The deregulation lobby operates on faith — the faith that government regulation is unnecessary because the magic of competition is all that’s needed to keep consumer prices under control.
But is it so?
California has been running a sort of laboratory test of this theory since 2006, when the state Public Utilities Commission deregulated telephone landline prices. The PUC’s rationale was that competition from wireless, cable phone service, and voice-over Internet protocol (VoIP) carriers such as Vonage had become strong enough to keep landline rates in check.
It’s all the more important to make sure that customers still on landlines are not being gouged.
— Christine Mailloux, Turn
Last November, the PUC decided that after 10 years “the time seems ripe” to check on whether its expectations were fulfilled. The commissioners issued an order requiring landline, wireless and other telecommunications providers to deliver data on the price, availability and quality of all forms of competing offerings, including how they service the state’s geographically, ethnically and economically diverse communities.
It’s not a trivial concern. Although customers have been rapidly abandoning their landline phones for wireless and Internet-based service, more than 18% of California households still relied on landlines for all or most of their phone service as of 2012, according to federal government estimates.
That’s about 7 million residents, and they don’t need the new data sought by the PUC to know their rates have skyrocketed since deregulation: AT&T‘s flat rate for basic phone service rose from $10.69 in September 2006 to $24 in January 2015, according to PUC figures.
Some other fees rose even more steeply. The charge for directory calls went from 46 cents each to $2.09, and the number of free 411 calls per month went from three to zero. Call forwarding, caller ID, call waiting, three-way calling and rejection of anonymous calls cost a total of $17.76 a month in September 2006, and $47 by January 2015. That’s an increase of 164%. Over the same period, inflation as measured by the consumer price index rose by about 17.5%.
California’s other big landline provider, Verizon, also jacked up its landline prices, although not quite at AT&T’s pace. The state’s two remaining carriers, SureWest and Frontier, implemented price changes much more in line with consumer inflation, and in some cases even lowered prices. AT&T says through a spokesman that because its rates were much lower than other carriers during the period of price regulation, they had “more room to even out” and settle at “market levels” after price caps were lifted.
“It’s all the more important to make sure that customers still on landlines are not being gouged and that service quality is maintained,” says Christine Mailloux, a telecommunications expert at the consumer group Turn, which in 2013 filed a complaint with the PUC about AT&T’s rapid run-up in landline rates. “The PUC had this grand plan in 2006 for customers to be taken care of, and that’s just not been the case.”
Consumer advocates want to know whether the big carriers are goading landline customers into shifting to their wireless or Internet plans by raising prices on the traditional service, letting its quality go to hell, and steering unhappy customers to newer, more lucrative and largely unregulated options. “Cord-cutting is definitely happening,” Mailloux says, but it may not reflect a free choice by consumers weighing a full range of options.
The telecommunications industry has responded to the PUC’s initiative with what can only be described as a mass conniption fit. AT&T, Verizon, Time Warner and other providers have questioned the PUC’s authority to ask for the data and complained that it’s asking for too much.
They’ve tried to kill the inquiry outright or, failing that, delay it for at least six months. They’ve enlisted their friends in Silicon Valley to join the attack on what a coalition of high-tech and business lobbying groups labeled in a Dec. 5 letter “an ill-conceived solution in search of a problem that will harm and distract California’s innovation economy” and may even be illegal.
The assertion that the PUC is threatening to stifle innovation is a common theme voiced by telecom executives. “Many of the new products available today allow customers to do so much more than just carry on a verbal conversation,” Ken McNeely, president of AT&T California, told me in an emailed statement. “Customers now use text, Facebook, Twitter, Snapchat, WhatsApp, Instagram, Skype —the list goes on — instead of using the phone hanging on the kitchen wall.”
Still, they’re not all adequate substitutes for simply picking up the phone from the kitchen wall and having a conversation, especially in regions where Internet connections are spotty or nonexistent, or for customers reliant on cheap “lifeline” rates mandated by state regulators.
The PUC thus far has stood fast and demanded to see the first round of data submissions by March 15.
The California PUC is not alone in grappling with technological and statutory transitions that dilute its authority, such as the shift to digital telecommunications from traditional voice networks—often known by the dismissive acronym POTS, for “plain old telephone service.” New York utility regulators launched their own investigation of telecommunications competition last year.
The California PUC also has faced narrowing jurisdiction over electric power, in part because deregulation has shifted authority over power generation to the federal government. Years ago, the commission lost its regulatory oversight of airline service in the state when airline deregulation allowed California-only carriers such as PSA and AirCal to expand beyond the state’s borders; PSA eventually merged into USAir and AirCal was acquired by American Airlines.
Underlying the conflict over phone service are industry leaders’ fears that the PUC wants to extend its authority to businesses that have been lightly regulated by an indulgent Federal Communications Commission.
“Every time the PUC says they want to look at Internet-based services, we’re quick to point out that it’s not in their jurisdiction,” says John Doherty, general counsel of TechNet, a lobbying organization for high-tech companies that joined in the Dec. 5 letter.
Yet the PUC has stated explicitly that it doesn’t intend to invade the FCC’s jurisdiction. But it also observed in its order launching the investigation that it’s impossible to tell whether the proliferation of new wireless and Internet-based telecom choices has affected competition with tradition landlines without knowing more about those new markets.
No one disputes that plain old telephone service is on the way out, or that its price has soared and service quality deteriorated. The big carriers have made no secret of their desire to abandon their old landline technology based on twisted pairs of copper wires; it’s expensive to maintain and becoming more so as the number of subscribers wanes.
Verizon has been aggressively exiting the business to concentrate on wireless; last year it sold its wire-line businesses in California, Florida and Texas to Frontier for more than $10 billion. That followed its $5.3-billion sale of phone lines in 14 states to Frontier in 2010.
“The fact is,” AT&T’s McNeely says, “most Californians have moved to more advanced services that best meet their needs and lifestyles and offer always-on, always-with-them, multi-tasking technology.” That still leaves the question of how to protect those customers who find that the service that best meets their needs is the old one.
That’s what the PUC is asking, and the telecom industry’s efforts to stand in its way suggests that it doesn’t want anyone to hear the answer.
Michael Hiltzik’s column appears every Sunday. His new book is “Big Science: Ernest Lawrence and the Invention That Launched the Military-Industrial Complex.” Read his blog every day at latimes.com/business/hiltzik, reach him at firstname.lastname@example.org“>email@example.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.