308. Qwest's
aggregated approach is not consistent with Section 62-622(3), which requires the Commission to
cease regulating rates "in a local exchange calling area" when the requisite standards for
competition are met for that specific local calling area. In this case there is no exchange specific
information at all showing, for example, what number or percentage of customers in each
exchange have substituted cellular service for their Qwest basic local service.When the
Commission considers whether the statutory standards for deregulation are met in the Idaho Falls
exchange, for example, there is practically no evidence to show that customers in Idaho Falls
have "embraced wireless technology as a competitive alternative.
The statistical data Qwest did offer, in addition to being aggregated, shows little more
than that cellular service is available; it does not establish that wireless service is competing with
Qwest's basic local service. Exhibit 1 shows an increase in the number of cell phone customers
ORDER NO. 29360
in all of Idaho from approximately 167 000 in April 1999 to approximately 540 000 in June
2002. Exhibit 2 shows declines in the number of Qwest' s basic service access lines in five ofthe
seven exchanges from December 2000 to September 2002. In a sixth exchange (Pocatello), the
number of Qwest access lines declined from December 1999 through September 2002, Exhibit 2
p. 7, and the number of Qwest lines in one exchange (Meridian) only increased from December
1999 through September 2002. Exhibit 2, p. 5. Qwest provided no evidence to show a direct
correlation between the substantial increase in cellular customers and the relatively small
decrease in its local service lines in six exchanges. For example, there is no evidence to show
how many of the 540 000 cellular customers are in the Twin Falls exchange, or that cell phone
purchases in Twin Falls had anything to do with the decline of approximately 200 in Qwest's
access lines. Qwest candidly admitted it "never attempted to prove a precise loss of lines
attributable to wireless competition.Tr. p. 94.On cross-examination, Qwest's witness
admitted the Company had no information on several different possible causes for the decline in
access lines in the Nampa exchange, Tr. p. 112, or for the increase in lines in the Meridian
exchange. Tr. pp. 113-14.
Nor does the survey commissioned by Qwest provide objective evidence that cell
phone service effectively competes with Qwest's basic local service. We note first that the very
purpose of the survey limits its usefulness to this case. Dr. Lincoln testified that the survey was
designed as "marketing research to determine if customers in those exchanges perceive wireless
phone service to represent effective competition with Qwest's basic local exchange service." Tr.
p. 207 (emphasis added). In other words, the survey made no attempt to obtain objective data
about customers' actual conduct or purchasing decisions that might be relevant to show whether
cellular service is actually competing with Qwest's local service.
marketing research" designed to gauge customers' perceptions.
Qwest instead obtained
The survey questions and results demonstrate the limited nature and effectiveness of
the survey. For example, only one question in the survey addressed whether cellular service
might be a substitute for wireline service. The question was narrowly focused, asking: "For the
purpose of making and receiving local calls, could your household solely rely on cell phone
service?" Exhibit 8, p. 2. By focusing the question on only use of a phone for local calling, the
survey question minimized the chance respondents would think of other reasons or differences in
uses that make cell phones as a wireline substitute impossible or impracticable. The question
ORDER NO. 29360
also asked for a response to a mere possibility, and did not seek information on the likelihood the
customer would actually replace his wireline service with cell phone service. The survey pool
was Qwest's basic local service customers in the seven exchanges, so each respondent that stated
use of a cell phone also used Qwest's wireline service. The survey made no attempt to ascertain
the reasons the customers used both services and did not substitute wireline service with cellular
service. Indeed, when Dr. Lincoln was asked on cross-examination about possible follow-up
questions designed to explore reasons the customers chose not to substitute, he answered "
would be a waste oftime and money to do that." Tr. p. 318.
Finally, because Qwest filed its Application seeking deregulation of the seven
exchanges in the aggregate, the survey results are not reliable for each of the seven individual
exchanges. Dr. Lincoln testified the survey "population was defined as the seven exchanges
together... and the reporting is based on that." Tr. p. 308. As the result, Dr. Lincoln stated he
cannot draw statistical inferences (from the survey) for any of these seven exchanges, not very
strongly." Tr. p. 308. Exhibit 113 , which shows the survey results for each exchange, confirms
Dr. Linclon s testimony.For example, when the Commission considers the evidence on
effective competition in the Meridian exchange, it is not meaningful that eleven residential
customers in Meridian stated it might be possible for them to rely on their cell phones for local
calling. Exhibit 113 , p. 3.
Nor do the "media articles and interviews" offered by Qwest provide convincing
information that cell phone service competes effectively with Qwest's service in each of the
seven exchanges. Most of the newspaper articles mentioned by Qwest's witnesses do not
contain any information about cellular customers in Idaho. For example, one witness stated
(t)here are numerous anecdotes of consumers declining to install wireline service (i., upon
moving to a new location) when they can be reached conveniently over their wireless phones
and cited a New York Times article. Tr. p. 156-57. The witness ' testimony was offered to
provide a "national perspective" on local telecommunications competition, Tr. p. 153 , and he
conceded his testimony did not provide any evidence specific to the seven local exchanges in this
case. Tr. p. 202.
One Qwest witness did briefly discuss an article in the Boise newspaper about
farmers ' use of cell phones in their business operations. According to the witness, the article
stated that farmers spend less time driving to their homes to make and receive calls, which
ORDER NO. 29360
increases the lives of their pick-up trucks. Tr. p. 372. The witness concluded that
, "
In this
industry, wireless service has clearly been accepted as a cost-saving alternative to basic local
exchange service.Id. Qwest did not provide the article as an exhibit, so the Commission has
no way to determine if the witness' conclusion is sound based on the text of the article. In
addition, Qwest did not provide any objective data to assess whether farmers have replaced their
local exchange service with cell phones as a cost-saving alternative, relying instead on its
witness' hearsay statements about the information in the article. The Commission cannot find
on the survey evidence and media interviews and articles in the record, that many customers in
the seven exchanges "are choosing wireless service over traditionallandline service.'~
The statistical data on cell phone use Qwest did provide contains little information
relevant to this case. Qwest at several points in the record mentioned a study by the Federal
Communications Commission indicating that three to five percent of wireline customers
nationwide may have discontinued use of their wireline service in favor of cellular service.
Tr. p. 159. There is no evidence to indicate whether the FCC survey includes Idaho customer
data, nor did Qwest attempt to ascertain whether the three to five percent estimate is valid in the
seven Idaho exchanges. In short, the record is practically devoid of information to show that
cellular service competes effectively with Qwest's basic local service in the seven exchanges
named in Qwest's Application.
By reviewing the record and finding it devoid of evidence showing that customers are
switching to cellular service in place of wireline service, the Commission does not suggest an
applicant must show a specific number or percentage of customers have been lost to competitors
to be successful under Section 62-622(3)(b). As Qwest correctly noted
, "
the standard is not
whether most customers have already moved to a competitor." Qwest Post-Hearing Brief, p. 12.
We also reject, however, the standard for an adequate level of competition argued by Qwest:
The standard is whether there is a competitor for them to move to if, for example, Qwest uses
its pricing freedom to dramatically increase prices." Id. The statute requires evidence
demonstrating that an alternative local service is actually competing for customers with Qwest's
local wireline service, and evidence showing that customers are replacing their Qwest local
service with another service clearly would help provide the necessary proof. In this case, Qwest
presented practically no evidence that customers in the seven exchanges are replacing wireline
service with wireless service, and instead it assumed replacement was occurring or could occur
ORDER NO. 29360
based on the significant increase in wireless subscribers in Idaho. The best Qwest offered was a
witness' unsupported opinion "that, absent wireless competition, Qwest would likely be serving
the needs of many thousands of those (wireless) customers and would probably not
experiencing loss of access lines." Tr. p. 95.
EVIDENCE ON FUNCTIONAL EQUIVALENCE
AND PRICE COMPETITIVENESS
An applicant filing for price deregulation under Section 62-622(3)(b) must present
evidence showing the service alleged to be effective competition to basic local service is
functionally equivalent to and competitively priced with the wireline service. We turn next to the
evidence Qwest presented on these statutory requirements.
Qwest again relied primarily on its survey - particularly the question on whether a
customer might be able to rely solely on a cell phone for local calling - on advertisements by cell
phone companies touting their service as an alternative to basic local service, and on the
nationwide three to five percent substitution rate mentioned in the FCC survey findings. As with
the question of effective competition, the limited relevance of the Qwest survey and national
FCC survey provide little information on whether cellular service provides a functionally
equivalent service to customers in each of the seven Idaho exchanges. Nor do the advertisements
promoting cell phones as an alternative to basic local service provide much useful information.
Qwest made no effort to demonstrate whether the advertisements have had any effect in these
exchanges by convincing customers that the functional differences between wireless and wireline
services are insignificant. On the other hand, there is evidence in the record showing the
functional differences mean cellular service does not actually compete with Qwest's basic local
servIce.
The evidence presented by the Intervenors primarily addressed the functional
differences that prevent cellular services from competing effectively for small business
customers. The Intervenor witnesses explained why their small businesses use cell phones in
addition to Qwest's wire line services , and why it is not possible for them to rely solely on
cellular service.The small business wireline service provides functions that allow use
multiple extension phones, and a "roll over" feature that allows an incoming call to ring on any
of the local lines serving the small business. Tr. p. 547. Small businesses rely on their local
wireline service to enable use of facsimile machines and access to the Internet that provides
ORDER NO. 29360
electronic mail and research features. Tr. pp. 549-550. Intervenor witnesses explained why
Qwest's wireline service , which enables use of a facsimile machine and Internet connection, is
essential to a small law firm, Tr. pp. 548-550, and a small real estate brokerage business. Tr. pp.
570-573.
Nor did Qwest present evidence showing that cellular service is competitively priced
with Qwest's basic local exchange service. In its case-in-chief, Qwest provided copies of cell
phone advertisements, its survey results and Exhibit 5, which shows only "examples of how
three different wireless pricing plans can be placed into a competitive map with Qwest's wireline
service." Tr. p. 274. Qwest did not attempt a side-by-side comparison of wireless and basic
local service rates until it filed a rebuttal exhibit in response to Staff s price comparison exhibit.
Qwest apparently did not attempt a direct comparison of prices based on its belief that such
comparisons are not the best way to determine price competitiveness. According to Qwest's
survey witness
, "
A better approach involves studying actual consumer price perceptions. Such
perceptions will influence consumers' willingness to substitute. Until they learn that their
perceptions are different than reality, perception will drive their behavior." Tr. p. 277.
According to Qwest, the survey "provides the most valuable scientific evidence relating to the
statutory requirement of competitively priced service." Id. Thus Qwest recommended the
Commission strongly consider the marketing research it compiled on customers' perceptions
when evaluating the evidence on competitive pricing. Tr. p. 510.
Qwest's survey is limited and provides little useful evidence on the competitive
pricing standard. First, the Commission is not convinced a marketing survey designed to capture
limited consumer perceptions is a sound basis for deciding statutory, regulatory issues. As
Qwest noted
, "
(c)onsumer price perceptions are formed in many ways:salesperson
presentations, seeing price tickets, seeing advertisements, talking with others, reading and paying
bills, etc." Tr. p. 271. It may be, as Qwest testified
, "
a rudimentary marketing principle that, for
initial purchasing decisions, consumer perceptions on pricing influence their behavior far more
than the reality of pricing decisions." Tr. p. 271. The Commission is not asked in this case to
decide issues of rudimentary marketing principles, however, and would be remiss in its duty if it
based significant, legal decisions on customer perceptions that may be erroneous. The
Commission must base its decisions on reality, knowing that customers some day will learn that
reality may be different than their perceptions.
ORDER NO. 29360
Second, the relevant survey question and the results are so limited as to be of little
practical use in determining whether cellular service is competitively priced with basic local
service. All survey respondents were Qwest basic local service customers, so all respondents
that stated they used a cell phone (approximately 67% of residential and 60% of small business
customers) currently used both services and thus were not relying solely on cell phone service.
Tr. p. 296, Exhibit 113 , pp. 2 and 10. The survey question asked respondents if they "think the
monthly price of using cell phone service for your household is about the same, more than, or
less than the price of using traditional service?" Exhibit 8, p. 5. The survey did not attempt to
ascertain what customers' perceptions of relative costs would be if they were to rely solely on
cell phone service. Even with that limitation, the survey results do not establish that customers
in the seven exchanges perceive wireless and wireline services to be competitively priced. For
example, the Idaho Falls exchange contains approximately 39 000 basic local exchange
customers, and only 23 residential and twelve business customers in Idaho Falls stated they
thought their current monthly cell phone service costs the same or less than their basic local
service. Exhibit 113 , pp. 6 and 14. In the Meridian exchange, which contains approximately
000 access lines, eleven residential and nine business customers stated a similar belief. Id.
The more objective data on price competitiveness is contained in the price
comparison exhibits submitted by Staff (Exhibit 101) and Qwest (Exhibit 19 and 20). In Exhibit
, Qwest presented a comparison of all the cell phone plans available in the seven exchanges.
Because cell phone service usually is priced by minutes of use, Qwest ascertained average
minutes of use for its customers and categorized them as low use, average use, and high use
customers. Tr. p. 462. In determining its customers' minutes of use , however, Qwest used call
hold-time statistics from 1996, rather from 2002. As Qwest explained
, "
(u)ntil1996, the average
hold-time was relatively flat for all classes of service. So to ... normalize the information to take
out the data usage, we selected a point of time before the call rate ramped up dramatically, so
re using that as a proxy for voice usage in 2002." Tr. p. 464. If more current calling data
were used, the average customer usage for Qwest's flat-rate customers , which is more than 95%
of its residential customers, would be more than double the minutes of use Qwest used to make
its price comparisons in Exhibits 19 and 20. Tr. p. 465.
Even with the lowered minutes of use Qwest utilized, its price comparison exhibits
show significant disparity between prices for wireless and wire line service. For average use
ORDER NO. 29360
residential customers, Exhibit 19 shows that wireless plans are priced from $3.95 per month to
$58.67 per month higher than Qwest's basic local service , and the cell phone prices do not
include $1.50 per month customers would pay for a directory listing, or fees for 911 service and
number portability that will soon appear on cell phone service bills. Tr. pp. 458-59. Staff
Exhibit 101, which assumed higher minutes of use than did Qwest's exhibits , shows even greater
disparities between Qwest's local service and cell phone service plans.
Qwest believes its Exhibit 19 demonstrates prices are competitive because "for every
class of customer and for every usage level, Idaho wireless competitors offer a calling plan for
local voice communications at a price within $10.00 of the price of Qwest' s basic local exchange
service." Qwest Post-Hearing Reply Brief, p. 10. According to Qwest, services priced within
$10 of Qwest's basic local service are "affordable alternatives for the customer to select." Tr. p.
492. Qwest also stated it considers wireless service plans to be competitive because it could not
impose significant rate increases without fear oflosing customers. Tr. p. 61. Qwest argued that
because many customers voluntarily "pay for wire line, wireless and cable broadband services
simultaneously, it is very unlikely that they would feel uncomfortable about migrating to
wireless for local voice calling if Qwest were to significantly raise its basic local service rates."
Qwest's Post-Hearing Reply Brief, p. 27. Qwest also provided testimony on what it regards as
significant but not unreasonable rate increases. Noting that Qwest's residential rate in the seven
exchanges is $17.50 per month, and that customers of companies operating in rural areas pay
$24.10 per month, a Qwest witness testified that "even a significant increase by Qwest would not
seem to implicate unreasonable rates given the $24.10 residential rate charged, by order of the
Commission, by rural phone companies." Tr. p. 92.
The Commission cannot find, on the evidence presented, that cell phone service in the
seven exchanges is competitively priced with Qwest's basic local service. The standards
advocated by Qwest, that cell phone plans are available within $10 per month of Qwest'
service, and that it could not dramatically increase its rates without fear of losing customers, does
not demonstrate a level of competitive pricing that will effectively protect consumers, in the
absence of regulation, from significant, unrestricted rate increases.
ORDER NO. 29360
QWEST'S EVIDENCE WAS CONSISTENT WITH
ITS INTERPRETATION OF THE STATUTE
Using its own narrow interpretation of Section 62-622(3)(b), it is not surprising that
Qwest's evidence fails to show that cellular service effectively competes with Qwest's basic
local service, or that it is functionally equivalent and competitively priced. After all
, "
Qwest'
evidence is consistent with its legal interpretation of the statutes." Qwest Post-Hearing Reply
Brief, p. 9.
Qwest construed the "functionally equivalent" and "competitively priced" standards
in the statute as satisfied at very low thresholds, and especially made its burden of proof easy on
the functional equivalence requirement by its interpretation for that standard. In its rebuttal
testimony filing, Qwest directly stated its interpretation of Section 62-622(3)(b). Noting that
paragraph (b) references functionally equivalent "local services , and that the term local services
is not defined in the statute, Qwest assumed the term means "basic local exchange services."
Qwest then further narrowed the functional equivalent standard by focusing on the reference to
voice communications in the "basic local exchange service" definition. A Qwest witness
provided his layman s opinion regarding the legislature s intent for this section: "I believe the
only logical interpretation of the term 'local services,' as used in Section 62-622(3)(b) is as a
shorthand reference to 'basic local exchange service , defined as two-way interactive switched
voice communication services provided by non-incumbent service providers." Tr. pp. 76-77. By
Qwest's interpretation, the question of functional equivalence ends if it is established that the
alternative service provides switched voice communication. Qwest's witnesses thus consistently
insisted throughout their testimony that any discussion of cell phone or wireline telephone
functions other than voice communication was irrelevant to its case. See e., pp. 398, 430
435-439 441.
Qwest's interpretation of paragraph (b) was disputed by Staff and the intervenors , and
the parties' positions were presented to the Commission in the petitions for declaratory ruling
filed by Staff and Qwest. The Commission did not rule on the petitions, and now rejects the
narrow interpretation Qwest places on the statute s "functional equivalent" standard for several
reasons. First, the legislature selected the term "local services" for paragraph (b) and readily
could have used the term "basic local exchange service " a term defined in statute, if it had
intended that specific definition in the paragraph. Absent an absurd result by application of the
ORDER NO. 29360
words used by the legislature, the Commission will not assume a meaning or words different
from the ones actually appearing in the statute. See e.g., Inama v. Boise County ex rel Bd. of
Commissioners, Idaho -' 63 P.3d 450 (2003)(The words of a statute must be given their
plain, usual, and ordinary meaning; unless the result is palpably absurd, the courts will assume
the legislature meant what is stated in the statute.
Second, Qwest places too narrow a definition on the term "basic local exchange
service " defined at Idaho Code 9 62-603(1) as "the provision of access lines to residential and
small business customers with the associated transmission of two-way interactive switched voice
communication within a local exchange calling area." Clearly the access lines provided for basic
local exchange service allow for functions in addition to voice communication, such as facsimile
transmission and Internet connection. Qwest's witness readily conceded that "when a . . . Title
61 residential customer or small business customer uses their access line for a fax machine or to
connect to a computer, that is billed by Qwest as basic local exchange service.Tr. p. 115.
Accordingly, even if Qwest's argument were accepted, that the legislature intended the term
basic local exchange services" when it used the term "local services" in paragraph (b), the
definition of the first term would not restrict a review of functions solely to determine whether
voice communication is provided.
Finally, the narrow standard placed by Qwest on the functionally equivalent
requirement runs counter to the purpose of the statute. If the purpose is to determine whether an
alternative service is actually competing with basic local service, evidence must demonstrate the
other service functions in similar enough ways that customers are able and willing to switch as
an alternative to basic local service. If the functional equivalence inquiry ends with voice
communication, as Qwest insisted in its testimony, it would be irrelevant that other functions of
the two services are unique enough that customers do not purchase them as alternative
competitive products, thereby negating the purpose ofthe statute.
By its interpretation of Section 62-622(3)(b), Qwest claimed it need only show that
cellular service provides voice communication, that it is offered at prices within an undefined
range to Qwest's local service, and that it is reasonably available. On that evidence, Qwest
asserted all statutory requirements for price deregulation are met, including the legislature
specific intent that "for there to be actual and effective competition there needs to be substantive
and meaningful competition throughout the incumbent telephone corporation s local exchange
ORDER NO. 29360
calling area.Idaho Code 9 62-602(2). So for example, a Qwest witness testified that if "Staffs
testimony attempts to convince the Commission that Qwest does not face 'effective competition
Staff must overcome Qwest's evidence that it has met the statutory standard by showing that
functionally equivalent' and 'competitively priced' local services are available from a number
of unaffiliated wireless providers." Tr. p. 88. Qwest's interpretation of the statute would mean
the incumbent provider s local service prices would become deregulated if an alternative voice
communication service was merely offered, at competitive prices, even if for some reason not a
single customer was willing to purchase the alternative service. That result is contrary to the
words and purpose of the statute, and the legislature s intent that effective competition must be
substantive and meaningful, and "more than the mere presence of a competitor." Idaho Code
62-602(2). The result of Qwest's interpretation is that "the legislature s express requirement that
competition be effective, actual, substantive, meaningful, involving a significant number of
customers, and throughout the local calling area is all rendered meaningless." Order No. 28369
p. 6. Qwest in its post-hearing reply brief noted the disagreement over its interpretation of the
statute, and acknowledged "the outcome of that debate may very well determine the outcome of
the case." Qwest's Post-Hearing Brief, p. 9.
REQUEST FOR INTERVENOR FUNDING
The Intervenors filed a request for intervenor funding on July 9, 2003, requesting an
award of $12 500, pursuant to Idaho Code 9 61-117A and the Commission s Rules of Procedure
161 - 170. Intervenor funding may be available to cover expenses in a case in furtherance of the
legislature s policy "to encourage participation at all stages of all proceedings before the
commISSIOn so that all affected customers receive full and fair representation in those
proceedings. "Idaho Code 9 61-117A(1).The Commission s determination to approve
intervenor funding is to be based on the following considerations: (a) that the participation of the
intervenor has materially contributed to the decision rendered by the commission, (b) that the
costs of intervention are reasonable in amount and would be a significant financial hardship for
the intervenor, (c) the recommendation made by the intervenor differed materially from the
testimony and exhibits of the commission staff, and (d) the testimony and participation of the
intervenor addressed issues of concern to the general body of users or consumers. Idaho Code
61-617A(2).
ORDER NO. 29360
After reviewing all the evidence submitted by the Intervenors and their participation
at the hearing, the Commission has determined to approve in part their request for intervenor
funding.Although much of the testimony offered by the Intervenors is similar to Staffs
testimony, the information provided by the Intervenors did materially contribute to the record on
the functional differences between wireless and wireline service, particularly for small business
customers.Although Staff testified that the functional differences mean small business
customers are not able to substitute cell phone service for their Qwest basic local service, the
evidence provided by the Intervenors was more specific, and was made more effective by the
testimony of actual business customers. The Commission accordingly is approving an intervenor
funding award in the amount of $6 000. The Commission finds an award of that amount will
further the statute s purpose of encouraging "participation at all stages of all proceedings before
the commission so that all affected customers receive full and fair representation in those
proceedings.
CONCLUSION
Qwest filed its Application for deregulation of its rates for basic local exchange
service in seven specific exchanges in southern Idaho, arguing that cell phone service provides
effective competition for its local services in those exchanges.The Commission was not
persuaded by Qwest's evidence that cellular service effectively competes for local service
customers of Qwest's wire line service. On the evidence presented to us, we cannot find that cell
phones are functionally equivalent and competitively priced to Qwest's local service. Qwest's
reference to an FCC study indicating that nationwide three to five percent of wireline customers
have replaced their wire line service with cell phone service is not adequate evidence for the
finding Qwest asks the Commission to make. Even if Qwest had presented evidence establishing
the same rates of replacement in the exchanges named in its Application, substitution rates of
three to five percent do not demonstrate that cell phone service effectively competes with
wireline service.
ORDER NO. 29360
Our conclusion based upon the evidence in this proceeding is similar to a conclusion
recently reached by the FCC. In its Triennial Review Order! issued August 21 , 2003, the FCC
stated that "Neither wireless nor cable has blossomed into a full substitute for wireline
telephony.FCC Triennial Review Order, paragraph 245.The FCC found that
, "
despite
evidence demonstrating that narrowband local services are widely available through CMRS
(wireless) providers, wireless is not yet a suitable substitute for local circuit switching." FCC
Triennial Review Order, paragraph 445. The FCC further stated that "only about three to five
percent of CMRS subscribers use their service as a replacement for primary fixed voice wireline
service, which indicates that wireless switches do not yet act broadly as an intermodal
replacement for traditional wireline circuit switches.Id. The FCC apparently was convinced
that functional differences prevent a higher substitution rate, because it noted "the record
demonstrates that wireless CMRS connections in general do not yet equal traditional landline
facilities in their quality and their ability to handle data traffic.1363"
Id. (The FCC noted in
footnote 1363 industry representative comments "stating that wireless service is engineered to
provide only roughly 70% call completion rate while wireline call completion rates exceed 99%.
Finally, because Idaho Code 9 62-602(3) directs the Commission to consider the
impact deregulation would have on the public interest, the Commission will comment briefly on
public interest issues. One of the most significant public interest concerns, of course, is the
impact on customer rates the Commission s action would have, and it became clear that Qwest
would increase its rates if they were unregulated. Nowhere in the record does Qwest contend it is
considering lowering its basic local service rates as the result of the competitive pressure it
currently faces from cellular service. In fact, in response to Staffs concern Qwest would raise its
rates, Qwest volunteered only to forego rate increases through 2004, and then limit its rate
increases "to $6.60 per month for residential customers and $9.49 per month for small business
customers" through 2007. Staff Response to Qwest's Motion to Re-open Record , p. 7. The
public interest is served if basic service rates are deregulated only when effective competitive
forces exist to protect customers from monopoly pricing. In that environment, it would not be
necessary for Qwest to volunteer to limit increases in its local service rates.
1 The FCC Order is called the Triennial Review Order because it is entered in three FCC Dockets: Review of the
Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers; CC Docket No. 01-338
Implementation of the Local Competition Provisions of the Telecommunications Act of 1996; CC Docket No. 96-
, Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Docket No. 98-147
Report and Order and Further Notice of Proposed Rulemaking, FCC 03-36 (re!. Aug 21 2003).
ORDER NO. 29360
The public interest also is served when the Commission s regulation does not unduly
restrict utility operations, because unnecessarily restrictive regulation could have a stifling effect
on companies. The legislature addressed that concern for telecommunication services when it
enacted the Idaho Telecommunications Act of 1988, in part to "encourage innovation within the
industry by a balanced program of regulation and competition." Idaho Code 9 62-602(1).
Pursuant to that Act
, "
(fJor the last 13 years, Qwest has operated with its prices economically
deregulated for nearly all services other than basic local exchange service for residential and
small business customers." Tr. p. 50. With that regulatory freedom, Qwest currently is able to
package services and products and adjust its package prices, to attract customers and respond to
perceived customer demands. Tr. p. 116. Qwest stated that "customers tend to stay with you
longer when they have a package " and acknowledged that Qwest currently "can offer discounts
through certain packaging strategies." Tr. p. 494. Qwest overstated it by asserting its "ability to
respond to wireless competition quickly with targeted landline promotions and packages is
currently limited because of the constraints of full regulation compared to its competitors, who
are unconstrained as to pricing." Tr. p. 65.
ORDER
IT IS HEREBY ORDERED that Qwest's Application for deregulation of its rates for
basic local exchange service in the Boise, Nampa, Caldwell, Meridian, Twin Falls, Idaho Falls
and Pocatello exchanges is denied.
IT IS FURTHERED ORDERED that the Meirerotto Intervenors are awarded
intervenor funding in the amount of $6 000.Qwest is directed to pay that amount to the
Intervenors. Pursuant to Commission Rule of Procedure 165., the intervenor funding amount
of $6 000 will be allowed as a business expense in Qwest's next rate case , chargeable to the small
business class of customers. IDAP A 31.01.01.165.03.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case
No. QWE- T -02-25 may petition for reconsideration within twenty-one (21) days of the service
date of this Order with regard to any matter decided in this Order or in interlocutory Orders
previously issued in this Case No. QWE-02-25. Within seven (7) days after any person has
petitioned for reconsideration, any other person may cross-petition for reconsideration. See
Idaho Code 99 61-626 and 62-619.
ORDER NO. 29360
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this .2.0
tI...
day of October 2003.
MARSHA H. SMITH, COMMISSIONER
ATTEST:
~A).
D. Jewell
Commission Secretary
Vld/O:QWETO225 - ws4
ORDER NO. 29360