NOTICES

Verizon Pennsylvania Inc. 2007 Price Change Opportunity Filing

[37 Pa.B. 296]
[Saturday, January 13, 2007]

Public Meeting held
December 21, 2006

Commissioners Present: Wendell F. Holland, Chairperson, statement concurring in part and dissenting in part follows; James H. Cawley, Vice Chairperson; Kim Pizzingrilli; Terrance J. Fitzpatrick

Verizon Pennsylvania Inc. 2007 Price Change Opportunity Filing; Doc. Nos. R-00061915, P-00930715F1000

Office of Small Business Advocate v. Verizon Pennsylvania Inc.; Doc. No. R-00061915C0001

Order

Non-Proprietary

By the Commission:

Background

   Before us for disposition is the Verizon Pennsylvania Inc. (''Verizon PA'' or ''Company'') annual 2007 Price Change Opportunity (''PCO'') filing and the associated revenue increases. Verizon PA's annual 2007 PCO filing was made under the provisions of the new Chapter 30 law, Act 183 of 2004, P. L. 1398 (66 Pa.C.S. §§ 3011--3019) (''Act 183'') and pursuant to the Company's Alternative Regulation and Network Modernization Plan (''Chapter 30 Plan'') that this Commission approved at Docket No. P-00930715F1000.¹

   As a result of the passage of Act 183, companies with Chapter 30 Plans are entitled to significantly lower inflation offset values within their respective price cap formulas in exchange for a commitment to accelerated broadband deployment. Inflation offsets previously ranging from 2% to 2.93% were reduced to either 0% or 0.5%, depending on each company's Chapter 30 Plan. In Verizon PA's case, the inflation offset was reduced from 2.93% to 0.5%. Accordingly, annual PCO filings have the potential for substantial revenue and rate impacts on end-user consumers.

   Under the Company's Price Stability Mechanism (''PSM''), the PCO calculates the allowable change (increase or decrease) in rates for noncompetitive services based on the annual change in the Gross Domestic Product Price Index (''GDP-PI''). The PSM also contains special provisions for protected services and addresses revenue neutral adjustments to the rates of noncompetitive services. The PSM set forth in Verizon PA's Chapter 30 Plan is a complete substitution of the rate base/rate of return regulation. Noncompetitive services are defined as regulated services or business activities that have not been determined or declared to be competitive.

Company Filing

   On November 1, 2006, Verizon PA filed its annual PCO filing using the change in 2005 and 2006 first quarter GDP-PI (Gross Domestic Product--Price Index) of 3.31% that produced an overall 2.81% increase allowable for noncompetitive revenues. According to this filing, the Company is proposing an annual revenue increase of $19,829,000. However, the actual proposed price increases resulting from the instant filing will equal $20,314,000 because the Company proposes to use $485,000 of the recurring banked increase from its 2006 PCO filing to account for the difference.

   Verizon PA proposes to implement its PCO by increasing rates for the following services: Residence and Business Dial Tone Line, Business Local Usage Call Band 1, Business Local Area Unlimited, Business Extended Area Unlimited and the Business Late Payment Charge. The proposed tariff revisions to Tariff Telephone Pa. P.U.C. Nos. 1, 180A, 182, 182A, 185B, 185C and 500 were filed to become effective January 1, 2007, with the exception of the Business Late Payment Charge. The new rate for the Business Late Payment Charge is scheduled to become effective April 1, 2007. A summary of the current and proposed rates is as follows:

Service	Current Rate	Proposed Rate
Residence Dial Tone Line
Cell 1	$5.78	$6.29
Cell 2	$6.08	$6.59
Cell 3	$6.44	$6.97
Cell 4	$6.84	$7.37
Business Dial Tone
Single Line
Cell 1	$11.20	$11.75
Cell 2	$13.70	$14.25
Cell 3	$16.20	$17.00
Cell 4	$18.75	$19.50
Multi-Line
Cell 1	$10.20	$10.85
Cell 2	$12.70	$13.35
Cell 3	$15.20	$16.00
Cell 4	$17.75	$18.60
Business Local Usage
Local Call Band 1 (per message)	$0.065	$0.078
Local Area Unlimited
Rate Group A	$10.70	$11.95
Rate Group D	$15.00	$16.55
Rate Group F	$19.20	$19.95
Extended Area Unlimited
Rate Group A	$15.00	$16.55
Rate Group D	$19.25	$19.95
Rate Group F	$23.50	$23.95
Business Late Payment Charge	1.25%	1.50%

   Verizon PA requests permission to continue in 2007 to use the on-going value of its 2003 PCO to support the Company's payments to the Pennsylvania Universal Service Fund (''Pa. USF'') per the Commission's Order entered October 11, 2005, at Docket Nos. P-00930715 and P-00001854. Verizon PA also proposes to continue to bank the difference each year between the 2003 negative value of the PCO and its payments into the Pa. USF.

   Verizon PA also proposes to account for the three-month delay in implementing the increase to the Business Late Payment Charge by banking a one-time increase of BEGIN PROPRIETARY         END PROPRIETARY.

   On November 9, 2006, the Office of Small Business Advocate (''OSBA'') filed a Formal Complaint at Docket No. R-00061915C0001. The OSBA contends that the Company's proposed rates, rules, and conditions of service may be unjust, unreasonable, unduly discriminatory, and otherwise contrary to law, particularly as they pertain to small business customers.

   On November 17, 2006, the Office of Consumer Advocate (''OCA'') filed a Notice of Intervention and Public Statement.

Discussion

1.  PCO Calculations and Rate Increases

   The annual Verizon PA PCO submissions under Chapter 30 laws must conform to its Commission-approved Amended Chapter 30 Plan. Our review of the calculations submitted by Verizon PA indicates that they appear to be consistent with the terms of the Company's Price Stability Mechanism/Price Change Opportunity formula approved in its Chapter 30 Plan at Docket No. P-00930715F1000. However, we disagree with the banked amount that Verizon PA is using to cover additional rate and revenue increases in excess of its calculated PCO allowable revenue increase as discussed below. Thus, the rate increases proposed by Verizon PA may be greater than what the Company is entitled to under its Chapter 30 Plan.

   Accordingly, we find the Company's PCO to be only partially consistent with its Chapter 30 Plan at Docket No. P-00930715F1000. As such, we will require Verizon PA to revise the banked amount in Attachment B of its filing and adjust the revenue and rate increases. The tariff supplements that Verizon PA submits implementing the currently allowed $18,997,370 annual revenue increase shall reflect the original revenue allocations on a percentage basis as filed by the Company in its original 2007 PCO submission to the Commission on November 1, 2006. The proposed tariffed rate increases, as revised by this Order, will be permitted to go into effect subject to findings of the Office of Administrative Law Judge (''ALJ'') regarding the complaint filed by OSBA and subject to refund.

2.  Banked Revenues

   Per our Order entered March 22, 2006, at Docket Nos. R-00051228 and P-00930715F1000, Verizon PA was given approval to adopt the following banking methodology and timing that we previously approved for The United Telephone Company of Pennsylvania d/b/a Embarq Pennsylvania (''United''):²

   1.  After 2001, annual price decreases calculated under the PSI filed on September 1 of each year may be banked for application in future years, not to exceed four (4) consecutive years.³ Such banking of decreases will be with interest at a rate set forth in 66 Pa.C.S. § 1308.

   2.  The banked price changes must be implemented no more than four (4) years after the annual price change is applied.

   3.  If a decrease is greater than $500,000, the Company will implement the decrease immediately.

   This adoption of the United banking methodology constitutes an agreement between the Commission and Verizon PA pursuant to § 3013(b) of Act 183. We note the net banked increase per the March 22, 2006 Order is BEGIN PROPRIETARY         END PROPRIETARY. We further note the remaining banked value of the Company's 2003 PCO is a negative BEGIN PROPRIETARY END PROPRIETARY inclusive of interest, and the banked increase due to the Business Late Payment Charge delay is BEGIN PROPRIETARY         END PROPRIETARY. This results in a net available banked decrease of BEGIN PROPRIETARY         END PROPRIETARY. We believe this decrease should be applied to the Company's 2007 calculated PCO revenue increase in accordance with the United banking methodology which will result in a revised annual revenue increase amount of $18,997,370. We make no determination at this time whether the recoveries of banked amounts are affected by a company's past or future competitive service declarations. However, we are mindful of Sections 3016(b) and (f) of the Code, 66 Pa.C.S. §§ 3016(b) and (f), and encourage the Company to recover any banked revenue increases from the appropriate group of its non-competitive customers, consistent with applicable provisions of Chapter 30 (66 Pa.C.S. §§ 3001, et al.).

   The Company proposes to use $485,000 of the recurring banked increase from its 2006 PCO filing to offset the difference between the allowable revenue increase from the PCO calculation and the total proposed revenue increase. This does not agree with our calculation of the available banked amount as noted above. The banked increase from the 2006 PCO has already been included in the net banked increase amount carried forward per the March 22, 2006 Order. According to the Company, the banked increase from the 2006 PCO has a recurring value in 2007. The Company is attempting to implement a portion of the 2007 value. The difference is then added to the bank. We find the Company's methodology to be contrary to the application of banking methodology for United and other ILECs. We recognize that the United method is geared to establishing, ultimately, a recoverable level of annual revenue still related to the price cap rate setting method. On the other hand, Verizon PA's proposed method would result, ultimately, in a recoverable level of annual revenue in excess of the price cap rate setting method. Therefore, we shall deny Verizon PA's proposal to use a portion of the banked increase from its 2006 PCO. In addition, the disputed issue of accounting methodology for banking shall be incorporated into the complaint proceeding at Docket No. R-00061915C0001 and assigned to the Office of Administrative Law Judge.

   The Company requests permission to continue in 2007 to use the on-going value of its 2003 PCO of negative $17.4M to support its payments to the Pa. USF and bank the difference. This request is made pursuant to the Commission's Order entered October 11, 2005, at Docket Nos. P-00930715 and P-00001854. In this Order, Verizon PA was directed to bank the difference each year between its available 2003 PCO monies and its required contribution to the Pa. USF and account for this in the annual PCO filings including interest on the banked amounts. These banked amounts are specific to the on-going value and use of the 2003 PCO and is a method of accounting for the difference, since the Pa. USF amount can vary from year to year. Verizon PA has complied with the October 11, 2005 Order. Therefore, in light of the discussion in the October 11, 2005 Order mentioned above, we shall permit Verizon PA to continue using its available 2003 PCO money to fund its required contributions to the Pa. USF and bank the difference utilizing the United methodology.

   The Company also proposes to account for the three-month delay in implementing the increase to the Business Late Payment Charge by banking a one-time increase of BEGIN PROPRIETARY         END PROPRIETARY. In past years, the one-time financial value of Verizon PA's PCOs not fully implemented on January 1 has been accounted for in some manner (e.g., support for the Company's Lifeline program). We believe this accounting for the delay value is reasonable and in the public interest. Therefore, we shall approve Verizon PA's proposal for the delay value of the Business Late Payment Charge; Therefore,

It Is Ordered That:

   1.  Verizon Pennsylvania Inc's 2007 PCO filed on November 1, 2006, is deemed in partial compliance with its Commission-approved Amended Chapter 30 Plan.

   2.  Verizon Pennsylvania Inc. submit a revised Attachment B from its filing to reflect a revised banked amount, consistent with the discussion in this Order, and adjust the revenue and rate increases as necessary within five (5) days of the entry date of this Order.

   3.  The tariff supplements to be submitted by Verizon Pennsylvania Inc. implementing the currently allowed $18,997,370 annual revenue increase shall reflect the original revenue allocations on a percentage basis as filed by the Company in its original 2007 PCO submission to the Commission on November 1, 2006, and that the resulting rates shall remain in effect during the pendency of the Office of small Business Advocate Formal Complaint adjudication and be subject to the findings of the Office of the Administrative Law Judge.

   4.  Verizon Pennsylvania Inc.'s proposal to use a portion of the recurring banked increase from its 2006 PCO filing is denied.

   5.  The disputed issue of accounting methodology for banking shall be incorporated into the complaint proceeding at Docket No. R-00061915C0001 and assigned to the Office of Administrative Law Judge. The Administrative Law Judge shall issue a Recommended Decision no later than seven months after the date of entry of the Order in this proceeding.

   6.  Verizon Pennsylvania Inc. be permitted to continue using its available 2003 PCO money to fund its required contributions to the Pennsylvania Universal Service Fund and bank the difference utilizing the United methodology.

   7.  Verizon Pennsylvania Inc.'s proposal to account for the delay value of the Business Late Payment Charge is approved.

   8.  The Commission Order in this matter be published in the Pennsylvania Bulletin.

   9.  A copy of this Order be served on the Office of Consumer Advocate, Office of Small Business Advocate, the Office of Trial Staff and the Office of Administrative Law Judge.

JAMES J. MCNULTY,   
Secretary

Statement of Vice Chairperson James H. Cawley
Concurring in Part and Dissenting in Part

Public Meeting: December 21, 2006
DEC-2006-FUS-0521*

Verizon Pennsylvania Inc. 2007 Price Change Opportunity Filing; Doc. Nos. R-00061915, P-00930715F1000

Office of Small Business Advocate v. Verizon Pennsylvania Inc.; Doc. No. R-00061915C0001

   Before us for disposition is the Staff recommendation regarding the Verizon Pennsylvania Inc. (Verizon PA or Company) Chapter 30 2007 Price Change Opportunity (PCO) filing, and the related revenue and rate increases. Consistent with my Statement of March 2, 2006 regarding the Verizon PA 2006 PCO submission at Docket No. R-00051228 et al., I concur in part and dissent in part to the current disposition of the Company's 2007 PCO filing adopted by the majority.

   I had hoped that, by the time the Company reached the November 1, 2006 deadline for the filing of its Chapter 30 2007 PCO submission with its associated revenue and rate increase, the Commission would have disposed of the material issues still outstanding in the Verizon PA and Verizon North Inc. (Verizon North) 2006 PCOs and the related Office of Small Business Advocate (OSBA) Formal Complaint adjudication. However, this is not the case since the Recommended Decision in that proceeding was issued on December 13, 2006, and the filing of Exceptions and Reply Exceptions still needs to take place in the near future.⁴

   I will not reiterate at length the concerns that I expressed in my March 2, 2006 Statement which are still applicable on various issues that relate to the current implementation of the Verizon PA 2007 PCO submission. These concerns in summary form are as follows:

   1.  Staff Calculation of Allowable Revenue Increase: Pending the resolution of the OSBA Formal Complaint against the Verizon PA 2007 PCO, I agree with the Staff analysis and method of calculation of the allowable revenue increase that is permitted to go into effect subject to refund investigation and recoupment.

   2.  One-Time Banking of Delay Value for the Business Late Payment Charge: Consistent with my position in my March 2, 2006 Statement opposing the use of banking provisions for Verizon PA, I disagree with the use of the one-time banking for the time delay value of the Company's Business Late Payment Charge. Furthermore, I do not believe that the Company has offered a coherent and sufficient explanation of why the effective date of the increased Business Late Payment Charge will be effective on April 1, 2007, while all the other rate changes contained in the 2007 PCO will go into effect on January 1, 2007. In view of the fact that Verizon PA filed its 2007 PCO on November 1, 2007, the Company has had ample time to work on conditioning its internal billing systems of whatever vintage so that the rate change for the Business Late Payment Charge could be effectuated concurrently with the other rate changes without resorting to the unnecessary accounting complexity of the one-time banking provision. I also note that the Company needs to resort to potentially duplicative notice mailings--at additional cost--because not all of its 2007 PCO rate changes are concurrent.

   3.  Funding of Pennsylvania Universal Service Fund Obligations: Consistent with my March 2, 2006 Statement and my previous positions expressed in my Statement of October 6, 2005 regarding the Verizon PA and Verizon North 2005 PCOs at Docket Nos. P-00930715 and P-00001854, I disagree with the continuous use of the available negative revenues arising from the Company's 2003 PCO for the funding of the Verizon PA contribution assessment obligations to the Pennsylvania Universal Service Fund (Pa. USF). As I have previously stated, these monies belong to the ratepayers of Verizon PA and should have been used to offset the cumulative effect of the Company's Chapter 30 cumulative revenue and rate increases to end-user consumers of its non-competitive telecommunications services.

   4.  Existence, Use and Accounting of Banked Revenues: Although I agree with the Staff analytical accounting and calculations as they relate to Verizon PA's banked positive revenues in the instant filing, consistent with my March 2, 2006 Statement on the Verizon PA 2006 PCO, I continue to be opposed to the establishment and presence of a banking mechanism within the Company's Chapter 30 Amended Network Modernization Plan (Amended NMP). I have tentatively concluded that this banking mechanism was not established in accordance with the statutory provisions of Chapter 30 and, thus, it is outside the boundaries of the Company's Amended NMP. This banking mechanism was not established following the filing of a petition to modify the Company's Amended NMP. See generally 66 Pa.C.S. § 3014(e). Instead, it was established in the context of Verizon PA's 2006 PCO tariff filing. Furthermore, the Company's PCO tariff filings appear to be used for ''one-time'' adjustments to the banking mechanism, i.e., the banking of the time value for the Business Late Payment Charge.

   5.  Amended NMP Safeguards and Rate Effects: In the absence of a final resolution of the OSBA Complaint action against the Verizon PA 2006 PCO at Docket Nos. R-00051228C0001 et al., I continue to have major concerns on whether important safeguards that existed in the original pre-Act 183 NMP of the Company (ex-Bell Atlantic-Pennsylvania, Inc.) continue to be in effect within the Verizon PA Amended NMP. Assuming that such safeguards are still applicable, the Commission has not yet resolved the interplay of § 3019(h) of Chapter 30, 66 Pa.C.S. § 3019(h), which gives an independent legal existence to the Amended NMPs of Chapter 30 incumbent local exchange carriers (ILECs), and the more relaxed rate safeguards for residential end-user consumers under § 3015(a)(3), 66 Pa.C.S. § 3015(a)(3).

   It is obvious that the utilized allocations of the annual revenue increases from the Company's PCOs predominantly impact its residential end-user consumers for basic local exchange telephone services. Although conventional wisdom holds that this class of customers has the least price elasticity of demand, I have major concerns that the cumulative annual PCO rate increases can and will translate to negative impacts for maintaining and enhancing universal telephone service in Pennsylvania, which continues to be one of the major policy goals of the Chapter 30 law. Available statistics continue to indicate a worrisome trend of declining telephone penetration rates in Pennsylvania. For example, according to Federal Communications Commission (FCC) statistics, household telephone penetration in Pennsylvania measured on a ''unit'' basis had an annual average value of 98.0% in year 2000. The corresponding figure had declined to 94.8% by March 2006, despite the fact that this statistic is designed to capture the widespread availability of wireless/cellular as well as ''other'' types of telephone service.⁵

   The focused allocation of Chapter 30 PCO revenue increases to the basic local exchange services of the Company also results in rates that are growing at a pace much higher than conventional measures of economic inflation. Although under the Verizon 2007 PCO request the Residence Dial Tone Line rates would have increased by an absolute value of $0.51 - $0.53 per month, this would have represented a 7.75% to 8.82% increase from their previous values. In comparison, the U.S. Department of Labor Bureau of Labor Statistics (BLS) in November 2006 reported a 2.0% increase in the consumer price index for all urban consumers (CPI-U). From the associated November 2006 BLS CPI-U release one can easily discern that the rate of inflation for telephone services from November 2005 to November 2006 was 1.4%.⁶ Similarly, another statistical report from the FCC indicates that the annual rate of change of the monthly consumer price index for landline telephone service local charges increased by 3.19% from December 2004 to December 2005.⁷

   For these reasons, I concur in part and dissent in part in the disposition of the Verizon PA 2007 PCO submission.

[Pa.B. Doc. No. 07-74. Filed for public inspection January 12, 2007, 9:00 a.m.]

_______

¹  Petition for Amended Alternative Regulation and Network Modernization Plan of Verizon Pennsylvania Inc., Docket No. P-00930715F1000 (Order entered May 20, 2005).

²  The reference to ''PSI filed on September 1 of each year'' in the United banking methodology should be modified to read ''PCO filed on November 1 of each year'' for Verizon PA.

³  For annual price increases, the Company may apply them in future years, without limitation as to time.

⁴  Pennsylvania Public Utility Commission et al. v. Verizon North Inc., Docket Nos. R-00051227, R-00051227C0001, R-00051227C0002; Pennsylvania Public Utility Commission et al. v. Verizon Pennsylvania Inc., Docket Nos. R-00051228, R-00051228C0001, R-00051228C0002, Recommended Decision issued December 13, 2006.

⁵  Alexander Belinfante, Telephone Subscribership in the United States, Industry Analysis and Technology Division, Wireline Competition Bureau, FCC (Washington, D.C., October 2006), p. 2 and n. 3, Table 3, pp. 18, 21.

⁶  U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index: November 2006, p. 1 and Table 1.

⁷  FCC, Reference Book of Rates, Price Indices, and Household Expenditures for Telephone Service, Industry Analysis and Technology Division, Wireline Competition Bureau, (Washington, DC, August 2006), Table 3.2.

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