BEFORE THE PUBLIC SERVICE COMMISSION OF THE STATE OF DELAWARE IN THE MATTER OF THE TARIFF FILING OF BELL ATLANTIC-DELAWARE, INC. FOR THE IMPLEMENTATION OF RESIDENCE ISDN SERVICE PSC DOCKET NO. 95-014T FINDINGS AND RECOMMENDATIONS OF THE HEARING EXAMINER NOTICE: CERTAIN NUMBERS (ITALICIZED) APPEARING IN THIS DOCUMENT ARE DEEMED PROPRIETARY AND SHOULD BE TREATED ACCORDINGLY. EXPURGATED VERSION DATED: MAY 7, 1996 G. ARTHUR PADMORE HEARING EXAMINER TABLE OF CONTENTS PAGE I. APPEARANCES 1 II. BACKGROUND 2 III. SUMMARY OF PUBLIC COMMENTS 5 DOVER 5 WILMINGTON 6 IV. POSITIONS OF THE PARTIES 7 BELL ATLANTIC-DELAWARE, INC. 7 THE OFFICE OF THE PUBLIC ADVOCATE 11 THE PSC STAFF 16 V. DISCUSSION 22 VI. RECOMMENDATIONS 35 FINDINGS AND RECOMMENDATIONS OF THE HEARING EXAMINER G. Arthur Padmore, duly appointed Hearing Examiner in this Docket pursuant to 26 Del. C. '502 and 29 Del. C. Ch. 101, by Commission Order No. 4061, dated October 24, 1995, reports to the Commission as follows: I. APPEARANCES On behalf of the Applicant, Bell Atlantic-Delaware, Inc. ("BA-Del," or "the Company"): JOSHUA W. MARTIN, III, ESQUIRE & DAVID A. HILL, ESQUIRE On behalf of the Office of the Public Advocate ("OPA"): PATRICIA A. STOWELL, The Public Advocate On behalf of the Public Service Commission Staff ("Staff") MORRIS, JAMES, HITCHENS & WILLIAMS BY: P. CLARKSON COLLINS, JR., ESQUIRE & BARBARA MacDONALD, ESQUIRE II. BACKGROUND 1. On September 5, 1995, BA-Del filed with the Commission a tariff for implementing "Residential IntelliLinQ7 BRI" Service, also known as Residence ISDN service, to become effective November 4, 1995. 2. By letter dated October 18, 1995, the Office of the Public Advocate raised a number of bona fide issues regarding the justness and reasonableness of the tariff terms and conditions under which BA-Del proposed to offer Residence ISDN service. In addition, upon initial review, the Commission Staff concluded that it was unable to endorse the proposed BA-Del tariff as just and reasonable without further inquiry. Staff, therefore, recommended that the Commission designate a Hearing Examiner to develop an evidentiary record concerning just and reasonable rates for the proposed Residence ISDN service. 3. On October 24, 1995, the Commission issued Order No. 4061 establishing this docket and designating this Hearing Examiner to conduct evidentiary hearings to consider the justness and reasonableness of the BA-Del tariff filing. The Commission's Order also allowed the proposed Residence ISDN rates to become effective November 4, 1995, unless voluntarily suspended by BA-Del, subject to the Commission's authority to order prospective implementation of such rates and tariff terms and conditions as it shall determine to be just and reasonable. 4. Following a November 20, 1995 pre-hearing conference, a procedural schedule was established for the conduct of proceedings in this docket. At that time, it was anticipated that public comment hearings for public input, to be followed by the filing of memoranda by the participants, would suffice for carrying out the Commission's mandate. 5. However, during a January 4, 1996 teleconference relating to other matters concerning this docket, Rate Counsel brought to the Hearing Examiner's attention certain provisions of the Delaware Administrative Procedures Act ("APA") requiring the Commission to conduct public evidentiary hearings when matters before it involved, among other things, "price fixing and rate making." Consequently, by letter dated January 17, 1996, the Hearing Examiner informed the parties of his decision to schedule and conduct an evidentiary hearing in this matter on March 29, 1996. According to the Hearing Examiner's letter, "[i]n addition to fulfilling the APA's requirements, the hearing will afford Staff and the parties an opportunity to cross-examine and formally enter into the evidentiary record the written material scheduled to be filed on February 28 and March 13, 1996, as well as any live testimony adduced by the cross- examination of the witnesses sponsoring the filed material." 6. Pursuant to the procedural schedule, duly noticed (Ex. 1) public comment hearings were conducted in Dover and Wilmington, respectively, on the evenings of January 16, 1996 and January 18, 1996. A total of four persons attended the two public comment hearings. Their comments are summarized, infra, for the Commission's consideration. 7. By letter dated February 16, 1996, BA-Del formally requested a "delay" in the procedural schedule because it expected to submit a "new [R-ISDN] rate structure package" for Commission consideration in March, 1996. (Letter from Douglas R. Smith to the Hearing Examiner, February 16, 1996.) According to the Company, these new rate proposals would "resolve many, if not all, of the issues in the [pending] proceeding." (Id.) By letter dated February 20, 1996, the Hearing Examiner initially suspended the procedural schedule. 8. However, following a telephone conference on March 4, 1996, the Hearing Examiner determined that the Commission's mandate in this docket is to determine whether or not the current rates for Residence ISDN service are just and reasonable; and, since it had become apparent that the Company's new rate proposals would not be replacing the Company's September 5, 1995 tariff filing, he concluded that it would be appropriate to reinstate the procedural schedule, with the evidentiary hearing rescheduled to take place on April 19, 1996. 9. Besides the Public Advocate, who exercised her statutory right to intervene in this proceeding, no other person intervened in this proceeding. In addition, besides the four persons who attended the public comment hearings, no other person participated in this docket. 10. A duly publicized (Ex. 1) public evidentiary hearing was conducted in Wilmington on Friday, April 19, 1996. No member of the public attended the hearing. All participants filed initial and reply written comments, which have been made part of the evidentiary record. (Ex. 2, 3, 5, 6, 7, & 8.) Bell Atlantic officials, Linda Gaghan, Product Manager for Residential ISDN, and John Pehta, Director for Cost Analysis and Regulatory Support testified on behalf of BA-Del; the OPA presented the testimony of its Consultant, Dr. Scott J. Rafferty; and Commission Public Utilities Analyst, John C. Citrolo, testified for the Staff. 11. At the conclusion of the hearing, the record consisted of eight exhibits and a 220-page verbatim transcript. No briefs were deemed necessary. I have considered the entire record of this proceeding. Based thereon, I submit for the Commission's consideration these Findings and Recommendations. III. SUMMARY OF PUBLIC COMMENTS 12. Dover. Paul Gumerman of Felton and Michael Lecuyer of Viola were the only members of the public attending the January 16, 1996 public comment hearing in Dover. (Tr. at 45.) Mr. Gumerman stated that his first impression of BA- Del's R-ISDN service offering was that the pricing of that service was driven not so much by marketing and the cost of providing ISDN as it is an attempt by the Company to protect its leased lines business. (Id.) In essence Mr. Gumerman asserted that he felt that the proposed rates are structured in such a way that would discourage the widespread use of R- ISDN service. (Id. at 70.) He suggested that the Company would quickly expand its R-ISDN customer base by offering a flat intrastate rate rather than a measured rate. (Id. at 74-76.) Mr. Gumerman opined that most people would prefer a flat rate so that their costs for the service will remain predictable. (Id. at 76.) He suggested that a flat monthly rate of approximately $39 - $50 would be reasonable and appropriate. (Id.) 13. In brief remarks, Mr. Lecuyer also expressed objections to the current R-ISDN rate structure and stated further that the current structure of the R-ISDN rate does not meet customers' need for "conductivity." (Id. at 49- 50.) He opined that if the Company did not find a way to meet these needs, it was likely that the customers would themselves find a way to achieve conductivity by using special modems and "data over voice channels." (Id.) 14. Wilmington. Messrs. Stewart Dickson and Reggie Shaw, both of Wilmington, were the only members of the public to appear at the January 18, 1996 public comment hearing conducted in Wilmington. Mr. Dickson stated that in his opinion, BA-Del's R-ISDN rate would impede universal access to telecommunications service, thereby widening the gap between the technological haves on the national information infrastructure and the have-nots who cannot afford to get on line. (Id. at 88-89.) He asserted that "[w]ord on the street is that [R-]ISDN service is prohibitively expensive, and no one is buying it for that reason." (Id.) 15. According to Mr. Dickson, measured service rates do not reflect the real cost of providing ISDN service. (Id.) Mr. Dickson compared the BA-Del ISDN rate with rates being charged for that service in California, and he observed that he had been a Delaware R-ISDN user for approximately six months and, during that period, he had paid BA-Del more than he would have paid for five years of service in California, for "half the data transmission speed" he had in California.. (Id. at 89-90.) 16. Mr. Shaw stated that in his view, R-ISDN was "too expensive for the average consumer." (Id. at 100.) He said that he would like a more affordable rate for R-ISDN service so that more people would be able to use the service. (Id. at 101.) IV. POSITIONS OF THE PARTIES 17. Bell Atlantic-Delaware, Inc. The Company contended that its R-ISDN tariff establishes rates which mirror those offered in other Bell Atlantic jurisdictions and which allow the Company "to effectively study demand and usage levels and then propose optional rate structures to meet customer needs." (Ex. 2 at 1.) Thus, the Company argued, there is no reason to "tinker with the existing tariff today to prematurely require some form of flat rate structure." (Id.) According to BA-Del, requiring such a change would "distort data on usage" and would benefit only heavy R-ISDN users to the detriment of smaller R-ISDN users, as well as all other BA-Del ratepayers. (Id. at 1-2.) Thus, the Company urged the Commission to allow the existing tariff to remain effective and afford customers "some certainty in the provisioning of [R-ISDN] service and allow BA-Del to continue gathering the information necessary to finalize new, discounted usage rates." (Id. at 2.) 18. BA-Del asserted that the "traditional 'just and reasonable' standard" (i.e., the standard associated with rate of return regulation) "plainly" no longer applies under the TTIA because the TTIA has "replaced revenue requirement regulation with price indexing." (Id. at 3.) Thus, according to BA-Del, there is no need to establish, for this proceeding, "a new elaborate test or standard." (Id.) 19. BA-Del contended that a usage-based rate is appropriate at this time because R-ISDN costs are incurred on a per-minute basis. (Id.) In this regard, BA-Del asserted that "every minute of ISDN [use] ties up a path through BA-Del's network, thus customers should continue to pay on a per minute basis until sufficient data is gathered concerning usage patterns and demand to allow the development of a reasonable alternative pricing structure." (Id.) 20. In any event, the Company asserted that the current R-ISDN usage rates are just and reasonable because they are minimal, even for heavy users. (Id.) Furthermore, BA-Del argued, "[c]ustomers who can already afford computers, modems, software, and on-line server charges cannot reasonably claim that [the proposed usage] rate is excessive, particularly given the increased speed and, therefore, value that R-ISDN will provide." (Id. at 4.) 21. BA-Del also contended that its R-ISDN rates are just and reasonable because they provide contribution that is appropriate for a service which is not essential for any customer to maintain access to core telephone service and which carries with it a great deal of uncertainty, due to the use of new telephone and computer technologies. (Id. at 5.) With respect to the level of contribution, BA-Del asserted that limiting that level in this case to some "average," or requiring that the service be introduced on a "revenue neutral" basis, would be in conflict with the TTIA's "key objectives of fostering investment in telecommunications and diversity in resulting services." (Id.) Moreover, such a requirement would provide a disincentive to the Company to spend the resources and energy to develop new products. (Id.) 22. In reply comments, BA-Del asserted that there is "no reason to tinker with the existing tariff today" because the Company intends to propose additional R-ISDN flat rate discounted packages, accompanied by complete supporting cost data, no later than the end of April, 1996. (Ex. 3 at 1.) Moreover, the Company contended, the Telecommunications Technology Investment Act ("TTIA" or "Act"), 26 Del. C. ''704, et seq. does not require that R-ISDN, or any new basic service, should be introduced and forever-after provided essentially at cost (i.e., include no net contribution from basic services). (Id. at 2.) To the contrary, the Act expressly states in § 706(a)(1) that the Commission should determine that the proposed rate for a new basic service is "just and reasonable," not that the service will only cover costs or that its revenues will be offset by rate reductions for other basic services. (Id. at 2-3.) Furthermore, BA-Del contended, "[a]n overarching objective of the TTIA was to begin to fulfill the policy objectives of the Telecommunications Regulation Modernization Act, 26 Del. C. '701 et seq. ("Modernization Act"), including "encourag[ing] the providers of [telecommunications] services to take advantage of technological advances and efficiencies" and making those advances available throughout the State. 26 Del. C. '703(3). 23. Thus, the OPA's theory would destroy the incentive to develop the most important of those new services (i.e., services which are "basic" for any of the reasons set forth in §705(a) of the Act) since under the OPA's rule, any such services would offer no new revenue to a provider. (Id.) BA-Del further argued that even if the OPA's theory were limited to ISDN, its effect would remain counterproductive and devastating because there would be little reason to invest in enhancing this new technology if the returns from it must remain a zero sum game, regardless of the added value enhancements may offer consumers. (Id. at 3-5.) 24. Turning to the issue of the justness and reasonableness of the existing R-ISDN rates, BA-Del agreed that such rates must be "just and reasonable" under the express provisions of '708(a)(1) of the TTIA. (Id. at 5.) However, BA-Del differs with Staff's and the OPA's interpretation of what constitutes a "just and reasonable" standard. (Id.) According to the Company, it is an "incorrect" perspective to construe the "just and reasonable" standard under the TTIA as identical to the standard as defined under traditional rate of return regulation, i.e., a cost-based price which allows only a limited return on investment. (Id.) Citing 26 Del. C. '703(3), BA-Del contended that the Modernization Act "specifically authorized" the Commission to "to depart from rate base, rate of return regulation" in order to further the public interest and economic development goals of the statute. (Id., emphasis in original.) Thus, BA-Del argued, construing "just and reasonable" to mean "exactly the same thing as it meant under rate base, rate of return regulation would defeat, not further, the objectives of both the Modernization Act and the TTIA, and would be tantamount to saying the 'alternative' form of regulation was simply traditional regulation by a different name." (Id. at 5-6.) 25. With respect to the Staff and OPA criticisms of its R-ISDN cost study, BA-Del argued that these criticisms were "unfounded" and that the cost analysis "has been performed in a manner which is both accurate and consistent with proper, accepted TS-LRIC methodology." (Id. at 13, Exhibit "B".) 26. The Office of the Public Advocate. Dr. Scott J. Rafferty testified on behalf of the OPA. Dr. Rafferty proposed that pursuant to the requirements of the Telecommunications Technology and Investment Act ("TTIA") and proposed Staff regulations relating thereto, Residence ISDN should be tariffed on a revenue neutral basis. (Ex. 5 at 1.) 27. Dr. Rafferty asserted that a Residence ISDN line (with 100 hours of data service) should be priced at the same price as a second analog line with unlimited usage, with usage over 100 hours priced at "true" incremental cost and capped at marginal cost. (Id. at 2.) In addition, Dr. Rafferty urged that additional revenues from usage fees be tracked and used to reduce other rates through a revenue neutral restructure. (Id.) 28. Dr. Rafferty characterized Residence ISDN lines as "second lines," which generate significant excess contribution. (Id.) He contended that since BA-Del equips residential installations with at least one spare pair, second lines can, in most cases, be provisioned with no additional trenching. (Id.) Moreover, he asserted, BA-Del includes all loop costs in the incremental cost of ordinary access lines; therefore, any extraordinary growth in second lines, such as ISDN lines, creates "a windfall" for BA-Del. (Id.) According to Dr. Rafferty, this "windfall" is more than sufficient to cover the actual incremental costs of an ISDN connection (i.e., the difference between an analog line card and an ISDN card plus the U-repeater). (Id.) 29. Dr. Rafferty rejected BA-Del's cost studies, which BA-Del claims are proprietary and, therefore, cannot be disclosed publicly, as inadequate and inconsistent and asserted that based on public sources, the true incremental cost of ISDN is between $4 and $9 and falling. (Id. at 3.) 30. Dr. Rafferty also criticized as discriminatory a Residence ISDN tariff provision which requires that local measured rate usage charges will apply to voice calls. (Id.) He pointed out that the Business ISDN tariff does not include this provision, thus it should be eliminated in the Residence ISDN tariff. (Id. at 3-4.) Dr. Rafferty also proposed that the Residence ISDN rate should be made available to schools as has been done in Tennessee. Furthermore, he proposed that the $125 installation charge should be reduced to the same level as it is for analog service. (Id. at 4.) 31. Comparing BA-Del's proposed ISDN rates with other jurisdictions around the United States, Dr. Rafferty noted that the BA-Del rate is second highest for 100 hours of usage and the fourth highest for full access. (Id. at 10- 11.) 32. Dr. Rafferty defined "revenue neutrality" as having BA-Del absorb "the incremental costs of providing the new functionality." (Id. at 17.) He asserted that since the additional costs of implementing ISDN were foreseen at the time that BA-Del elected price cap regulation, they cannot be recovered from ratepayers except through a revenue neutral rate restructuring. (Id.) 33. Dr. Rafferty concluded his presentation by stressing that the proposed Residence ISDN rates are unjust and unreasonable because these proposed rates "reflect region-wide tariffs that subsidize jurisdictions with higher costs or the ability to use premium charges to offset basic rates under rate-of-return regulation." (Id. at 32.) He claimed that the costs that are "truly incremental" to ISDN service can be covered by current rates, particularly since the marginal costs of second lines is below the existing tariff. (Id.) 34. In reply comments, the OPA agreed with Staff that BA-Del should be required to provide Residence ISDN service at rates substantially below those that are currently in effect. (Ex. 6 at 1.) The OPA asserted that although overcharging for ISDN is not in the best interests of the Company, these "exorbitant" rates "demonstrate that BA-Del is prepared to exploit its short-term monopoly on high-speed data access." (Id. at 2.) 35. According to the OPA, if the Commission allows the Company's proposed rates to remain in effect, the availability of "a whole generation of new services" to consumers will be retarded. (Id.) In addition, the OPA argued, such Commission action will also place other regions, such as rural Arkansas, at an economic advantage over Delaware, which has naturally low network costs. (Id.) In short, the OPA contended that retarding the availability of ISDN service will "impose substantial social costs on Delaware consumers and retard economic development in the state." (Id.) 36. The OPA also contended that there is no question that BA-Del can and should make ISDN available at the rates proposed by Staff and the Public Advocate without losing any of the revenue streams that the price cap regime allows. (Id. at 3.) According to the OPA, ISDN is nothing more than a new, more efficient technology to deliver an existing service, residential dial tone. (Id.) Nor is there any justification for a BA-Del claim that the costs of implementing ISDN service are "exogenous" and, thus, recoverable under the price cap regime. (Id.) The Public Advocate argued that The Company reasonably foresaw the costs of implementing ISDN service; therefore, these costs cannot be deemed "exogenous," and "to the extent that the rates that the Public Advocate proposes actually allow recovery of the incremental costs of implementation, they represent the absolute outer limit of what the Commission may find to be 'just and reasonable.'" (Id.) 37. The Public Advocate rejected the cost data on which The Company relied to support its ISDN usage rates. According to the OPA, these costs are "dated and cannot be extrapolated to cost a full-time connection." (Id. at 4.) Moreover, the OPA characterized BA-Del's "undocumented assumption" that ISDN usage costs more than analog usage as "de[fying] engineering and common sense." (Id.) For example, the OPA noted, BA-Del is currently obliged to provide unlimited analog usage for $1.60 a month; therefore, implementing a technology that will allow consumers to download information in one-fifth the time it normally would take in an analog environment saves the Company money. (Id. at 5.) 38. The OPA rejected as incoherent the BA-Del contention that it would be "premature" to set low usage prices before consumer response provides marketing data. (Id. at 6.) The OPA contended that the very purpose of utility regulation, whether rate-of-return or price cap, is to ensure that consumers of monopoly services do not pay "whatever the market will bear." (Id.) According to the OPA, a utility has no right to charge above economic cost for services that are monopolies, particularly when the General Assembly has defined the service as "basic" to residential subscribers. (Id.) 39. The OPA also characterized as unreasonable BA- Del's "insistence on region-wide rates." (Id.) Citing the benefits of Delaware's "low-cost geography," the OPA argued that it is inappropriate to require Delaware consumers to "subsidize" other jurisdictions which are "higher cost" for other reasons, including the fact that some of them are rate-of-return jurisdictions where contribution can be recovered to reduce other monopoly rates. (Id.) 40. The OPA also rejected as "profoundly unreasonable," three other aspects of The Company's tariff. First, the OPA pointed out, the subscriber is required to forego his ability to have unlimited voice calls for $1.60. (Id. at 7.) It is inappropriate to require a consumer to forfeit this right simply because he or she is using a new technology. (Id.) Second, the tariff sets different rates for voice and data, with additional voice minutes priced as low as 25 percent of the data rate. (Id.) According to the OPA, one of the primary virtues of ISDN technology is that it allows customers to switch from voice to data in a single call, and The Company has no way accurately to charge the tariff without constantly eavesdropping on customers, a practice that would be completely unacceptable. (Id.) Third, The Company actively markets full-time ISDN connections among business Centrex locations "for a usage price of zero." (Id., emphasis in original.) The OPA contended that this practice "constitutes an indefensible discrimination against residential subscribers." (Id.) 41. In sum, the OPA recommended the following: (a) that residential ISDN access be priced at or near the price for an analog line; (b) that unlimited usage should be made available at the same price for analog service (i.e., $1.60, subject to future price cap adjustments); and (c) that the installation charge should be no more than one month's access charge. (Id. at 8.) 42. The PSC Staff. Staff contended that although it does not expressly set forth the manner or measure by which the justness and reasonableness of rates should be determined, the TTIA requires that rates for a new basic service be "just and reasonable." 26 Del. C. '706(a)(1). (Staff at 4.) Thus, in the absence of such guidelines, the Commission must devise an appropriate standard for making such a determination. (Id.) 43. Staff acknowledged that rates for basic services in existence at the time of BA-Del's election are presumptively "just and reasonable," such rates can be changed outside the TTIA only if the adjustment is revenue neutral, i.e., it "neither increase[s] nor decrease[s] the total revenue to the service provider from that particular service." (Id. at 5, citing 26 Del. C. '707(c)(4).) 44. Staff pointed out that BA-Del's cost information demonstrates that, in evaluating whether its proposed (and currently effective) Residence ISDN rates recover service costs and provide some contribution to joint and common costs, the Company has used an appropriate standard, total service long run incremental cost ("TS-LRIC"). (Id.) However, BA-Del has included some cost elements that are not TS-LRIC costs and has failed to provide a cost basis for other elements of its proposed rates. Therefore, Staff contended, BA-Del has failed to meet the requirements of 26 Del. C. '706(a)(1) and, in view of that deficiency, the R-ISDN rates should not be approved. (Id.) 45. Staff noted that the proposed Residence ISDN rate consists of three parts: (a) an initial connection charge, (b) a recurring monthly subscription charge, and (c) a usage charge. (Id. at 6.) However, Staff criticized BA-Del's cost justification for its proposed rate as "inadequate" because: (a) BA-Del's calculation of the direct recurring costs for ISDN service includes several elements which are not properly part of TS-LRIC; (b) BA-Del's cost study shows that its usage-related costs are no higher than costs incurred for providing "traditional telephone service;" and (c) there is no cost justification whatsoever for the proposed connection charge, which Staff alleged is "grossly disproportionate to the service performed." (Id. at 6.) 46. With respect to BA-Del's alleged inclusion of non- TS-LRIC elements in its cost calculation, Staff identified three cost elements which Staff contended BA-Del would have incurred, whether or not it provided Residence ISDN service (i.e., unavoidable costs). (Id.) Staff argued that BA-Del inappropriately included in its calculations costs associated with the network capability known as "ISDN Anywhere." (Id. at 7.) According to Staff, these costs result from BA-Del's deployment of SS7 technology throughout its network, which deployment the FCC has designated as "a 'general infrastructure upgrade' whose costs are not to be associated with any particular service or function using the SS7 technology." (Id.) Thus, network capabilities and/or functions that are available due to BA-Del's general upgrade to SS7 switches cannot appropriately be attributed as a direct cost of R-ISDN. (Id.) 47. Staff also identified BA-Del's additional loop cost as inappropriate for inclusion in the calculation of R- ISDN costs. (Id. at 8.) Staff contended that BA-Del's loop upgrade is a necessary consequence of digitizing the network. (Id.) According to Staff, given the Company's other technology commitments, such an upgrade would be necessary, whether or not BA-Del offers R-ISDN service. (Id.) 48. Lastly, Staff pointed out that the provision of R- ISDN to customers requires the upgrading of the analog line termination equipment in BA-Del's central office to digital line termination equipment (i.e., line cards and switch modules); however, BA-Del's calculation of direct cost includes the cost of both the analog line card and the digital line card. (Id.) Staff argued that the correct "increment" of cost for upgrading the line to ISDN-capable should be the cost of only the digital line card, not the full cost of both cards since the digital card cost is the only "incremental cost" BA-Del incurs to provide R-ISDN service. (Id.) 49. Based upon the foregoing, Staff removed the costs deemed inappropriate and calculates as reasonable a monthly recurring charge of $12.92 for R-ISDN service in Delaware. (Id. at 9.) 50. Turning to the question of reasonable usage charges, Staff asserted that BA-Del's cost studies demonstrate that incremental usage costs for ISDN are no higher than costs associated with POTS. Staff contended that although BA-Del claims a higher incremental usage cost for ISDN-based transmission of circuit switched data, the comments of a BA-Del consultant belie this claim, i.e., digital data transmissions are indistinguishable from digital voice transmissions and neither cost any more than analog voice transmission. (Id. at 9-10.) Based upon the foregoing, Staff recommended that circuit switched voice and circuit switched data usage charges be set at the same level as BA-Del's current tariffed rates for local usage, including the flat rate option. (Id. at 10.) These rates are $1.60 per month for unlimited local usage, or $0.03 for the first 3 minutes of use, and $0.005 for each subsequent minute of use thereafter. (Id.) 51. Turning to the issue of BA-Del's proposed $125 connection fee, Staff contended that the Company provided no data or information in support thereof. (Id.) According to Staff, "installation" of R-ISDN service requires BA-Del only to transfer the end user from an analog line card termination to a digital line card termination by reprogramming the software, an operation which is performed in the customer's central office within a matter of seconds. (Id.) In view of the foregoing, Staff suggested a connection fee which is no more than one month's subscription to R-ISDN, i.e., $12.92. (Id.) 52. In summary, Staff recommended the Commission disapprove as unjust and unreasonable BA-Del's proposed R- ISDN tariff and instead adopt as reasonable the following rates for R-ISDN service in Delaware: Connection $12.92 Monthly Recurring $12.92 Usage package $0.03/minute for initial 3 minutes $0.005/minute for each subsequent minute OR $1.60/month, unlimited usage. (Id. at 11.) 53. In reply comments, Staff rejected as inappropriate BA-Del's argument that customers who are sufficiently affluent to purchase and use computers cannot reasonably claim the ISDN rate is excessive. (Ex. 8 at 1.) According to Staff, such an argument supports approval of "a rate that the 'market' will bear" and is an inappropriate standard for a basic service, such as, ISDN. (Id.) Staff contended that basic service rates should be cost-based and that the rates for the basic services carried by BA-Del under its election into the TTIA were cost based under application of the traditional rate base/rate of return "just and reasonable" standard. (Id. at 1-2.) Staff asserted that these rates are intended to remain cost-based, as the TTIA regulatory scheme permits only inflationary rate adjustments, other than adjustments for unforeseen and uncontrollable changes in BA- Del's costs of providing telecommunications services. (Id. at 2.) 26 Del. C. '707(c)(6). 54. With respect to BA-Del's tariffed installation charge for R-ISDN service, Staff reiterated that BA-Del had produced no evidence that the cost of installing an R-ISDN line is more than the cost of removing an analog line card and installing a digital line card for the customer's line and, unless and until sufficient contrary evidence is produced, BA-Del has shown no basis for using its "excessive" installation charge proposal. (Id. at 2-3.) 55. Staff pointed out that the BA-Del R-ISDN monthly subscription rate includes costs that are not incremental to the provision of that service. (Id. at 3.) Some of these costs include costs associated with "ISDN Anywhere" service, additional loop, and the analog line card costs, which, as previously noted, Staff recommended should be excluded,. (Id. at 3-4.) 56. Staff also took issue with the BA-Del position that it should not be required to offer a flat rate usage package until it has studied usage patterns. (Id. at 4.) First, Staff noted, it is clear, from the comments made at the public comment hearings, that the current R-ISDN service is priced so high as to discourage use of a service that customers would otherwise use. (Id.) Second, Staff argued, the Company is mistaken when it suggests that "every minute of R-ISDN ties up a path through BA-Del's network" because the moment data transmission stops by a particular user, the pathway that was being used becomes available for use by another user even though the first user has not terminated his connection. (Id. at 5.) Moreover, Staff contended, the capacity of fiber optic cable is so immense that even if every ISDN subscriber were to transmit data 24 hours/day at the highest speed at which computers are capable, substantial volumes of unused capacity would remain. (Id.) Therefore, there is no merit to the assertion that current usage rates need to be preserved while BA-Del gathers usage data. (Id.) V. DISCUSSION 57. The Commission has jurisdiction over this matter. There is no dispute that, as a matter of law, ISDN service is classified as a "basic service." 26 Del. C. '705(a)(12). Furthermore, it is undisputed that R-ISDN is a new basic service. Under the TTIA, the offering of new basic services in Delaware is subject to the provisions of subchapters I, II and V and '' 301, 303(a), 304, 305 and 308 of Title 26. 26 Del. C. '707(a). In addition, all Commission procedures, rules and regulations are applicable with respect to the provision of basic services, except to the extent inconsistent with the TTIA. (Id.) In determining the ultimate question of the justness and reasonableness of BA- Del's R-ISDN rates, the following issues must first be resolved: a) What is the appropriate standard to determine just and reasonable basic service rates under the TTIA? b) Must rates for a new basic service be implemented on a revenue neutral basis? and c) Based on the standard discussed above, are the rates for R-ISDN just and reasonable? 58. Turning first to the question of the appropriate standard to determine just and reasonable basic service rates under the TTIA, BA-Del contends that since the TTIA has "replaced rate of return regulation with price indexing," the "traditional 'just and reasonable' standard associated with rate of return regulation plainly no longer applies." (Ex. 2 at 3.) Instead, the Company suggests that the Commission not establish "a new, elaborate test or standard" in this proceeding to determine the reasonableness of the R-ISDN rate. The Company recommends that the Commission determine the justness and reasonableness of basic service rates on a case by case basis, taking into account such considerations as "characteristics of the service, [the service's] essentiality, and the demographics of demand for [such a service]." (Ex. 3 at 7.) For the following reasons, the Commission should decline to adopt the BA-Del recommendations. 59. First, adoption of a standard such as the Company recommends would require the Commission to abdicate its role of protecting consumers from monopoly pricing of basic telecommunications services by the Company. The Commission should not lose sight of the fact that the General Assembly has obviously recognized that not all telecommunications services will be subject to full, or even emerging, competition. Thus, for the time-being, some telecommunications services will still continue to be available only from a single provider. The General Assembly has, therefore, specifically mandated the Commission to continue its direct supervision of basic services, and some of Bell Atlantic-Delaware's statements of record in this case confirm my opinion that the Commission scrupulously carry out the legislative mandate that the pricing of basic services be subject to a "just and reasonable" standard and to Commission approval. 60. With the enactment of the TTIA in 1993, rates for telecommunications services which were classified as "competitive" were no longer fixed by the Commission. The Commission's role regarding rates for competitive services was limited to ascertaining, as appropriate, that such rates were not below incremental cost. Rates for telecommunications services classified as "basic services" and "discretionary services" however, were required to be "just and reasonable" and also subject to Commission approval. 26 Del. C. '706(a)(1), (2). Basic service, in particular, was also subject to '303(a), which heretofore operated under the standard that a just and reasonable rate was one which recovered the cost of providing the service in question plus a reasonable return on investment. 61. It may well be, as BA-Del argues, that the methodology for determining the "cost" of providing a service under the TTIA should not be the same as used in determining the cost of providing a service under a rate base, rate of return regime. Nonetheless, there is no dispute that the Commission is still under a duty to ensure that rates for new basic services are "just and reasonable." 26 Del. C. '706(a)(1). My reading of '705(a) of the TTIA, which defines "basic services," makes no reference to "characteristics" or "essentiality" or "demographics of demand" as elements of a basic service. In fact, '705(a) specifically defines the characteristics of basic services, all of which R-ISDN possesses. Furthermore, inclusion of the elements recommended by BA-Del in a new "just and reasonable" standard would inappropriately inject into the process of determining a fair rate for the provision of monopoly services considerations more suitable for a determination of the pricing of competitive services. Such a procedure would be unsuitable for services for which there are no competitive pricing restraints. 62. In my opinion, a reasonable standard to determine "just and reasonable rates" for a basic service is one which would require the service to be priced at a level that recovers the incremental cost of providing the service plus a reasonable margin, i.e., a level of contribution to cover shared and common costs associated with the provision of the service in question. Staff and the OPA have provided arguments in support of such a standard, and even BA-Del admits that such a standard should, at the very least, be a component of any just and reasonable standard. In addition, such a standard comports with the pricing standards established by Congress in '252(d)(1) of the Telecommunications Act of 1996, i.e., a "just and reasonable rate" shall be based on the cost (determined without reference to a rate-of-return or other rate-based proceeding) of providing the service, shall be non- discriminatory, and may include a reasonable profit. In view of the foregoing, I recommend this standard to the Commission for determining the justness and reasonableness of BA-Del's R-ISDN rate in this proceeding and, until adoption of Rules in PSC Regulation Docket No. 41, the standard of determining just and reasonable rates for all basic services provided under the TTIA. 63. The Public Advocate has raised the issue that pursuant to the TTIA and Staff Rules proposed (but not yet adopted by the Commission) in PSC Regulation Docket No. 41, R-ISDN rates should be "revenue neutral." The OPA contends that since the additional costs of implementing ISDN were foreseen at the time that BA-Del elected price cap regulation, they cannot be recovered from ratepayers except through a revenue neutral rate restructuring. (Ex. 5 at 17.) I find no requirement for revenue neutral pricing of new basic services under the TTIA. In fact, the only reference to a "revenue neutral" rate change in the TTIA relates to price changes for existing basic services, and reads as follows: "Upon application by a service provider, the rate structure for a basic service may be adjusted by the Commission where such adjustments would neither increase nor decrease the total revenue to the service provider from that particular basic service." 26 Del. C. '707(c)(4). This record clearly establishes that R-ISDN is a new basic service. Accordingly, I find no support for the OPA contention that rates for R-ISDN must be "revenue neutral." I, therefore, recommend that the Commission decline to adopt the OPA recommendation that it require a "revenue neutral" rate for R-ISDN service. 64. There are three distinct components of BA-Del's R- ISDN rate that have been challenged by Staff and the OPA: (a) the recurring monthly charge of $19.50; (b) the usage rate for data transmissions of $.02 per peak minute per data channel and $.0l per minute per data channel at all other times and for voice transmissions, 3¢ for the first 3 minutes of use and 1/2¢ for each additional minute thereafter; and (c) the non-recurring installation charge of $125. Under the TTIA, any provider of a new basic service must provide the Commission with 60-days' notice of its intent to provide such service. 26 Del. C. '706(a)(1). Such notice must conform to Commission rules applicable to tariffed service and must provide the Commission with information sufficient to demonstrate that the service is correctly classified as basic and that the proposed rates are just and reasonable. (Id.) Thus, in this proceeding, BA-Del bears the burden of producing evidence sufficient to prove that its R-ISDN rate is just and reasonable. My review of the record reveals that with respect to the three components identified above, BA-Del has failed to meet that burden. 65. First, with respect to the monthly recurring rate, the record indicates that although BA-Del has used a reasonable standard, i.e., total service long-run incremental costs ("TS-LRIC"), to determine its R-ISDN rate, it has improperly included in its calculation of the R-ISDN rate cost elements which are not incremental to the provision of that service. Staff points out that by BA- Del's own definition, TS-LRIC is "the difference between [the Company's] costs of offering all services and the cost of offering all of its services except the service in question." (PSC at 6, citing Comments of BA-Del in PSC Regulation Docket No. 41. ) Thus, according to Staff, it would be inappropriate to include in the monthly recurring R-ISDN rate costs (also known as "unavoidable costs") not directly incremental to the provision of R-ISDN. 66. Specifically, Staff recommends the exclusion of the following cost elements from the calculation of the R- ISDN monthly recurring rate: costs attributed to the network capability known as "ISDN Anywhere;" costs of loop upgrades; and costs associated with both the analog termination equipment and digital line equipment. (Ex. 7 at 7-8.) According to Staff, "ISDN Anywhere" is merely another name for the fact that SS7 switches make ISDN available across the network, i.e., to central offices that are not presently ISDN capable. Staff explained that BA-Del's upgrade to SS7 switch technology was a generic type of upgrade which would have occurred whether or not they chose to offer R-ISDN service. Thus, costs associated with the implementation of SS7 technology are not incremental to the provision of R-ISDN service and should not be included in an incremental cost analysis. With respect to the loop upgrade costs, Staff asserts that such an upgrade was a necessary consequence of digitizing the BA-Del network and would have been necessary, given BA-Del's technology commitment to develop a digital network in Delaware. Staff explains that with regard to the line termination equipment, the correct "increment" of cost for upgrading the line termination equipment from analog to digital should be the cost of the digital line card only. The cost of the analog line card should not be included. The Staff contentions are persuasive. 67. Company witness Pehta explained that ISDN Anywhere is essentially a foreign exchange ("FX") type of service which allows "a customer in a non-ISDN-equipped office to get ISDN service from a different central office." (Tr. at 176.) Mr. Pehta also acknowledged that SS7 is "the network facility that makes all interoffice services work." (Id. at 212.) Moreover, it is clear from the record that the Company's inclusion of ISDN Anywhere costs in the R-ISDN rate means that all customers pay for this FX type of service, whether or not their individual central offices are ISDN capable. (See Tr. at 212.) This is contrary to the Company's stated position advising the Commission against adopting rates that might create a situation where "all ratepayers will [subsidize] a small group of [other ratepayers]." (Ex. 2 at 2.) Moreover, it is unreasonable to include in rates for prospective application ISDN Anywhere costs that will disappear within a few months. 68. Turning to the costs of the loop upgrade, BA-Del has included a loop cost of xxx as part of its ISDN increment. BA-Del witness Pehta explained that the loop cost represented costs associated "with subscribers that are served by carrier systems like SLC 96." (Tr. at 175-176.) He testified that "[f]or those customers you need to swap out the analog plug-in for SLC 96 and insert an ISDN plug- in;" and the cost included in the Company's cost study is "a differential in cost between the analog plug-in and the ISDN plug-in." (Id.) Mr. Pehta acknowledged that "[n]ot all customers are served by SLC 96, but the costs of servicing SLC 96 customers is spread over all customers." (Id. at 214.) Staff witness Citrolo presented uncontroverted testimony, on the other hand, that the SLC 96 costs to which Mr. Pehta testified relate to a generic loop upgrade that is common to both business and residential ISDN. It is, therefore, unreasonable, in my view, to seek to recover these as "incremental" to the provision of R-ISDN service. Therefore, for the same reasons stated above with respect to rejecting the inclusion of ISDN Anywhere costs, the Commission should adopt the Staff position regarding the ISDN loop costs. 69. In sum, based upon the foregoing discussion, my recommendation is that the Commission adopt the monthly recurring ISDN cost of xxx, which, as proposed by Staff, excludes costs associated with ISDN Anywhere, loop upgrades, and analog termination equipment. On the basis of the foregoing, Staff has proposed a monthly recurring R-ISDN rate of $12.92, which I find reasonable and recommend to the Commission for adoption. 70. As noted above, BA-Del has imposed separate measured usage rates for voice and data transmissions. Specifically, R-ISDN customers must pay for data transmissions at a rate of $.02 per peak minute per data channel and $.0l per minute per data channel at all other times; and for voice transmissions, customers must pay 3¢ for the first 3 minutes of use and 1/2¢ for each additional minute thereafter. The Company has provided no credible evidentiary support either for the distinction between the charges for voice and data service or for the level of these rates. ISDN is a digital service and, according to BA-Del's marketing material, this means that all transmissions are in "digital form from end to end." (Ex. 4 at 5, emphasis added.) It is my understanding that digital transmissions consists of voice, data, or video information that has been converted into "bits." Telecommunications experts have held the view that the "great advantage to digital transmission over analog is its generality, any stream that can be converted to ones and zeroes can be transported over a digital carrier system," regardless of whether the information to be transmitted is voice, data, or video. (Ex. 7 at 9-10, citing a Bell Atlantic Consultant.) Thus, as Staff witness Citrolo testified, it is "virtually indiscernible" whether a digital transmission is voice, data, or video. (Tr. at 311.) 71. BA-Del has provided no satisfactory rationale for the distinction it makes between digital voice and data transmissions. Nor, for that matter, has BA-Del explained how it proposes to distinguish between digitized R-ISDN voice and data transmissions in order to properly apply its usage rates. Moreover, BA-Del's marketing material boasts that ISDN "is an all digital network that allows users to access a range of separate services by way of a single set of standards. The goal is to provide widespread, end-to-end connectivity, enabling the user to move data, voice, image, and facsimile over the same pair of copper wires already in the home. ISDN is designed to 'digitize' the last mile, bringing the strength of The Company's digital network into your home." (Ex. 4 at 9.) 72. Furthermore, BA-Del's cost studies indicate: (a) that the MOU cost for circuit switched voice ("CSV") POTS is xxx; and (b) the incremental MOU cost for R-ISDN is xxx. Thus, the MOU cost for providing R-ISDN CSV should be no more than the cost of providing CSV for POTS. (Ex. 7 at Exhibit "C".) If the CSV R-ISDN transmission is digital, then it should cost no more than a digital circuit switch data transmission or vice versa. The inconsistent manner of determining rates for digital voice and data transmissions is unjustified on this record and persuades me to give little credence to BA-Del's contentions. I conclude, therefore, that, indeed, BA-Del has not met its burden of proving that its usage rates are just and reasonable. Accordingly, I recommend that they be rejected by the Commission. 73. Having said that, I urge the Commission to favorably consider the Staff proposal that R-ISDN usage rates be set at the same level as BA-Del's current tariffed rate for local usage of POTS, i.e., a flat rate of $1.60 monthly or a measured rate of $.03 for the initial three minutes and $.005 for each additional minute thereafter. I find the Staff proposal reasonable because it is evident, based on BA-Del's cost study, that the measured rate is above incremental cost and provides a reasonable level of contribution to cover shared and common costs. The proposed flat rate is also reasonable because, based on an average monthly use of 20 hours, it, too, is higher than incremental cost and provides a reasonable level of contribution. Moreover, it is a matter of public record that BA-Del has installed in Delaware an advanced telecommunications network in which, by the Company's own account: (a) all central offices have fiber facilities connecting them; and (b) all but one switch (i.e., 97.5% of all switches in Delaware) are digital. Furthermore, BA- Del's filing of new, flat rates to replace its current R- ISDN rate, belies the Company's contention that a flat rate would result in certain customers tying up its network, thereby, requiring BA-Del to increase its capacity. (Tr. at 43; Ex. 2 at 4.) The Delaware network, by the Company's own account, is nearly all-fiber and all-digital. Clearly, it has the capacity to accommodate the widespread deployment of enhanced telecommunications services, such as R-ISDN service, that can be provided at affordable rates. Thus, given the capacity available on BA-Del's all-fiber network and BA-Del's April 17, 1996 filing of a proposed flat rate for R-ISDN service, I see little justification for the imposition of measured usage rates. Accordingly, I recommend that the Commission also implement Staff's proposed flat monthly usage rate of $1.60. 74. Until it filed its April 3, 1996 Reply Comments in this docket, BA-Del provided no cost support for its $125 installation charge for R-ISDN service. Therefore, neither Staff nor the OPA could perform a meaningful analysis of the connection charge. I do not find the information eventually provided in support of the connection charge credible, particularly as these costs might apply to the Bell Atlantic-Delaware network. (Emphasis supplied.) In its Reply Comments, the Company asserted that the non-recurring costs associated with installing R-ISDN service amounts to xxx, assuming that the customer will, at the same time order a dial tone line to be installed. (Ex. 3, Attachment "B" at 3-4.) It is evident that this assumption is not always the case, particularly where there are customers who wish to subscribe to R-ISDN service and already have more than a single dial tone line. (See discussion, Tr. at 231-234.) Under the current rate structure, such customers still have to pay the $125 connection, regardless of whether or not they needed to install an additional dial tone line to their home. (Id.) 75. Testifying in support of the reasonableness of the $125 connection charge, Company witness Pehta stated that BA-Del technicians spend substantial time in the field checking a prospective R-ISDN customer's line to make sure that it is ISDN-capable. (Tr. at 233-234.) I ascribe little merit to this contention because my review of the record reveals that the rates currently in effect in Delaware are actually regional rates, which have most likely been developed based upon average regional costs. Although regionally developed rates might be appropriate in some cases, they are not in this case because regional rates would not necessarily reflect the fact that BA-Del's network is one of the most advanced in the entire Bell Atlantic region. This means that costs, such as those relating to connection of R-ISDN service, should be lower for Delaware than what they would be in other Bell Atlantic jurisdictions. Furthermore, as the Public Advocate persuasively argued, "Delaware consumers should not [be made to] subsidize jurisdictions with higher costs . . . [nor should they] pay the same rates charged in rate-of-return jurisdictions where contribution can be recovered to reduce other monopoly rates." (Ex. 6 at 6.) The foregoing and other aspects of the BA-Del presentation persuades me that these cost estimates should not be relied upon. Nonetheless, even if assuming, arguendo, all of the cost estimates relating to connection charges presented are reliable, BA-Del has presented no justification for a connection charge that is nearly xxx above cost. In view of the foregoing, I find the Company's cost justification for the $125 installation charge unreliable and conclude, therefore, that the Company has failed to meet its burden of proving that the proposed charge is just and reasonable. Accordingly, I recommend that it be rejected. 76. Staff has proposed that the Commission impose a connection charge of no more than $12.92, the equivalent of one month's subscription for R-ISDN service. (Ex. 7 at 10.) Staff has provided no support for this recommendation, and I would, therefore, decline to recommend it to the Commission. Pending verification by Staff of actual costs associated with connecting R-ISDN service in Delaware, a reasonable alternative might be for the Commission to require that the maximum charge should be equivalent to the connection fee for a second POTS line. I, therefore, recommend that the Commission adopt a connection charge of $35.90, the tariffed rate for connecting an additional residential POTS line. 77. As a postscript to the foregoing discussions, the Commission should be aware that in addition to the tariffed charges for R-ISDN service, customers will have to purchase an additional piece of equipment known as an ISDN terminal adapter. According to BA-Del officials, this adapter is part of the customer premises equipment EXPURGATED ("CPE")necessary for ISDN service and costs anywhere from less than $300 to as high as $1,000. (Tr. at 58.) This CPE is available from BA-Del, for "less than $300," as well as from other vendors. (Id.) 78. To summarize, with respect to the currently effective R-ISDN rates, I recommend that the Commission find these rates unjust and unreasonable and direct BA-Del forthwith to implement in their stead the following rates: (a) a monthly recurring rate of $12.92 for R-ISDN service; (b) a flat monthly usage fee of $1.60; and (c) a connection charge of no more than $35.90. The foregoing translates into a total monthly outlay of $28.02 for R-ISDN service which, in my opinion, is quite reasonable when compared to the BA-Del rates of $40.90 under the currently effective tariff, using the same assumptions as the Staff calculation of a monthly rate, or to $31, as proposed in the replacement tariff filed on April 17, 1996. VI. RECOMMENDATIONS 79. In summary, and for the reasons discussed above, I propose and recommend to the Commission the following: A) That the Commission, for the setting of just and reasonable basic service rates, adopt a standard requiring such rates to be at a level which recovers the incremental cost of providing the service plus a reasonable margin to cover shared and common costs; B) That the Commission not require "revenue neutral" rates for R-ISDN service; C) That the currently effective rates for R-ISDN service are found to be unjust and unreasonable; and D) That the Commission find just and reasonable the rates set forth in &78, supra, and direct BA-Del to implement these rates forthwith. Respectfully submitted, ________________ G. Arthur Padmore Senior Hearing Examiner Dated: May 7, 1996 Residence ISDN service is a digital service which permits simultaneous access, transmission, and switching of voice, data, and image information over existing copper wires of telephone customers' homes. References to the exhibits entered into the evidentiary record will be cited as "(Ex. __)" or "(Ex. __ at ___)". References to the transcript of the pre-hearing conference, the public comment hearings, and/or the April 19, 1996 evidentiary hearing will be cited as "(Tr. at __)". Exhibits 5 and 7 contain material claimed to be proprietary. Expurgated versions of these exhibits, designated Exhibits 5A and 7A, have been prepared and are available for public use. Except for the redaction of the specific information deemed proprietary, these exhibits are identical to the unexpurgated versions in all other respects. References to "Bell Atlantic" in the context of this Report means BA-Del's parent company, Bell Atlantic. BA-Del further alleges that these "incorrect rate structures" could lead to a situation where all ratepayers will help pay the bills of a small group of heavy users. (BA-Del at 2.) The Company also argues that there is no reason to determine in this or any other proceeding a standard for what an appropriate level of contribution should be in determining just and reasonable rates under the TTIA. (Id. at 5.) Instead, the Company proposes that such determinations should be done on a case by case basis, and should pertain to "the characteristics and demographics of the service, its essentiality, the specific rate proposed, and other options to the service and/or the rate which might be in the offing." (Id. at n.6.) Section 702(2) of the Modernization Act further provides that it is the policy of the State to foster "responsible and reasonable investment in and development of telecommunications systems employing advanced technology," an objective emphasized in '702(3) ("The availability of customer choices among a continuously developing variety of telecommunications services shall be encouraged.") Moreover, the commitment to introduce ISDN itself appears in '711 of the TTIA, titled "Plan for technological investment and deployment," which requires at least $250 million in investment by a provider and the filing of a plan detailing "the extent to which such investment will make new telecommunications technology available to rate payers or expand the availability of current technology" ('711(2).) Part of the criticisms of Staff and the OPA appear to be founded in the claim that much of BA-Del's cost data was unavailable prior to BA-Del's filing of its Reply Brief in this proceeding. According to Mr. Rafferty, "Universal ISDN was one of the principle (sic) goals of the statute. Unlimited local usage for a modest price, indexed to inflation, was one of the principal benefits of price cap regulation for Delaware consumers." (OPA at 1.) Dr. Rafferty claimed that he could not determine "true" incremental cost with available data. (Id. at 2.) The OPA presented testimony that in Arkansas, unlimited ISDN service costs $17.90 per month. According to Staff, '707 evinces a legislative intent that a service provider under the TTIA will be able to increase the profitability of its basic services only through increased efficiency. (Staff at 5; emphasis in original.) Thus, Staff argues, allowing BA-Del to realize increased profits for basic service through other means, such as by introducing new services set at rates unrelated to their costs, would deviate from the purpose of the Act. (Id.) Section 706(a)(1) provides that the telecommunications provider must demonstrate that the proposed rates for a new basic service are just and reasonable. Staff also points out that long before the Company made R-ISDN service available, it committed to converting its network to 100% digital switches capable of using SS7 technology. See "Technology Deployment Plan," attached as Exhibit 1 to BA-Del's Notice of Election to be regulated pursuant to the TTIA, dated March 24, 1994. Staff stresses that although its proposed rate has left unchanged the level of contribution included in BA- Del's proposed rate, this inaction should in no way be construed as a concession that contribution at this level is "appropriate for all, or any, other new basic services." (Staff at 9.) POTS is a telephone industry acronym for "plain old telephone service." Indeed, it appears that between the public comment hearing on January 16, 1996 and the April 19, 1996 evidentiary hearing, the number of R-ISDN customers has shrunk from 13 to 7. (See Tr. at 36-37, 320.) See 26 Del. C. '707(a). As previously noted, BA-Del appears to support a pricing standard based upon non-specific criteria which will be determined on a case by case basis. (Ex. 2 at 4, n.6.) In addition, the Company contends that "[c]ustomers who can already afford computers, modems, software, and on-line server charges cannot reasonably claim that [the current R-ISDN] rate is excessive, particularly given the increased speed and, therefore, value that R-ISDN will provide." (Id. at 4.) The Delaware Courts, on several occasions, have affirmed the propriety of the Commission's construction of "just and reasonable" rates. See, e.g., In re Wilmington Suburban Water Corp., Del. Super., 203 A.2d 817 (1964) mod. Del. Supr., 211 A.2d 602 (1965), where the court held that a reasonable rate is one designed to recover the utility's cost of providing the service, plus a reasonable return on investment. In its reply comments, BA-Del suggested that, at a minimum, one (but not the sole) factor for the just and reasonable test is cost-based pricing plus a reasonable margin above the service's cost-based level. (Ex. 3 at 7.) These pricing standards are applicable to prices to be charged by incumbent local exchange companies (monopoly providers) for interconnection to their networks by competing local exchange carriers. PSC Regulation Docket No. 41, Ex. 36 at n.23. The record indicates that within a few months, BA-Del will be 100% ISDN-capable; therefore, there will be no need for ISDN Anywhere service to be deployed in Delaware. (Tr. at 211; Ex. 9.) Based upon information filed with the Commission in March, 1996, 76% of the Company's central offices are ISDN capable and the Company expects to reach 100% capability by the end of 1996. "Second Year Report - Telecommunications Technology Investment Act of 1993," at page 1, Bell Atlantic-Delaware, Inc., filed March 20, 1996. EXPURGATED Mr. Pehta also testified that approximately 20% of BA-Del customers are served by the SLC 96 carrier system. (Tr. at 214.) EXPURGATED In terms of digital technology, a "bit" is the smallest quantity a computer can measure or detect; it corresponds to a binary digit (either a 0 or 1). EXPURGATED Witness Gaghan testified that the Company now acknowledges that a reasonable estimate of average monthly usage for R-ISDN service is 20 hours. (Tr. at 117.) EXPURGATED The Company indicates that by year's end, all of its switches in Delaware will be digital. (Tr. at 156; Ex. 9; "Second Year Report," supra, at 1.) EXPURGATED Indeed, according to BA-Del's cost figures, costs associated with "Travel/Field," constitute nearly xxx of the non-recurring cost of installing R-ISDN service. (Ex. 3, Attachment "B" at 4.) BA-Del acknowledges that an application to offer "identical rates" is pending before the District of Columbia Commission and that "identical tariffs are already in effect in Maryland, West Virginia, Virginia, Pennsylvania, and New Jersey." (Ex. 2 at n.2.) EXPURGATED The components of this monthly rate are: ISDN monthly rate - $12.92; usage rate - $1.60; Dial Tone Line - $9.40; Touch Tone - $0.60; FCC Subscriber Line Charge -$3.50. See Ex. 3 at 9.