The Rhode Island Public Utilities Commission last week finalized new regulations for Verizon Communications that allow the telecommunications giant to raise basic residential rates on each telephone line up to $1 a month next year and another $1 in 2004.
On Tuesday, Jan. 14, the PUC gave approval to a regulation compromise initially struck between Verizon and the Division of Public Utilities and Carriers, a state agency that protects the rights of ratepayers. That compromise paves the way for the first rate increases in basic telephone service in Rhode Island since 1994.
The new regulations give the phone company more pricing flexibility than it has ever had in the state, but also implements stricter standards for quality service standards that the phone company must meet.
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The new agreement with Verizon also assures up to $4 million in voluntary funding by the phone company for two more years of a popular Internet access program for school and libraries.
In last minute additions to the new regulations, the PUC required the phone company to give regulators quarterly reports tracking the renting of space on Verizon telephone lines by competitors such as Cox Communications and Conversant Communications. Such arrangements are typical in the competitive local exchange carrier market.
A PUC spokesman said the requirement was added so regulators can track how giving Verizon more latitude to set rates affects competition in the telecommunications industry in the state.
In a final modification to the new regulations, the PUC capped price increases for all ancillary services, such as call waiting and call forwarding. The PUC installed an annual price ceiling of 15 percent for residential services that currently cost $5 or less; a price ceiling of 10 percent for services that currently cost between $5 and $10; and a price ceiling of five percent for services that currently cost $10 or more.
“This part of the agreement wasn’t initially spelled out, and they were concerned that the charge for services like call waiting could double in a month,” said Terry Mercer, the PUC spokesman.
In adopting the new, looser regulations – especially with regard to Verizon’s business services – the PUC essentially agreed with Verizon’s argument that there is now enough competition in the local telephone business that some restrictions on the biggest player in the industry should be lifted.
“They looked at to what extent competition has grown for Verizon. Was Verizon, for lack of a better term, still the big dog? They determined that although competition has increased somewhat over the last few years, there’s no question that Verizon is still the big carrier in the state,” said Mercer.
Verizon and regulators also agreed to a price floor, placing restrictions on how much the company can lower its rates. But at a series of hearings prior to the PUC’s ruling, Verizon’s competitors warned that the price floor was set too low, which could allow Verizon to squeeze its new competitors right back out of the industry.
The price floor that was adopted could allow Verizon to pull off a classic price squeeze – dropping their rates so low that competitors simply couldn’t afford to match them, Cox Communications and Conversent Communications said during testimony before regulators. The two companies are Verizon’s main competitors in Rhode Island. Once competition is gone, Verizon would be in a position to raise rates without losing customers, they asserted.
But the regulators were not persuaded, instead agreeing with Verizon officials and independent utilities analysts who said during testimony that it would be unlikely that Verizon would lower its rates significantly below its own costs, which it would have to do to establish a classic price squeeze.
“It [was] a balancing of interests between ratepayers, the competitors and Verizon,” said Steven Frias, executive council to the Rhode Island Public Utilities Commission. “The question was, ‘Is there enough competition in Rhode Island that would allow us to give pricing flexibility to Verizon?’ Competition here is in the initial stages, with some competitors like Cox and Conversant just out of the gate. How much latitude we give Verizon could affect how competition does in the long run. But costs have gone up and Verizon, of course, has a right under law to obtain a fair rate of return. So it’s a balancing of the three interests.”
Complicating the issue, when negotiating with regulators Verizon tied continuation of its voluntary funding of Internet services to schools and libraries to receiving greater pricing flexibility and a price floor that is lower than the one its competitors lobbied for.
Verizon officials said after negotiations that its compromise with the Division of Public Utilities and Carriers constituted a take-it-or-leave-it offer for the PUC, said Frias.
“Verizon is indicating that they’re willing to voluntarily continue providing the Internet funding on the condition that they get pricing flexibility and the lower price floor,” said Frias.
Regulators were eager to preserve the Internet service for schools and libraries – a service that cannot be switched to another service provider without significant service interruptions and a high cost to the state.
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