BEFORE THE PUBLIC SERVICE COMMISSION OF THE STATE OF DELAWARE IN THE MATTER OF THE TARIFF FILING BY ) BELL ATLANTIC - DELAWARE, INC. FOR THE )PSC DOCKET NO. 95-014T IMPLEMENTATION OF RESIDENCE ISDN SERVICE ) (FILED SEPTEMBER 5, 1996) ) FINDINGS, OPINION AND ORDER NO. 4246 AND NOW, to-wit, this 2nd day of July, 1996, the Public Service Commission ("PSC") finds and orders as follows: A. BACKGROUND 1. On September 5, 1995, Bell Atlantic-Delaware, Inc. ("BA-Del") filed a proposed tariff to govern a new service denominated "Residential IntelliLinQ BRI" service, Bell's tradename for Integrated Services Digital Network ("ISDN") services as marketed to residential telephone customers. Under the Telecommunications Technology Investment Act ("TTIA"), 26 Del. C. Sub. Ch. VII-A (under which BA-Del elected coverage on March 24, 1994) categorizes ISDN as a "basic" service, 26 Del. C. § 705(12), meaning that it is a non-competitive service subject to price regulation. 2. BA-Del describes ISDN as "one of the most significant new technologies supported by the Company's investment commitments: ISDN provides a single "interface" (i.e., access line) for all telecommunications needs, including voice, data, image, and video services. In contrast to today's separately wired networks, ISDN satisfies all these needs through a single, switched access line. By equipping existing copper telephone lines to serve as a gateway for all communications services, ISDN is a critical forerunner of future direct optical digital connections. We consider ISDN a business and lifestyle revolution in the making. Every customer in Delaware will have an equal opportunity to "network" computers, conduct desktop video conferences, and send photo- quality images through the same phone lines they use to make voice calls. BA-Del Technology Deployment Plan, March 24, 1994, at 11.[1] Apart from its generality, ISDN's great advantage is its transmission speed. According to BA-Del's marketing materials, R-ISDN "boosts transmission [of data] speeds from two to 50 times faster than analog modems." Ex. 4.[2] It is thus an attractive and useful service to residential customers who use computers to access the networks such as the Internet. 3. The TTIA provides that a new basic service may be implemented sixty (60) days after the filing of the proposed tariff, except that the Commission may suspend the tariff for up to an additional thirty (30) days. Thus, the TTIA required BA- Del's rate to go into effect as filed on November 4, 1995 (or, if suspended, then no later than December 4, 1995) unless, in the interim, the Commission established a different rate as just and reasonable. 26 Del. C. § 706(a)(1) and 706(b). 4. In a letter to the Commission dated October 18, 1995, the Office of the Public Advocate ("OPA") [3] raised meritorious concerns about the proposed tariff. Likewise, at the Commission's regular public meeting of October 24, 1995, the Commission's Staff ("Staff") informed the Commission that it could not endorse BA-Del's proposed tariff as just and reasonable without further inquiry. BA-Del, however, opposed suspension of the proposed tariff for the reason that it had invested heavily in a marketing campaign intended for pre-Thanksgiving release. 5. BA-Del therefore suggested, and Staff and the OPA concurred, that BA-Del's proposed tariff not be suspended, but be allowed to go into effect on the statutory date of November 4, 1995 in return for BA-Del's agreement that, in the event the Commission ultimately found the rates to be unjustified, the Commission would have the authority to order implementation on a prospective basis of the rates the Commission determined to be just and reasonable. 6. The Commission accordingly entered Order No. 4061, dated October 24, 1995, appointing a Hearing Examiner to develop an evidentiary record and make recommendations to the Commission concerning just and reasonable rates for R-ISDN service but, nonetheless, allowing BA-Del's proposed tariff to become effective November 4, 1995 unless voluntarily suspended. No voluntary suspension took place, and the rates accordingly became effective on November 4. Those rates are: (a) A one-time connection charge of $125.00; (b) A monthly recurring rate of $19.50; [4] (c) A usage rate for data transmission of $0.02 per minute per data channel peak [5] and $0.01 per minute off peak; and (d) A rate for voice transmission of $0.03 for the first three minutes of use and $0.005 for each additional minute thereafter. 7. Following a November 20, 1995 pre-hearing conference, the Hearing Examiner established a procedural schedule for the conduct of proceedings in this docket. 8. Pursuant to that schedule, the discovery period closed on January 31, 1996. By letter dated February 16, 1996, BA-Del requested a "delay" in further proceedings for the reason that "the Company is preparing new rate structure packages for this service in response to a variety of inquiries throughout the Bell Atlantic region.... It is expected that a final proposal will be submitted to the Commission in March 1996." By letter dated February 20, the Hearing Examiner agreed that given BA- Del's apparent plan to replace its current tariff with an entirely new one: It would be pointless to continue with the established procedural schedule. In fact, as a practical matter, the current schedule should be cancelled and a new schedule developed when BA-Del files its restructured Residence ISDN Service. However, the Hearing Examiner "recommended" that BA-Del voluntarily suspend offering R-ISDN service to new customers in the meantime. 9. The next day, February 21, 1996, the Company, again by letter, took "exception" to this recommendation saying it would: needlessly deprive consumers of the opportunity to immediately receive the benefits of this service. Such a deprivation would be especially unjustified in view of the fact that the proposed filing that Bell Atlantic-Delaware plans to make in March augments the existing service rather than replaces the existing usage packages. However, the Company concurred with the Hearing Examiner's decision to "cancel" the existing schedule, observing "it appears that a new schedule, including public comment sessions, are required to provide the full record needed in this investigation." On February 22, the OPA submitted a letter stating its opposition to any cancellation of the schedule. The Public Advocate observed that: ISDN is a new basic service for which Bell Atlantic is charging an excessive rate. To permit this rate to continue [during a hiatus in the schedule] creates an incentive for Bell Atlantic to delay the proceeding while the Company continues to enjoy monopoly profits." Accordingly, the OPA suggested the Company be given a delay in the proceeding to file new rates only if it agreed to refund its customers for excessive rates charged them in the interim. On February 28, Staff wrote the Hearing Examiner to express its opposition to delay or cancellation of the schedule unless BA-Del agreed to refund to its customers any excessive rates collected during the delay period. 10. At a March 4 telephone conference to discuss the issue, BA-Del would not agree to undertake such refunds. As a result, and based upon BA-Del's representations that the promised "revised" rates would likely only supplement (by adding optional discount packages or other adjustments) rather than replace the existing rates, the Hearing Examiner determined to reinstate the procedural schedule. 11. On April 17, 1996, two days before the scheduled evidentiary hearings, BA-Del filed the revised proposed tariffs which, in February, it had promised would be filed in March. Contrary to BA-Del's earlier indications, the revised proposed tariffs contained an entirely new rate and rate structure, and thus would supersede the existing rates. The proposed revised rates set forth in this new filing were: (a) A one-time connection charge of $125.00; (b) Monthly recurring rates in usage increments: 20 hrs (one channel) $ 31.00 60 hrs (one channel) 45.00 140 hrs (one channel) 60.00 300 hrs (one channel) 90.00 500 hrs (one channel) 120.00 unlimited hrs (one channel) 249.00 and (c) between increments, data and voice transmission rates to apply at current usage rates. 12. The Hearing Examiner conducted a duly publicized public evidentiary hearing in Wilmington on Friday, April 19, 1996. At that time, BA-Del requested that the scope of the hearing be confined to the existing rates, not the proposed revised rates, representing "We are in no way trying to turn this into a proceeding on the new packages." 4 TR 110. Staff agreed that consideration of the new filing would be inappropriate and the Hearing Examiner concurred. 13. No member of the public attended the hearing. All participants filed initial and reply comments in advance of the hearing, which the Hearing Examiner made part of the evidentiary records. 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. At the conclusion of the hearing, the record before the Hearing Examiner consisted of eight exhibits and a 220 page verbatim transcript. The parties waived the opporutnity to submit post- hearing briefs. 14. The Hearing Examiner issued his Findings and Recommendations on May 7, 1996. He recommended that the Commission find BA-Del's current rates for R-ISDN service to be unjust and unreasonable and that, in their stead, it authorize the following rates: (a) A one-time connection charge of $35.90; (b) A monthly recurring rate of $12.92; and (c) A flat monthly fee of $1.60.[6] BA-Del filed exceptions to the Findings and Recommendations of the Hearing Examiner on May 28, 1996. 15. This matter came on for consideration at the Commission's public meeting of June 4, 1996. At that time, the Commission tabled the matter for two weeks so that the parties could attempt to reach agreement. The matter returned to the Commission on June 18, 1996. The parties having been unable to reach a settlement, the Commission now determines this matter as follows: B. SUMMARY OF THE EVIDENCE 16. The Commission adopts by reference the summary of the evidence set forth by the Findings and Recommendations of the Hearing Examiner, pages 5-22. C. FINDINGS OF FACT AND CONCLUSIONS OF LAW Generally. 17. The Commission adopts by reference the findings of fact and conclusions of law as set forth by the Findings and Recommendations of the Hearing Examiner, pages 22-36. BA-Del's Request for Remand 18. In its filed Exceptions, BA-Del appeared to request the Commission to adopt its proposed revised rates without any proceedings thereon. However, at the Commission's public consideration of this matter on June 4, 1996, BA-Del modified its approach to request that this matter be remanded to the Hearing Examiner for an evidentiary proceeding on the new proposed rates. At the Commission's June 18th meeting, BA-Del's attorney explained that two purposes would be served by such a remand. First, BA-Del would have the opportunity to introduce new cost studies, which are "slightly different" from those it used to support its current rates. Second, the "principal difference will be a more complete explanation of how the technology works and a more complete examination of what other jurisdictions have done and concluded with respect to [R-ISDN] rates ..." 6 Tr. 474. 19. As BA-Del's new proposed rates are significantly lower than the current rates, it seems unlikely that the "slight difference" in its cost studies (adjusting the costs downward to support the lower rates of BA-Del's revised filing) would persuade the Hearing Examiner or the Commission that, in fact, rates higher than those the Hearing Examiner recommended are appropriate. Second, BA-Del had an ample opportunity to present any and all relevant evidence at the April 19 evidentiary hearing. The fact that it is not satisfied with the Hearing Examiner's recommendation and believes that its tactical decisions concerning which witnesses and evidence to present are responsible, does not entitle it to a re-hearing of its claims. 20. Ratemaking, or in this matter price fixing, is one of this Commission's most important functions. This is particularly true when, as here, the prices to be approved involve a new basic service offering under the TTIA. In that situation, the initial prices will act as benchmark for future price adjustments under the TTIA's price cap regime. 26 Del. C. § 707(a), (b). 21. Determining a just and reasonable rate or price is more an art than science. It requires an appreciation and blending of technological facts, economic precepts, practicalities, legal rules, and public policy. To find the appropriate mix, this Commission must necessarily rely heavily on the open, adjudicatory process and its experienced hearing examiners. Such hearing process gives each party the opportunity to give content to, and provide understanding of, the detailed and often complex economic and technological issues and to explain its view of the appropriate blend of pricing factors. Allowing the parties to create such a record gives the Commission a foundation to understand not only the facts and details, but also the competing policies. Moreover, the Commission must trust its hearing examiners to translate and synthesize those difficult issues and to recommend ultimate conclusions, including rates, which can be drawn from the established record. 22. Of course, it is this Commission, and not the Hearing Examiner, which has the final responsibility to determine both matters of fact and policy from the record built during the adjudicatory process. The Commission need not necessarily respect any finding or conclusion made by the Hearing Examiner. Yet, because the Hearing Examiner, and not the Commissioners, was present as that record was being constructed, the Commission cannot help but grant weight to his view of conflicting evidence especially on complex issues of technology, economics, and accounting. 23. In this matter, Staff and BA-Del vehemently disagree over what should be the initial price for the R-ISDN service. However, they have told us that in this docket they are not in dispute over the broad formula to be used for determining the initial prices for that service: prices should reflect "costs plus a reasonable profit." 5 Tr. 374-75, 412. That is the formula utilized by the Hearing Examiner. Findings and Recommendations at 25. The argument here centers on what exactly are those "costs." 24. In September, 1995, when BA-Del first offered R- ISDN service, it put on the record its view of what its costs, supplemented by a reasonable profit, were for R-ISDN service. That view was reflected in the rates it had proposed and which it began charging in November, 1995. At the end of the evidentiary hearing, the Hearing Examiner found differing figures for those costs and profits. Before the Commission, BA-Del contends that the Hearing Examiner's cost formulations were flawed by three misunderstandings, most related to the ISDN technology. It thus urges the Commission to reject his findings and recommended rates. As explained below, the Commission does not find BA-Del's objections sufficiently weighty to require abandoning the Hearing Examiner's findings. But, more fundamentally, the Commission's difficulty is that, if, as BA-Del urges, the Commission should abandon the Hearing Examiner's conclusions, there is simply nothing in this record to which the Commission can look to determine, with assurance, what the costs are which lie behind this service and which should be reflected in the prices to be charged. 25. It was BA-Del who bore the burdens of production and persuasion to establish that the rates it proposed in September, 1995, and which it has charged since November, 1995, were just and reasonable. 26 Del. C. § 706(a)(1). If there is evidence to that effect in this record, BA-Del has not chosen to have us rely on it. Indeed, before the Commission, the Company has abandoned those prior rates in favor of the flat-rated packages which it filed just two days before the evidentiary hearing. It has urged the Commission to put the old rates behind as quickly as possible. 5 Tr. 347, 384. Yet, BA-De; does not suggest that there is anything in this record focusing on the costs underlying those new prices which the Commission can look to determine a just and reasonable price. In fact, it appears that before the Hearing Examiner, BA-Del objected to any discussion concerning the cost support for those rates, offering that its economic witness was not familiar and not prepared to discuss cost support for those new pricings. 4 Tr. 182, 184.[7] 26. Instead, BA-Del's request is that the Commission remand the matter so that it can now supplement this record with additional testimony and evidence to explain and justify the prices it proposed on April 17. As noted before, during the proceedings so far, BA-Del has acted inconsistently with regard to the new rates. It first suggested any new pricing formulation would supplement, rather than replace, the rates it proposed in September. Indeed, in its opening brief to the Hearing Examiner, BA-Del specifically rejected any call for flat rates, suggesting that implementing such rates would skew its ability to gather data on usage necessary to finalize new discounted usage rates. BA-Del's Op. Br. At 1-2 (March 14, 1996). Now, it asks that the current rates be replaced, not supplemented. 27. BA-Del argues that it is entitled to a hearing on these new prices as a matter of due process, suggesting that it was led to believe that, despite the hearing on rates in April, it would be provided a separate hearing to establish the justness and reasonableness of the prices set forth in its April 17 filing. Once more, the difficulty with BA-Del's premise is that it ignores BA-Del's initial obligation to establish that the prices it charges for this ISDN offering are just and reasonable. Its claim that it will now do so at a second hearing must be weighed against the fact that it has been charging, for eight months, prices for the service which it no longer wishes to support. While BA-Del has often referred to those prices as "interim," it has steadfastly refused to provide refunds to the customers who purchased the service under those now abandoned prices. 28. Under the TTIA regulatory regime, the importance of having the Company submit valid cost support data and establish prices in good faith has never been greater. Once the Company files for a new basic service, the TTIA affords only sixty (60) days from the filing subject to an additional thirty (30) days for cause shown, in which interested parties may review the filing, and the Commission may conduct hearings and issue a decision. The TTIA no longer affords the Commission any clear statutory right, as existing under the Public Utility Act of 1974, to suspend rates, allowing interim collection subject to refund, while the parties investigate the justness and reasonableness of the proposed rates within a nine-month period. If BA-Del's view is that the TTIA does not call for such refunds, then it should appreciate the importance, under the TTIA, of strict adherence to an administrative process that leads swiftly and directly to the implementation of just and reasonable rates. The TTIA leaves no room for the "trial and error" approach to price setting which BA-Del apparently assumed it could use in this docket without repercussions.[8] 29. In sum, the Commission, on these facts, sees no entitlement in law equity, or common sense, to grant BA-Del the opportunity to start the process anew to justify rates that have not been charged.[9] BA-Del Exceptions 30. BA-Del took exception to three purported errors in the Hearing Examiner's reasoning: (i) that he failed to appreciate that ISDN usage costs "differ from the usage costs for regular telephone service;" (ii) that he "wrongly excluded costs for additional network equipment;" and (iii) that he "wrongly ignored the additional non-curring costs associated with provisioning ISDN's service." Exceptions of Bell Atlantic- Delaware, inc. ("Exceptions") at 2-3. We will address these exceptions seriatim. (a) ISDN Usage Costs 31. BA-Del's current rates impose separate measured usage rates for voice and data transmission. Data transmissions are charged at a rate of $0.02 per minute per data channel (peak) and $0.01 per minute per data channel (off peak), while voice transmissions are charged at the rate of $0.03 for the first three minutes of use, and $0.005 for each additional minute thereafter. The Hearing Examiner found that "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." Findings and Recommendations at 30. He found BA-Del's cost studies, purporting to show differing usage costs for digital voice and data transmissions to be not credible, given that digital voice and data transmission both consist of indistinguishable "bits", and there is no reason to believe on the record that transmission of data bits cost more, on a minute of usage basis, than does transmission of voice bits. 32. In its exceptions, BA-Del attempted to justify its claim that it incurs usage costs not covered by the Hearing Examiner's recommended flat rate. Significantly, the explanations it proffered were not accompanied by relevant record citations and, indeed, are not supported in the record. Moreover, the two "usage" costs BA-Del identifies in its exceptions: increased switch costs and increased set-up costs, appear not to be usage-related costs at all. Exceptions at 3-4. Contrary to BA-Del's assertion, the Hearing Examiner's recommended rates do include an allowance for the cost of additional switch modules necessary to handle ISDN traffic; however, this cost is recovered as part of the mionthly recurring charge, and is not a usage cost. Likewise, call set-up requires the same operation regardless of the length of the call and is not a usage based cost. 33. Though BA-Del asserted, at the Commission's hearing of June 4, that the Hearing Examiner's recommended rates would cause it to lose "hundreds of thousands of dollars a year, if not millions of dollars a year," 5 Tr. 348, this claim is nowhere supported in the record. BA-Del's revised proposed rate package would set the total monthly R-ISDN rate for usage not exceeding 20 hours per month at $31.00, only $3.02 higher than the Hearing Examiner's recommended rate. Since, as BA-Del pointed out, the evidence shows that average usage is expected to be about 20 hours per month, 6 Tr. 461, it is difficult to avoid the conclusion that BA-Del is seriously exaggerating the claimed impact of the Hearing Examiner's recommendation. (b) Additional Network Equipment. 34. The Hearing Examiner recommended that BA-Del's claimed loop cost for customers served by the SLC 96 system be disallowed. BA-Del's Exception mischaracterizes the Hearing Examiner's reasoning, claiming that he found that the costs were related to the costs "of the digital loop carrier systems themselves," Exceptions at 6, rather than directly relating to provisioning ISDN. Staff witness Citrolo testified that those costs related to a loop upgrade that is common to both business and residential ISDN. The Hearing Examiner therefore reasoned that these were not direct incremental costs to the provision of residential ISDN service and should not be recovered in contribution and not as a direct cost. BA-Del has not challenged this reasoning and we find it to be valid. (c) Non-Recurring Costs. 35. The Hearing Examiner concluded that the current $125.00 connection charge is unsupported by the record. He noted that it is substantially above BA-Del's claimed costs and that even these costs are suspect. Findings and Recommendations at 34. BA-Del asserts that the Hearing Examiner's observation that BA-Del's claimed costs, rather than being credible estimates of costs actually incurred in this jurisdiction, "most likely have been developed based upon average regional costs" (Findings and Recommendations at 34) is unsupported in the record. Exceptions at 7. As the Hearing Examiner noted, however, Bell Atlantic Corp., BA-Del's parent, is pursuing a policy of pricing R-ISDN on a regionwide, not jurisdiction-specific basis. Moreover, Mr. Pehta, Bell Atlantic's Director of Cost Analysis and Regulatory Support, who developed the costs in question, displayed little familiarity with the status of the technology deployed in Delaware, thus lending support to the inference that he failed to take this technology into account in developing the claimed costs. E.g., 4 Tr. 198-199, 205-207. 36. Accordingly, we find no merit to BA-Del's exceptions and adopt the findings and recommendations of the Hearing Examiner (4-0). D. ORDER NOW, THEREFORE, it is hereby ordered: 1. The currently effective rates for R-ISDN service are found to be unjust and unreasonable. 2. BA-Del's request that this matter be remanded to the Hearing Examiner for consideration of the rates and terms set forth in BA-Del's revised proposed tariff filed April 17, 1996 (PSC Docket No. 96-009T), is denied., 3. Effective thirty (30) days from the date of this Order, BA-Del is directed to implement the following rates for R- ISDN service: (a) a monthly flat rate for R-ISDN service of $28.02; and (b) initial connection charge of $35.90. 4. That the Commission reserves the jurisdiction and authority to enter such further Orders in this matter as may be deemed necessary or proper. BY ORDER OF THE COMMISSION: /s/ Robert J. McMahon Chairman /s/ Joshua M. Twilley Vice Chairman /s/ Robert W. Hartley Commissioner ATTEST: /s/ Linda A. Mills Secretary FOOTNOTES 1 The TTIA requires BA-Del to make ISDN available to ratepayers not later than 3 years after its election to be governed by the TTIA. 26 Del. C. § 711(3)(i). 2. The exhibits entered into the record by the Hearing Examiner in the course of this proceeding are cited herein as "Ex. ___." 3. The Public Advocate exercised her statutory right to intervene in this matter. No other persons sought to intervene. 4. When all other necessary monthly charges are included (i.e., Dial Tone Line at $9.40, Touch Tone at $0.60 and the FCC Subscriber Line Charge at $3.50), the minimum monthly price becomes $33.00 before any usage charges. 5. R-ISDN service comprises two data channels used to transmit voice or data and one bearer channel (used for call set-up and signalling). A subscriber can utilize both data channels simultaneously but, under the current rates, thereby incurs double usage charges. 6. This charge is identical to that of the unlimited local usage package offered subscribers of residential dial tone line. 7. Such a declaration suggests that the new prices are more than a pricing reformulation based on the same cost and profit variables underlying the original rates. If that was true, then the witness could have still spoken about costs. In fact, BA-Del has described the differences between the old and new prices as substantial and has apparently offered new cost studies to support the new pricing formulations. See 5 Tr. 367. 8. The record reflects several representations by BA-Del which suggest that the prices proposed last September by the Company were "water-testing" - offered to measure usage demand with BA-Del then having the option of returning with new prices based on its samplings. If, as BA-Del suggests, the prior rates were trial ones, the logical outgrowth from such a characterization is that those participating in the trial should be entitled to refund once the test is concluded and lower rates are chosen. 9. The TTIA allows adjustment of the rate structure for a basic service subsequent to the establishment of the initial rate, though it requires such adjustments to be "revenue neutral." 26 Del. C. § 707(c)(4). BA-Del may pursue this course with respect to R-ISDN service if it so chooses. 10. The components of this rate are: ISDN monthly recurring rate at $12.92; flat rate local usage at $1.60 per month; dial tone line at $9.40 per month; touchtone at $0.60 per month; and FCC subscriber line charge of $3.50 per month.