The following is the October 18, 1995 letter from Patricia Stowell, the Delaware Public Advocate, to the Delaware Public Service Commission, objecting to the Bell Atlantic residential ISDN tariff. The Office of Public Advocate is at P.O. Box 8911, Wilmington, DE 19801; voice 302/577-3087.
October 18, 1995
Dear Bruce:
The introduction of residential ISDN helps to fulfill one of the Legislature's principal objectives in passing the Telecommunications Technology Act of 1993. Residential ISDN is already available in Maryland, Virginia and West Virginia. It is imperative that this critical service be introduced in Delaware without further delay.
However, the Public Advocate has concerns regarding the pricing of residential ISDN, particularly the imposition of high usage charges. The Legislature specifically designated ISDN service and featured as "basic service." The introduction of a new basic service should be revenue neutral. (See Staff Proposed Rule 6.13 and 6.15 in Regulation Docket No. 41). As such, it should be set at incremental cost plus any net revenue loss attributable to substitution from existing services.
Bell Atlantic has not produced a cost study, but has projected a very substantial contribution over the five-year planning period. This contribution is an inappropriate windfall to Bell Atlantic. Moreover, the study may understate the added contribution. Bell Atlantic executive Frederic D'Alessio has admitted that ISDN will experience "incredible growth," which ordinarily indicates economies of scale and declining unit costs. However, the projections show unit costs actually increasing with time and volume. This claim needs detailed justification.
Before Bell Atlantic charges a premium for residential ISDN, it should be required to produce a detailed incremental cost study of each proposed rate element. During the lifetime of the alternative regulatory plan, high adapter cost will make residential ISDN unsuitable for primary service. Therefore, loop costs should not be assigned to residential ISDN, since incremental cost studies of primary service already include a second line.
In the case of residential ISDN, there will be few revenues lost from other services. Usage charges will not be foregone, since almost all residential lines have flat rate usage. In contrast to business service, there are few configurations and little opportunity to substitute for any other service, except second lines. The incremental cost study should identify the extent to which residential lines displace existing second lines, as compared to new additional lines. The contribution diverted from second lines should be recovered from the residential ISDN per line charge.
The price of residential ISDN should be set at the residential line rate, unless Bell Atlantic can show that this is less than incremental cost (less loop costs) plus foregone contribution from displaced second lines. The rate should also include a block of usage. Assuming that incremental cost is less than the residential line rate, the usage allowance should be set such that its incremental cost will exhaust the differential.
There is a possibility that residential ISDN users will have dramatically higher levels of usage than other residential lines, and even a chance that some customers may use a switched connection to establish a permanent data link. Bell Atlantic should be permitted to surcharge these customers, but only at the incremental cost of the excess usage. Bell Atlantic should also surcharge any users that use residential ISDN as primary service. The surcharge should recover loop cost (which were excluded from the calculation of the incremental cost of a second line) reduced by the amount claimed by Bell Atlantic to subsidize primary residential service (the excess of incremental cost over the residential line rate).
In no event should usage charges increase net revenues. The proposed rate of 2 cents per peak minute clearly exceed incremental cost, even at very low levels of production. Bell Atlantic should study the incremental cost of ISDN usage over a broad spectrum of projected demand. It should also analyze the cost of an open circuit, which should provide a cap for time-sensitive charges. To the extent that demand is greater or less than Bell Atlantic's projection, any resulting changes in unit incremental cost should be treated as unforseen, exogenous changes. Rates should be adjusted accordingly.
The Commission has authority to set the rate for a new service. Pending a cost justification of different rates, the price for additional line residential ISDN should be set at the residential line rate (which is also the rate at which Bell Atlantic charges conventional second lines). Bell Atlantic should be authorized to surcharge high usage customers, as well as customers (if any) who use ISDN for primary service, provided that these surcharges are revenue neutral.
Copied by Mark Konrad. Corrected for typos, October 25, 1995