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In the Matter of the Board's Review of the :
Amended and Restated Agreement and :
Plan of Merger Dated as of April 21, 1996 :
by and between NYNEX Corporation :
and Bell Atlantic Corporation :

DOCKET NO. TM96070504

In the Matter of the Board's Inquiry into :
Bell Atlantic-New Jersey's Progress and :
Compliance with Opportunity New Jersey, :
its Network Modernization Program :



DOCKET NO. TX96100707






Division of the Ratepayer Advocate
31 Clinton Street - 11th Floor
P.O. Box 46005
Newark, New Jersey 07101
(201) 648-2690

Blossom A. Peretz
Ratepayer Advocate
Of Counsel

Heikki Leesment
Deputy Ratepayer Advocate
James O'Hern
Deborah M. Franco
Jonathan Askin
Lawanda Gilbert
Assistant Deputy Ratepayer Advocates
Gregory Vadas
Staff Attorney On the Brief






A. The Board Has the Authority to Modify ONJ Pursuant to its Statutory Powers and Fundamental Common Law Principles of Utility Regulation and General Contract Law

1. Legislative Powers

a. Earnings
b. Dividends
c. Return on Equity
d. Cost of Debt
e. Additional Benefits

2. Fundamental Common Law Principles of Utility Regulation and Contract Law

a. BA-NJ has Failed to Meet its Projected Capital Expenditur Commitments
b. Broadband Has Not Been Equitably Deployed.
c. Reduction in Rate Base.
d. Decline in Quality of Service

B. The Board Should Exercise Its Authority to Create a Fund To Provide for Advancements in Technology to Schools and Libraries and To Accelerate Deployment and the Provision of Advanced Telecommunications Services to Schools, Libraries, Residential and Low Income Consumers and High Cost, Rural and Urban Areas

1. Accelerated Deployment of Broadband and Switching Capabilities
2. Educational Fund for Schools and Libraries
3. Bell Atlantic Educational Initiatives In Other States
4. Low Income and Residential Consumers

a. Lifeline
b. Link-Up
c. Toll Blocking
d. Customer Education and Outreach




In this docket, the Board of Public Utilities ("Board") is conducting a review of Bell-Atlantic-New Jersey, Inc.'s ("BA-NJ" or "Company") compliance with, and performance under Opportunity New Jersey, the Company's alternative form of regulation plan ("ONJ Plan," "Plan" or "ONJ"), approved by the Board in May, 1993.1 The ONJ Plan replaced traditional rate-base/rate of return regulation with an incentive ratemaking system in exchange for, inter alia, a commitment from BA-NJ to greatly accelerate deployment of advanced technologies in its communications network to the entire State by the year 2010 at an estimated additional capital expenditure of approximately $1.5 billion above "business as usual" from 1992 through 1999.2 Through the incentive of alternative regulation under the ONJ Plan, BA-NJ was given the financial flexibility to operate in the new competitive telecommunications market in exchange for commitments to upgrade the network in order to realize "positive benefits" to the New Jersey economy. 3

In accordance with the schedule established by the Board on February 18, 1997, the Division of the Ratepayer Advocate ("Ratepayer Advocate") hereby submits its initial brief recommending that the Board modify the terms of the Plan as suggested herein so that the benefits of its stated economic development goals may be realized not only by the business customers who until now have been the primary beneficiaries of ONJ,4 but also by ratepayers who heretofore have been largely overlooked by BA-NJ, namely schools and libraries, low income and residential ratepayers, and consumers in urban and rural areas and Urban Enterprise Zones ("UEZ").

Although BA-NJ projected that it would expend approximately $1.5 billion in network investment above "business as usual" by the end of 1999, Lauer Cross, February "Morning Session", Tr. at 7, from 1992 to 1996, BA-NJ has spent $545 million less than it forecasted in 1992 Id at 21; Transcript Request, TR-1-1. For the years 1993 through 1996, the Company's own projections stated that BA-NJ would spend $632 million above "business as usual" under ONJ. See Exhibit RPA-4 (RPAa1,2)5 However, the Ratepayer Advocate has calculated that BA-NJ has spent a total of $79 million above "business as usual" over these years. (RPAa54) During this period, BA-NJ's net earnings have increased by $85 million, its cost of debt has declined substantially resulting in an annual savings of $22 million in interest expense (RPAa4), dividend payments to its corporate parent have exceeded projections by more than $477.4 million (RPAa5), and the Company is earning a return on equity in excess of 21% (RPAa6), well above the average New Jersey State utility rate of return and substantially higher than any rate of return authorized by the Board in recent memory. Given these circumstances, BA-NJ can hardly be characterized as having made capital expenditures beyond "business as usual" during the first three years of ONJ. Indeed, in constant 1987 dollars, the company's capital expenditures have actually decreased. (RPAa3).

BA-NJ has over earned, underspent and inequitably deployed advanced telecommunications technology to business customers, while largely neglecting schools and libraries, low-income and residential ratepayers and consumers in UEZs as well as urban and rural areas. Since the imposition of ONJ the Congress has delineated a new national telecommunications policy, which is codified in the "Universal Service" requirements of the Telecommunications Act of 1996,6 ("Telco Act"). The new national policy specifically requires all telecommunications carriers, including BA-NJ to provide advanced telecommunications services at just, reasonable and affordable rates to all customers including low income ratepayers and those who live in high cost areas, and to provide said services at discounted rates to schools and libraries.

Accordingly, based on the evidence in this proceeding, the Board must conclude that the promise of ONJ has not been realized by the ratepayers of the State and the Board should exercise its broad authority to modify the terms of the Plan to share the benefits of ONJ more equitably between business customers and the education, low-income, residential, urban and rural communities by flowing back a portion of the substantial financial benefits reaped by the Company through its Plan to schools and libraries, low-income residential ratepayers, and consumers in urban and rural areas and UEZs. These ratepayers, like the business ratepayers on whom BA-NJ has narrowly focused its efforts' since implementing ONJ, through their payment of rates (which are unjustifiably high for these classes given their distinct societal needs), have funded not only the ONJ Plan while receiving little of its benefits, but the financial gains realized by BA-NJ and its shareholders through the Plan's alternative rate regulation model. Therefore, these customers are entitled to share in the benefits of alternative rate regulation through equitable deployment and share in BA-NJ's windfall ONJ profits on a real dollar basis.

While the precise means by which the Board should impute BA-NJ's financial gains to its customers are detailed below, in general, the Ratepayer Advocate urges the Board to modify ONJ to require BA-NJ to (1) create a fund to wire all public and not-for-profit schools and libraries for broadband capability by the year 2000 and accelerate deployment and provide these institutions with a high speed network for data exchange and Internet access at discounted rates; (2) institute rate reductions and related initiatives to low-income and residential customers; and (3) accelerate deployment of broadband to both inner city urban and high cost rural areas.7 Considering that BA-NJ's financial condition has improved significantly under the Plan and that it has only spent a small portion of the projected additional capital expenditures, the imposition of these requirements do not impact the financial integrity of the Company. By modifying the terms of the Plan in the manner recommended herein, the Board will ensure that a "positive benefit" will result for the State of New Jersey and all BA-NJ's customers.

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In a Decision and Order dated May 6, 1993 the Board of Public Utilities ("Board") approved a modified Plan for Alternative Form of Regulation Proposal ("Plan") filed by the then New Jersey Bell, which since has become Bell Atlantic-New Jersey ("BA-NJ"). In The Matter of the Application of New Jersey Bell Telephone Company for Approval of its Plan for an Alternative Form of Regulation, Docket No. TX96100707 (May 6, 1993). The Plan replaced traditional rate base/rate of return regulation with an alternative regulatory scheme that provides BA-NJ with the economic incentive and means to deploy advanced technologies in its network in order to achieve state-of-the-art telecommunications at the earliest possible time. Additionally, the Plan included a commitment to accelerate the deployment of high speed broadband technologies in its communications network. Bell Atlantic-New Jersey, Inc., referred to the accelerated deployment plan as Opportunity New Jersey or "ONJ". Business customers were anticipated to be the primary beneficiaries, particularly in the early years, of the accelerated deployment. Other classes of customers would receive benefits in later years. It is the position of the Ratepayer Advocate that now is the time for residential customers and for our schools and libraries to be included as beneficiaries.

In an Order date October 9, 1996, the Board initiated a proceeding to examine whether BA-NJ is meeting its obligations under the Plan for an Alternative Form of Regulation, including its commitments under ONJ for accelerated deployment of technology, and to determine whether the proposed merger between Bell and NYNEX could impair BA-NJ's ability to meet its capital/technology deployment commitments under ONJ. I/M/O the Board's Inquiry into BA-NJ's Progress and Compliance with Opportunity New Jersey, Its Network Modernization Program, Docket No. TX96100707 (October 18, 1996). The Board initially scheduled hearings for December 12, 13, and 19, 1996. Id. The Board granted the Ratepayer Advocate permission to participate at the hearings and conduct inquiry into all appropriate areas. Id. Thus, although the hearings were open to the public, questioning of BA-NJ witnesses was limited to the Board and the Ratepayer Advocate.

In a memorandum dated December 26, 1996, Board Staff initially advised the parties that the ONJ hearings would be rescheduled to January 16, 17, and 23, 1997. Subsequently, in an Order dated January 22, 1997, the Board combined its review of the proposed Bell/NYNEX merger with the ONJ proceedings. In the Matter of the Board's Review of the Amended and Restated Agreement and Plan of Merger Dated as of April 21, 1996 by and between NYNEX Corporation and Bell Atlantic Corporation, Docket No. TM96070504 and I/M/O the Board's Inquiry into Bell Atlantic-New Jersey, Inc.'s, Progress and Compliance with Opportunity New Jersey, its Network Modernization Program, Docket No. TX96100707 (January 23, 1997). The Board believed that it was appropriate to combine its review of the Bell/NYNEX merger with the ONJ proceeding because of the overlap of the issues to be considered in the two matters. Thus, the Board directed that ONJ hearings be expanded to also include all merger related issues and rescheduled the hearings for February 6, 11, and 18, 1997. The Board also reserved an additional hearing date for February 20, 1997. Additionally, the Board believed that it was appropriate to allow other parties to address merger issues in the combined proceeding and therefore granted such persons or entities the role of participant status. Participants were permitted to provide the Board with written input on the merger issues by filing initial and reply briefs on merger related issues.

The hearings were conducted on February 6, 11, and 18, 1997. BA-NJ presented witnesses Len Lauer, President and CEO of Bell Atlantic-New Jersey, Dr. Frank Cronin, Hagler and Bailey Associates, and Ronald Hubert, partner with Deloitte and Touche Consulting Group. On February 18, 1997, the Board granted AT&T, MCI, and Cablevision Lightpath, Inc., participant status in the merger portion of the proceeding. At the conclusion of the hearings on February 18, 1997, the Board established the briefing schedule. The Board directed the parties to file separate briefs for the Bell/NYNEX merger and the examination of BA-NJ's compliance and progress with ONJ. Initial briefs on both matters were to be filed on or before March 12, 1997, reply on the Bell/NYNEX merger by March 21, 1997, and the reply brief for ONJ on March 26, 1997. The briefing schedule has been revised a few times with the most recent schedule requiring filing of initial briefs on March 21, 1997 with reply briefs to follow on March 26th.

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A. The Board Has the Authority to Modify ONJ Pursuant to its
Statutory Powers and Fundamental Common Law Principles of
Utility Regulation and General Contract Law

The Board is empowered to modify ONJ as recommended by the Ratepayer Advocate herein pursuant to (1) the Board's broad jurisdictional powers codified in Title 48, the statutory scheme establishing the BPU, ( N.J.S.A. 48:2-13 and 48:2-40) and the alternative ratemaking authority expressly granted to the Board in the New Jersey State Telecommunications Act of 1992 (N.J.S.A. 48:2-21.16 et seq.) ("New Jersey Telco Act"); and (2) fundamental common law principles of New Jersey public utility regulation and general contract law. A description of the legal framework underlying these powers is set forth immediately below.

1. Legislative Powers

The Board's statutory authority enabling it to modify ONJ stems from its broad jurisdictional powers in N.J.S.A. 48:2-13 and 48:2-40 and its alternative ratemaking authority as set forth in the New Jersey Telco Act (N.J.S.A. 48:2-21.16 et seq.). Under sections 48:2-13 and 48:2-40, respectively, the Board has been granted broad discretionary powers over New Jersey public utilities and may modify any order affecting these public utilities if the Board finds that such order failed to accomplish its intended purpose.8 The Board also derives power to modify ONJ from the New Jersey Telco Act, which authorizes the Board to approve plans involving alternative forms of regulation in order to, inter alia, "address changes in technology and the structure of the telecommunications industry" 9

Applying these principles to the instant case, the Board has more than ample authority to modify the Plan in order to achieve its intended results of achieving "positive benefits" to the New Jersey economy and to allow for an equitable sharing of these benefits between the business community and the education, low-income, residential, rural and urban stakeholders. Specifically, in the Board Order adopting the Plan, the Board expressly reserved the right to accelerate deployment if the technology and/or costs of actual deployment become more advantageous than projected. (Board Decision and Order dated May 6, 1993 p.97) Acceleration is warranted here because technology for education and deployment to rural and urban areas has become "more advantageous" than projected. At the time of the implementation of the plan no one had envisioned the explosion of the Internet in this country. The Internet has become one of the most important means of learning, communication and research for information and technology. One of the most important goals this Board should seek to accomplish would be to make Internet service available to all citizens of this State. Internet access for all not-for-profit schools and libraries will ensure that no one is barred from benefitting from the power of the information age. And specifically, it should be available to the schools and libraries of this State to improve the educational standards and learning capabilities for the people of this State. A properly educated citizenry will bring benefits to the State for years to come.

In addition, in accordance with the legislative intent behind Alternative Regulation, the Board clearly has the power to modify the Plan if it finds that further changes have occurred since the inception of the Plan. There can be no doubt that monumental changes in the telecommunications arena have occurred since the Board's adoption of the Plan. The passage of the Telco Act has irrevocably altered the landscape of the industry by opening the local markets to competition and mandating Universal Service for all citizens of this country. Therefore, a modification of the Plan is needed to address and accommodate these changes.

Significantly, in the Board Order approving the Plan in accordance with its alternative ratemaking authority under the New Jersey Telco Act, the Board specifically reserved the right to review BA-NJ's compliance with its ONJ commitments "to ensure that [BA-NJ] does not recover the benefits of an alternative form of regulation without at the same time fulfilling its obligations." (May 6, 1993 Order p.97). By adopting the BA-NJ's Plan for an alternative form of regulation, the Board effectively allowed the company the opportunity to upgrade its network, to wire the State and to foster economic growth, while at the same time preparing BA-NJ for competition. Since the time of the adoption of the ONJ Plan, BA-NJ has received enormous financial benefits, greatly in excess of the Company's original projections. The gains captured by BA-NJ, which probably would not have been achievable but for the Plan, as set forth immediately below, involve earnings, dividends, return on equity, cost of debt and additional benefits:

a. Earnings

From 1993 to 1996 BA-NJ's earnings, which have increased substantially, in millions of dollars, are: 10

1993 $450.4
1994 $449
1995 $496.2
1996 $536.2

b. Dividends

BA-NJ paid out an additional $954.8 million in dividends over what was projected in 1992:

1993 1994 1995 Total
Dividends paid
Actual $436.8 $451 $533 $1,420.8
ONJ Planning Estimate $330.5 $310.8 $302.1 $943.4
Excess Dividends $106.3 $140.2 $230.9 $477.4 11

c. Return on Equity

The Advocate calculates that BA-NJ has earned well in excess of what other utilities in this State are permitted to earn. The present rate of return on equity in traditional rate proceedings is 11.25%. For the years 1993-1995, combining Group I and Group II services, BA-NJ has calculated its total company return to equity at [Begin BA-NJ Proprietary] [End BA-NJ Proprietary] respectively. (BA-NJ Exh. 1, p.33) Additionally, the record establishes that in 1994 BA-NJ earned 21.32% before adjustments. RPA Exh. 7 (RPAa6). The Plan provides that if BA-NJ intrastate return on equity for its rate regulated services exceed 13.7% those excess earning are to be shared equally between BA-NJ and its customers. Assuming Group I and Group II service were combined, the profit sharing mechanism would have been activated in each of those years as the company would have exceeded the 13.7% level of earnings. The Advocate calculates that under the sharing mechanism that BA-NJ would have returned approximately $103,342,000 to its customers. 12

d. Cost of Debt

BA-NJ's cost of debt has declined form 8.45% to 6.20%, resulting in annual interest savings of approximately $22.6 million dollars. Transcript Request, TR- 2-5; see also Lauer Cross, February 11, 1997, Morning Session, Tr. at 87. (RPAa4)

e. Additional Benefits

Bell Atlantic stock price has climbed from approximately $40 a share to $67 a share since 1992. (RPAa10) Notably, Bell Atlantic would most likely not have been able to acquire NYNEX but for the financial strength of BA-NJ, Bell Atlantic's highest revenue producing affiliate.

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2. Fundamental Common Law Principles of Utility Regulation and Contract Law

As set forth immediately above, BA-NJ's earnings have increased by $85 million, dividend payments have exceeded projections by $954.8 million, its cost of debt has declined resulting in interest savings of $22.6 million per year, its return on equity has been well above what other utilities in this State are permitted to earn and its stock price has increased substantially. In exchange, the Board expected that part of these benefits would be flowed back to the State by BA-NJ making a substantial increased capital expenditure over business as usual. BA-NJ has failed to live up to its responsibilities under ONJ and has not equitably returned commensurate benefits to New Jersey ratepayers. The benefits which have been returned have been imputed to business customers and not to schools or libraries, low income or residential ratepayers nor to consumers in urban and rural areas and UEZs.13 Before describing BA-NJ's specific responsibilities, which, in general, involve a commitment for increased capital expenditure, technology deployment, and maintenance of service quality standards, the legal principles upon which the Board may and should flow back to ratepayers an equitable portion of BA-NJ's financial gains under ONJ is instructive.

Under well settled principles of New Jersey utility regulation, the Board may impute back to ratepayers the economic benefits realized by BA-NJ and withheld from its customers under ONJ in the manner recommended herein (see section III.A.1.&2. infra). Where a utility's ratepayers, through rates have funded the very vehicle through which that utility realizes a financial gain, its customers are entitled to share in a portion of that gain on a real dollar basis. For example, in I/M/O The Petition of The Hackensack Water Company For Approval of the Transfer of Real Property, 14 the Board made the sale of utility property conditional upon a 50% sharing of the potential net gain with the utility's ratepayers. 15 In doing so, the Board concluded that the company's ratepayers were entitled to a fair share of the gain potentially realized from the transfer for their past contributions towards the maintenance of the property. 16 Where, as here, New Jersey ratepayers, have, through rates, funded not only the ONJ Plan while receiving little of its benefits, but the financial gains realized by BA-NJ through the incentive of alternative regulation under the ONJ Plan, they are now entitled to share in BA-NJ's net financial gains.

In a similar connection, the quid pro quo for the Plan's alternative regulation was BA-NJ's commitment to greatly accelerate deployment of advanced technologies in its communications network to the entire State by the year 2010 at an estimated additional capital expenditure of approximately $1.5 billion above "business as usual" from 1992 through 1999. BA-NJ has failed to uphold its end of the bargain and the Board should capture the benefits of the bargain for the ratepayers as provided for in section B, infra: 17

a. BA-NJ has Failed to Meet its Projected Capital Expenditure Commitments.

BA-NJ projected that it would expend approximately $1.5 billion dollars in additional capital investment as a result of ONJ and the Board approved the scheme for alternative regulation based upon that commitment. The record establishes that BA-NJ has spent only a small part of what was projected. BA-NJ acknowledges that expenditures have been less than what were projected. Lauer Cross, February 11, Morning Session, Tr. at 7. Although BA-NJ did not commit to making specific monetary expenditures, the Plan was approved with the understanding that those projections would be met. Moreover, considering all the financial rewards BA-NJ has reaped under the Plan, there is no reason for BA-NJ not to have made the expenditures. The amount of dollars returned to its corporate parent in the form of dividends reflects the rich earnings of BA-NJ. Obviously BA-NJ made a business decision not to spend the money and by doing so it failed to return to New Jersey what it had promised to give in return for being permitted to shield its earnings for extremely lucrative services from regulatory scrutiny. Since BA-NJ failed to uphold its end of the bargain, the Board should materially alter the requirements of ONJ and establish new milestones for measuring BA-NJ progress toward the goals of ONJ.

BA-NJ's planned capital expenditures under ONJ for 1993 to 1996 were for $3.048 billion. The actual expenditures were $2.603 billion, resulting in a shortfall of $445 million. RPA Exh. 4, 5, and 6. (RPAa1,2, 11-16) And that figure should be further reduced by for the $100 million which is the amount of money spent on Bell Atlantic's Regional Data Center in Freehold, because those expenditures were part of business as usual and did not reflect accelerated investment in the network. Lauer Cross, February 11, 1997, Morning Session, Tr. at 21; Transcript Request, TR-1-1.18 Thus, BA-NJ under-spent by a total of $545 million for just the first three years of ONJ. BA-NJ asserts that the ONJ projections should be restated to reflect the one year lag between when it was projected to start and when it was actually started. Even restating the figures, as requested by BA-NJ does not significant change the result. On a restated basis BA-NJ still spent $379 million less than what it was expected to spend. The State of New Jersey has simply not received that which it bargained for in approving ONJ.

The Advocate asserts that when BA-NJ's figures are subjected to closer scrutiny they are even less significant. BA-NJ has operated on price cap regulation ever since 1987. The record shows that BA-NJ's average business-as-usual expenditures under price cap regulation prior to the company's filing of its ONJ plan totaling $2.424 billion for the years 1987-1991, comes to an average of $606 million per year. Lauer Direct, February 6, 1997, Tr. at 59; Lauer Cross, February 11, 1997, Morning Session, Tr. at 36. Thus, extending the business-as-usual average into the first three years of ONJ (1993-1996) would result in a total expenditure of $2.424 billion. Deducting that figure from the actual expenditures made by the company during those years ($2.603 billion) shows that the company spent merely $179 million above business-as-usual levels of expenditure. Adjusting this figure further for the Bell Atlantic Regional Data Center results in the incremental amount of accelerated investment to be a mere $114 million. Hence, a closer analysis reveals BA-NJ only spent $114 million above business-as-usual from 1992 to 1996. When this figure of $114 million is compared to BA-NJ's projections included as part of its ONJ filing in 1992 that it would spend $1.462 billion from 1992 to 1999 beyond those monies that would have been spent for network improvements as part of BAU (business as usual), the patent failure of BA-NJ to honor its commitments under ONJ is glaring. In order for BA-NJ to fully expend the capital deployment envisioned by ONJ, the company would have to spend $1.348 billion in excess of BAU by 1999, or to put in other words, approximately $450 million per year above business as usual for 1997, 1998, and 1999. Adding the incremental expenditure to its BAU capital investment, BA-NJ would have to spend a total of approximately $1.105 billion in capital additions to its plant for each of the three years to meet that projection. This example serves to illustrate in unmistakable terms how BA-NJ has utterly failed to fulfill its obligations under the Plan. BA-NJ has done little more than conduct business as usual as it prepares for competition. The Board should require BA-NJ to do a great deal and more than business-as-usual and establish new milestones for gauging the company's progress toward its overall goal.

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b. Broadband Has Not Been Equitably Deployed.

From our review of broadband deployment to date, it appears that broadband has not been equitably deployed to rural and urban areas of the State. The first area of the State to receive widespread deployment of broadband is in the northern New Jersey towns of Clifton and Passaic. Right now 100,000 residential customers in Clifton and Passaic are receiving voice-grade service over broadband. Lauer Cross, February 11, 1997, Afternoon Session, Tr. at 140. BA-NJ plans to provide voice-grade service over broadband technology to an additional 400,000 households in Northern New Jersey by the year 2000, Id. at 147, though there appears to be no intention to provide any broadband services over the high speed network. The counties BA-NJ is presently targeting for this deployment are Bergen, Passaic, Morris, Essex, and Union. Id. However, BA-NJ has no corporate plan to make broadband available to the major population centers such as the cities of Newark, Jersey City, Elizabeth, Camden, and Trenton. Id. at 149-50. Thus, BA-NJ has not only inequitably deployed broadband in the past, singling out suburban areas for preferential treatment, but it apparently plans to continue that practice in the future. While the Northern New Jersey areas will no doubt benefit from deployment of broadband technology, the Advocate believes that other areas, including major population centers such as Newark, Jersey City, Elizabeth, Camden, and Trenton should also benefit from broadband availability.19

c. Reduction in Rate Base.

From 1993 to 1996 BA-NJ's rate base for Group II services, the rate regulated portion of its service offerings, has declined under ONJ by approximately $400 million. BA-NJ's rate base for the year ending December 31, 1994 was $2,795,565,000. RPA Exh. 9. (RPAa17) For the year ending June 30, 1996, however, the total rate base was $2,423,950,000. (RPAa18) Thus, BA-NJ's rate base has declined precipitously since 1993. This shows that since the adoption of the Plan, BA-NJ has been building less new plants in New Jersey than the company has been writing off. The expectation, of course, was that BA-NJ would invest more, not less, in the State under ONJ.

d. Decline in Quality of Service

BA-NJ's quality of service has also declined since the adoption of the Plan. Although the decline has been from a high level of service, any decline should however be of major concern to the Board, especially when quality of service should be increasing under the Plan, since the company is deploying cutting edge technology. For example, BA-NJ's performance in the following service categories was lower in the year ending September 1996 than in 1993, 1994, and 1995: (1) percentage of service order provisioning completed within 5 working days; (2) percentage of service order provisioning appointments met; and (3) percentage of directory assistance calls answered within 10 seconds. RPA Exh. 18. (RPAa19-21) In addition service standards for the percentage of BA-NJ customers having no difficulty reaching repair were below the targeted levels in both July and September 1996. Id. These standards also dropped from 1995 to the year ending 1996 by approximately 450 to 500 basis points. Id. In addition, the service standard regarding the percentage of service trouble reports cleared within 48 hours experienced a percentage decrease of approximately 480 basis points from 1995 to the year ending September 1996 and this service standard was below the exception and surveillance levels in July 1996 and August 1996. Id. Moreover, in a recent survey Bell Atlantic ranked fifth among the seven regional Bells in customer satisfaction according to the Federal Communications Commission.

The declines in quality of service are particularly troubling in light of the anticipated merger between Bell and NYNEX. NYNEX has had an abysmal track record with regard to quality of service. In the last three years, NYNEX has been punished for its failure to meet telephone service quality standards and, consequently, subject to monetary penalties in at least three of the jurisdictions in which it operates: New York, Massachusetts and Maine. Staff Exhibit 5. In New York alone, in November 1996, the Commission found that NYNEX's performance warranted $72.9 million in penalties, and after granting certain waivers, ordered $62.3 million in rebates. Thus, the merger creates the potential for an even further decline in quality of service.

B. The Board Should Exercise Its Authority to Create a Fund To Provide for Advancements in Technology to Schools and Libraries and To Accelerate Deployment and the Provision of Advanced Telecommunications Services to Schools, Libraries, Residential and Low Income Consumers and High Cost, Rural and Urban Areas

Having established the Board's legal authority to modify the Plan so as to equalize the level of ONJ benefits between the business community and the education, low-income, residential rural and urban communities, the Ratepayer Advocate urges the Board to modify ONJ to require BA-NJ to (1) create a fund to wire all public and not-for-profit schools and libraries for broadband capability by the year 2000 and provide these institutions with Internet access and discounted rates for these and other services; (2) institute rate reductions20 and related initiatives to low-income and residential customers; and (3) accelerate deployment to both inner city urban and high cost rural areas. While the business sector, who through market power, will receive advanced technologies services upon demand, there is no guarantee that those same technologies will be provided as rapidly to the State's schools and libraries or the rural and urban areas of this State. ONJ should be used as a tool to give every citizen of this State a chance to be a part of the information age. Such a shift in ONJ will be especially advantageous to the school children of this State because it will give them access to technologies and learning capabilities that people could only dream of before. In addition, educating our children with high technology is good for the State's economy and the State's businesses because it creates an educated and trained workforce; a workforce that will bring benefits to the State for years and years to come.

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1. Accelerated Deployment of Broadband and Switching Capabilities

The Board should accelerate the deployment of broadband services to all schools and libraries. BA-NJ asserts that all public and private schools and libraries in New Jersey have "access" to broadband services. Lauer Cross, February 11, 1997, Afternoon Session, Tr. at 182; see also RPA Exh. 26. (RPAa22) However, BA-NJ defines access as meaning that BA-NJ can provide broadband services to schools and libraries within its service territory upon request of the institution. Id. Access, therefore, does not mean schools have broadband, it means that BA-NJ will build out the service as requested. BA-NJ acknowledges that getting the service could take months after the initial request. Id. The Advocate recommends that the Board require BA-NJ to provide fiber to the premises of each school and library by the year 2000. Access to fiber will give all schools and libraries the capability of utilizing the most advanced broadband technologies available for a whole host of information age service, including interactive distance learning, data transfer, and Internet access.

Also, the Board should accelerate the date upon which its Interactive Distance Learning Service (IDLS) will become a fully switched service. BA-NJ states that "[a]lthough IDLS does not use the public switched network, it nevertheless is a switched service since it uses the process of interconnecting circuits to form a transmission path between the IDLS users." Transcript Request, TR-2-21. (RPAa23)

Under the definition provided by BA-NJ of what is a switched network almost anything would qualify as a switched network, including the famous old switchboards where an operator manually created the circuit. The Ratepayer Advocate recommends that the Board require BA-NJ to implement switching technology for IDLS so that the service is switched in the same manner as it is for voice telecommunications, i.e., dial up capability.

The Ratepayer Advocate also believes that broadband deployment should be accelerated to rural and urban areas and urban enterprise zones (UEZ). Moreover, the Board should mandate accelerated deployment of broadband to the cities of Newark, Jersey City, East Orange, Elizabeth, Camden, and Trenton.

2. Educational Fund for Schools and Libraries

The Ratepayer Advocate recommends that he Board should create a fund to provide $200 million to be used by schools and libraries for inside wiring, Internet Access, and a discounted rate for Interactive Distance Learning Service ("IDLS"). Additionally, the Advocate is recommending that all schools and libraries be permitted to purchase network services out of BA-NJ's residential tariff. The money needed for this effort should be spread out over five years resulting in an annual cost of merely $40 million to BA-NJ. The Ratepayer Advocate believes that given the extremely modest amount of money that BA-NJ has actually spent on ONJ compared to its projection of $1.5 billion, a $200 million fund for schools and libraries is a reasonable modification of ONJ. Modifying ONJ is also consistent with the new societal concerns established by the Telecommunications Act of 1996. See 47 U.S.C. 254.

Currently the availability of advanced communications technology in New Jersey for schools varies widely based on geography and financial resources of the school district. Many existing New Jersey public schools do not have the resources to access computers, modems, satellite dishes or high speed phone lines. Most importantly, many of our public schools lack basic infrastructure requirements, such as electrical wiring needed to run computers or phone/data lines needed to access the Internet or other online services. Thus, the acceleration of deployment of fiber to schools and libraries will be meaningless, unless funding is also provided for inside wiring, to allow the schools and libraries to be connected to this new technology waiting outside of their doorsteps. The problem was addressed in the Wall Street Journal on March 19, 1997 and a copy of this article is enclosed for the Board's consideration. (RPAa24,25)

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The importance of having a network which is universally available and affordable to all ratepayers cannot be overstated. Under the current deployment schedule which emphasizes businesses at the expense of residential ratepayers and schools and libraries, we will continue to have several technological initiatives at different levels of development in different areas of the state, thereby leaving the state's citizens at a disadvantage in obtaining information services which will become vital to their ability to survive in a future information-intensive society.

The Telecommunications Act of 1996 has fundamentally changed the telecommunications industry by eliminating government regulated monopolies and creating an industry in which the federal and state governments work together to create efficient competition. At the same time, the Act directs federal and state governments to develop ways to preserve and advance universal service in the new competitive environment. 47 U.S.C. 254(a)(1). The Act leaves ample room for action by the states to adopt provisions to address specific universal service needs unique to any given state. Section 254(f) states:

A State may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service. . . . A State may adopt regulations to provide for additional definitions and standards to preserve and advance universal service within that State only to the extent that such regulations adopt additional specific, predictable and sufficient mechanisms to support such definitions or standards that do not rely on or burden Federal universal service support mechanisms."

47 U.S.C. 254(h). The Act mandates that the concept of Universal Service should include qualify services at affordable rates, access for low income ratepayers, access in rural and high cost areas, and access to advanced telecommunications services for schools, libraries and healthcare facilities.
47 U.S.C. 254(b). This is the first time in the history of the telecommunications industry that broad societal interests have been identified by Congress as national goals.

The Act includes a number of elements that are designed to foster education. In defining universal service, the FCC is directed to take into account the needs of educational users. 47 U.S.C. 254(c)(1). Services included in the definition of "universal service," as established by a Federal-State Joint Board, are to be made available to not-for-profit elementary, secondary schools and libraries for educational purposes at discounted rates. 47 U.S.C. 254 (h)(1)(B). Clearly, therefore, the Board has the authority to act to address individual issues of specific concern with regard to New Jersey ratepayers, and in particular, with regard to low income customers, high cost areas, and schools and libraries.

The Ratepayer Advocate recognizes that the majority of the services that are to be supported by the fund, save IDLS, are currently being considered by the FCC in the context of its Universal Service proceeding. In fact, the Federal-State Joint Board in its recommended decision to the FCC specifically addressed the issues that the Ratepayer Advocate would like the educational fund to support. The Joint Board "recommended that the Commission expressly acknowledge that schools and libraries may receive discounts on charges for internal connections" In the Matter of Federal-State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96-45, at 244 (November 7, 1996) (hereinafter Recommended Decision). The Joint Board found that Congress recognized that internal "connections are a critical element for achieving the congressional purpose of section 254(h), and thus contemplated that schools and libraries receive universal service support for internal connections." Id. at 245. The primary way for classroom to have access to advanced telecommunications services "is for computers in each classroom to be connected to a telecommunications network." Id. at 246. The Joint Board also "recommended that the Commission adopt a rule providing that discounts for Internet access be available to schools and libraries." Id. at 237. Internet access would include the "communications link to the ISP [Internet Service Provider]" and "electronic mail." Id. Finally, with respect to the amount of the discount, the Joint Board recommended that "all eligible schools and libraries should receive discounts of between 20 and 90 percent on all telecommunications services, Internet access, and internal connections." Id. at 8.

Whether those positions are ultimately adopted by the FCC is uncertain. As this Board knows, a final decision is not expected until early May. But even if the FCC were to adopt the Joint Board's recommended decision it would still be subjected to further review. The parties could move for reconsideration first and then seek review in the courts or both, which means that a final decision may not be effective for quite some time. Thus, the Ratepayer Advocate urges the Board to create an educational fund right now in New Jersey. This proceeding provides such opportunity.

The Ratepayer Advocate is also aware that this Board will presently be involved in a Universal Service proceeding. But that does not eliminate the need to move now in the direction mandated by Congress because a state decision on Universal Service would be subject to the same legal uncertainty. And during all that time it is the children, the future workforce of this State, who will suffer from delaying deployment of advanced telecommunications services to schools and libraries. New Jersey currently ranks 42d in this country with regard to the percentage of schools that are presently on line. (RPAa26,27) And IDLS21 is not being utilized in this State because it is cost prohibitive. Lauer Cross, February 11, 1997, Afternoon Session, Tr. at 180; see also RPA Exh. 24.22 (RPAa28,29) There are 30 special needs districts in the State and only 11 of those districts utilize IDLS. RPA Exh. 25. (RPAa30) We can and must do better as a State. The creation of this fund will advance us in that direction.

The Ratepayer Advocate does not view the creation of an educational fund in the context of ONJ as a part of a Universal Service fund mechanism. The Ratepayer Advocate believes that the ONJ educational fund will be separate and apart. Again, all we are asking for is $200 million over the course of five years. That request is quite modest when compared to other financial information in this record, such as BA-NJ's failure to spend $500 of its projected capital expenditures on ONJ and BA-NJ paid dividends to Bell Atlantic which have to date been more than $470 million in excess of its projections for ONJ.

The second phase of ONJ was designed to primarily to deploy fiber to the curb of all residential customers. Lauer Cross, February 11, 1997, Morning Session, Tr. at 29.23 BA-NJ has already slowed the deployment of fiber. BA-NJ witness Joseph Weber in the Interconnection Proceeding testified that fiber will not be deployed as quickly as originally expected because it is a technology that is not mature and is expensive. Vol. 20, Afternoon Session, Tr. at 30. Mr. Weber further stated that BA-NJ is thinking of "having copper in there for a long period of time." Id. Hence, BA-NJ is telling the Board that ONJ as originally designed is no longer relevant. Therefore, the Advocate asserts that the Board should use the funds that it was promised by BA-NJ that have not been used for deployment to bring our educational system into the telecommunications age. There could be no better investment than in the education of the children and citizens of this state. The Advocate acknowledges that this fund will cover only a portion of the costs to wire all the schools and provide for discounted Internet access. But we also recognize that it will set the stage for what ultimately comes out the Universal Service proceedings so that New Jersey can be at the forefront of providing technology to our schools and libraries.

Accordingly, the Board should establish an educational fund that will provide support for internal wiring, Internet access, interim discounted rates for the schools and libraries of this state and a discounted rate for IDLS. It is clear that deploying advanced technology to our schools and libraries is both "more advantageous" now than was contemplated at the time of the adoption of the Plan and more critical than ever. The business concerns of the Board will be addressed by competition. Thus, it is the schools and libraries that will benefit most from the deployment of the advanced telecommunications technology. The Legislature of New Jersey intended for the Board to address just such changes in technology by giving the Board the power to modify the Plan for an Alternative Form of Regulation. Modifying the Plan to create an educational fund is not only in the public interest because it promotes education, but also because it enhances economic development by creating a skilled and highly trained workforce.

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3. Bell Atlantic Educational Initiatives In Other States

Bell Atlantic has supported education in states throughout the Bell Atlantic region and now New Jersey would like to see Bell Atlantic make an even greater commitment to New Jersey's schools and libraries. It is only equitable that New Jersey, the state that first implemented rate cap regulation, that generates the most revenue for Bell Atlantic, and the state where Bell Atlantic's revenue has continued to rise since the implementation of a plan for alternative regulation in 1993 (ONJ), see its share of Bell Atlantic's good fortune flow back to the state by funding of programs in New Jersey's schools and libraries. Bell Atlantic has consistently funded programs for schools and libraries throughout its region; it is time now to accelerate programs in New Jersey.

For instance, Bell Atlantic in an October 16, 1996 news release speaks of its accelerated investment in Delaware's telecommunications network under Delaware's Telecommunications Technology Investment Act (TTIA). Bell Atlantic states it has exceeded expectations by investing more than $170 million in digital switches, fiber optic cable and advanced signaling systems in the last two-and-a-half years, nearly 70 percent of Bell Atlantic's five year TTIA commitment. (RPAa31,32) It is the position of the Ratepayer Advocate that if Bell Atlantic can exceed expectations by accelerated investment in Delaware, the Board, given its broad statutory powers as well as the powers reserved to it in the ONJ Order, can modify the ONJ plan by having Bell Atlantic accelerate its investment in its 18 year plan for broadband deployment by 2010. If the Board does not accelerate deployment to New Jersey's schools and libraries today, the students of New Jersey's schools will be irreparably harmed, as well as New Jersey's future as one of the leading employers in high - tech industries. By hesitating and not advancing broadband deployment to New Jersey's schools and libraries the Board will severely limit the horizons of a generation of New Jersey school children. For example, if broadband is not deployed for another five years, this means that students who are presently in eighth and ninth grade will not have access to multimedia functions and distance learning over the Internet. The Board will have said by its inaction that a generation of New Jersey's children our expendable, and this is wrong.

Currently "[New Jersey] is experiencing a comeback in technology based jobs led by growth in software and computer-related businesses and telecommunication companies" according to Richard Goldberg, executive director of the American Electronics Association's New Jersey Council. The American Electronics Association released its report on February 13, 1997 which ranked New Jersey among the top 10 high tech states in the country in five categories: the number of establishments, average wage, total payroll, total employment, and the percentage of private- sector jobs classified as high-tech. (RPAa33,34) If New Jersey hopes to stay in the "top ten," broadband deployment to our schools and libraries is essential. The Board has the power to keep New Jersey in this top ten list by giving New Jersey's children the tools they need to compete in a global and increasingly information-based marketplace of tomorrow.

A Bell Atlantic news release dated December 11, 1996 states that Bell Atlantic has made a third installment on a $7 million commitment for Interactive distance learning in Virginia schools. (RPAa35-37) Bell Atlantic gave the Philadelphia school system a $500,000 grant that will help to place computers in all 256 of Philadelphia's public schools and libraries. (RPAa38-39) Bell Atlantic has given $750,000 to launch "Online at PA [Pennsylvania] Libraries" which will allow up to 300 libraries to purchase the equipment and technical assistance needed for library staff to ensure direct public access to the Internet. (RPAa40,41) In Maryland, Bell Atlantic has funded a $13 million effort to provide $50,000 to every four year public college, community college, and high school to purchase distance learning equipment. (RPAa42,43) Bell Atlantic-West Virginia has sponsored the World School Program as well as the On-Line Multimedia Development Project under which Bell Atlantic is providing digital, high speed Internet access to more than 700 K-12 public schools in its West Virginia service area. (RPAa44,45)

Bell Atlantic has provided some money to New Jersey's schools and libraries, but clearly not in proportion to what Bell Atlantic has earned in New Jersey. The Division of the Ratepayer Advocate applauds Bell Atlantic for programs such as Project Explore in Union City, and Bell Atlantic's TEC 2000. However, the Board must require Bell to make a much more substantial commitment to all of New Jersey's schools and libraries.

Regional bell operating companies (RBOCS) other than Bell Atlantic, are making substantial commitments to the funding of technology for schools and libraries in their respective states. For example Southwestern Bell on February 21, 1997 announced plans to launch "Operation SchoolNet" to wire (internal wiring) nearly 6,200 classrooms for Internet access throughout Texas, Missouri, Oklahoma, Arkansas and Kansas to ensure K-12 students fully capitalize on the educational benefits available through the Internet. Southwestern Bell's Operation School Net program will be supported by Southwestern Bell Internet Services in cities where it offers Internet access. It will offer free dial-up Internet access to participating schools for nine continuous months. Edward E. Whitacre Jr., chairman of the board and chief executive officer said Southwestern Bell plans to wire-up approximately 3,240 classrooms in Texas; 1,080 classrooms in Missouri; 660 classrooms in Oklahoma; 600 classrooms in Kansas; and, 600 classrooms in Arkansas. These figures are based on six Internet hook-ups per school, the state's percentage of Southwestern Bell access lines, the number of Pioneers (Southwestern Bell volunteers) per state, and other factors. According to Southwestern Bell at least 30 percent of the schools will be located in rural communities and low-income areas to ensure kids in these areas have the advantages of other students. (RPAa46-48)

Ameritech is making substantial commitments to invest in educational infrastructure solutions for schools and libraries in its territory. In Indiana, Ameritech has committed to invest up to $120 million over the six year period from 1994 to 2000 for broadband infrastructure support. This investment will "provide digital switching and transport facilities including, where appropriate, fiber optic facilities, to every interested school, hospital and major government center in the company's service area on a non-discriminatory basis." (RPAa49,50)

In addition to the infrastructure commitment that could reach nearly 2,000 schools in Indiana, Ameritech is donating $30 million over that same period to a non-profit organization, the Corporation for Educational Communications (CEC), for services and hardware for video distance learning (VDL). The CEC grants will provide classroom workstations and large screen monitors to approximately 550 middle schools, high schools and universities throughout the state. All public, private and parochial schools serving grades 7 through 12, located in the Ameritech Indiana serving areas, and accredited by the State Department of Education are eligible for grants. (RPAa49,50)

Additionally, in Ohio Ameritech has committed $18 million over six years to fund grants to state-chartered primary and secondary schools for use in applying fully interactive distance learning communications technology to education. Further, $2.2 million will be used to establish fourteen community computer centers in low-income neighborhoods within Ohio's service areas. The centers will bring together hardware, software, network access and training in a tutorial and workshop atmosphere. (RPAa49,50)

In Wisconsin, Ameritech will bring broadband transmission facilities (generally fiber optic cables) to the doorstep of every secondary school (middle and high schools), every college and university and every technical college in Ameritech areas by the end of 1998. With additional commitments to libraries and government centers, some 700 locations will be wired for broadband access. (RPAa49,50)

In addition to extending the broadband network, Ameritech also has pledged $13.5 million in contributions over five to seven years to the Wisconsin Advanced Telecommunications Foundation. The purpose of the Foundation is to fund applications of advanced communications technology. (RPAa49,50)

In Michigan, Ameritech has made a $10.6 million grant to provide distance learning systems for Merit Network of Ann Arbor, Michigan Community Colleges, Wayne County, Western Michigan University, Ferris University, Grand Valley University, Upper Great Lakes Educational Technologies, Northeast Exchange and St. Clair College. Monies will be used for Internet connections, compressed interactive video, and development of data and video networks. An additional $12.5 million matching fund grant for Michigan will provide customer premises equipment, servers, workstations and library automation center support. (RPAa49,50)

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4. Low Income and Residential Consumers

The Ratepayer Advocate maintains that the Board should direct a portion of the expenditures that BA-NJ did not make under ONJ to fund a Lifeline telecommunication program for residential and low income consumers. The Ratepayer Advocate recommends that the Board direct BA-NJ to make a good faith effort to establish a viable Lifeline program, increase public awareness of the Linkup program, implement free toll blocking for eligible subscribers, and develop a customer outreach program. The Ratepayer Advocate believes that these programs are in the public interest and therefore the Board should require BA-NJ to implement them immediately.

With respect to low income customers, the Ratepayer Advocate has continually pointed to the fact that BA-NJ fails to provide adequate measures to ensure the availability of affordable telephone service for the state's low income consumers. An examination of statistics on New Jersey's residential penetration rate shows that in November 1983, New Jersey's penetration rate of 91.4% exceeded the national average. However, over time, while residential subscribership throughout the United States has increased, New Jersey has countered that trend with a continual decline in its penetration rate. (RPAa52). In 1995, New Jersey was the only state designated as having experienced a statistically significant decrease in penetration rate, and in 1996, New Jersey was only one of four jurisdictions to have experienced a decrease in penetration rate. Belifante, Alexander, Telephone Subscribership in the United States, Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission, Chart 3 (February 1996). ( RPAa51) Although the state's annual average penetration rate rose slightly from 92.3% in 1995 to 93.6% in 1996, the first such increase in many years, the fact still remains that we have had a declining penetration rate over the past several years, and that, despite the most current increase, we continue to fall below the national average. See Belifante, Alexander, Telephone Subscribership in the United States, Industry Analysis Division, Common Carrier Bureau, Federal Communications Commission (February 1997). BA-NJ Exh. 9. In stark contrast, Pennsylvania, one of our neighboring states served by Bell Atlantic, has experienced a continual rise in its penetration, and has continued to hold one of the highest penetration rates in the country. The decline in penetration rates in New Jersey is stark testimony to the pressing need to have a Lifeline program, toll blocking, and to educate more of our citizens about the availability of Linkup.

a. Lifeline

Lifeline support is a national program available to the states for reducing the recurring costs of plain old telephone service (known as "POTS") for low income subscribers. Under this program, local exchange carriers are able to reduce monthly bills by either half, of the full amount of the federal subscriber line charge. Half of the reduction is reimbursed to the carrier by the National Exchange Carriers Association from interstate jurisdictional funds, while the other half is funded through matching state funds. New Jersey is one of only a very few jurisdictions that does not participate in the Lifeline program, and never has. Therefore, BA-NJ should be required to fund the State portion of Lifeline, so that matching federal funds will be made available for New Jersey low income subscribers.

b. Link-Up

Link-Up America is a program for reducing the costs of connecting to the telephone network for low income new subscribers. Under this program, Federal assistance is available to pay one-half the connection charge, up to $30, for low income households for the nonrecurring costs of establishing service. Federal assistance will also pay market rate interest on installment payments (for up to 12 months) allowed by a local exchange carrier to low income new subscribers, up to a $200 maximum principal amount. While BA-NJ participates in this program, New Jersey has very low participation in Link-Up America.24 In 1994, New Jersey had 567 participants in Link-Up, who received a total benefit of $11,814. Table 2.2 of the FCC Monitoring Report: Link Up America: Lifeline Connection Assistance and Deferred Payments, January 1 thru December 31, 1994. (RPAa52) This is less than 0.07% of the participants and aid provided nationally under Link-Up in that year. New Jersey's low subscribership in Link-Up America is primarily due to lack of subscriber information concerning availability of the program. To eliminate this barrier to participation, BA-NJ should be directed to increase public awareness of this program through various dissemination channels, including, but not limited to, bill inserts and meetings with social workers and a statewide campaign to greatly increase public awareness for their important program.

c. Toll Blocking

The Board should also require BA-NJ to implement a free toll blocking service for eligible low income customers. Toll blocking service is consistent with the Recommended Decision issued by the Joint Board on Universal Service (Joint Board) adopted November 7, 1996. In its Decision, The Joint Board recommended that eligible carriers receive universal service support for providing toll blocking and limitation services to low income customers, finding that the provision of voluntary toll limitation service free of charge to low-income customers should help increase Subscribership among low income customers. For the last decade, Pennsylvania has provided a toll blocking service. During that time, Pennsylvania's overall penetration rate has become the highest in the nation (97 percent in 1994, up from 94.9 or 8th place a decade earlier). Furthermore, among Pennsylvania households with incomes below $10,000, subscribership as of March 1993 was 92.3 percent significantly higher than the national average for that income group of 87.4 percent. Moreover, in 10 states that prohibit disconnection for non-payment of interstate toll, the average subscribership level is 95.0%, which exceeds the national average.25 The FCC has referred to Pennsylvania's program as being a significant factor in that state's high penetration rate. New Jersey low income residential subscribers deserve no less assistance.

d. Customer Education and Outreach

Finally, the Advocate recommends that BA-NJ designate funding to be dedicated for consumer outreach and education to ensure that low income consumers are made aware of the assistance programs available. Without a concerted effort to inform the consumers at which these programs are targeted, they will continue to fail to reap the benefits of these programs. For example, a penetration study conducted by Rutgers University in Camden, New Jersey failed to find a single person who knew of BA-NJ's participation in Link-Up America. See Mueller and Schement, Universal Service from the Bottom Up: A Profile of Telecommunications Access in Camden, New Jersey, Rutgers University Project on Information Policy (1995). Additionally, the FCC has acknowledged the need for increased consumer education, and stated that "Such educational programs may make non-subscribers aware of options (such as flat rate basic service with call blocking capabilities) and how these options can be used most effectively." Federal Communications Commission, In the Matter of Amendment of the Commission's Rules and Policies to Increase Subscribership and Usage of the Public Switched Network, Notice of Proposed Rulemaking, CC Docket No. 95-115, 46 (Adopted July 13, 1995). The Ratepayer Advocate maintains that increased consumer education and information efforts are vital to providing viable solutions to preserve and maintain universal service. Consumers must have sufficient information to attain the greatest level of benefit with increased competition for telecommunications services providers.

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When the Board of Public Utilities approved ONJ, it did so in reliance upon certain commitments of BA-NJ, accepting the reasonableness of various projections provided by BA-NJ in the hearing record. With the benefit of three and a half years of actual company performance under ONJ, we are able to evaluate the accuracy of those commitments and projections. It is now acutely clear, from the evidence in this record, that the company and its corporate parent are more profitable than ever; that BA-NJ has spent nowhere near its projected additional capital expenditures on network improvements; that deployment has favored business and suburban customers; and, since the Board authorized alternative rate cap regulation of the company during the term of ONJ, that the ratepayers of this State have been prevented from obtaining rate reductions for any network services, which would otherwise have certainly occurred under classical utility regulation. Clearly, the promised benefits have not flowed down to the ratepayer, either in terms of dollars or deployment.

In addition, since the inception of ONJ and with the passage of the federal Telecommunications Act of 1996, a whole new emphasis on societal concerns for Universal Service, low income ratepayers, and affordable access for schools and libraries to the information superhighway has become national policy. These concerns are not being responsibly addressed by BA-NJ and the record in New Jersey for resolving these issues has been woefully deficient.

Based upon the entire record of this proceeding and the societal concerns manifested in the federal Telco Act, this Board has the obligation to revisit ONJ and mandate modifications to ONJ for the remaining 2 and 3/4 years of its initial term, as proffered by the positions of the Ratepayer Advocate. It is time for the ratepayers who have fully funded the increasingly profitable ventures of the company, to share in a measure of the bounty.

"The legitimate object of government is to do for a community of people, whatever they need to have done, but cannot do at all or cannot so well do for themselves, in their separate and individual capacities." Abraham Lincoln.


Respectfully submitted,
Blossom A. Peretz, Esq.
Ratepayer Advocate of New Jersey
DATE: March 21, 1997
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1 I/M/O the Application of New Jersey Bell Telephone Company for Approval of its Plan for an Alternative Form of Regulation, Docket No. TX96100707 (May 6, 1993) (hereinafter referred to as the "May 6th Order"). Back

2 Specifically, under ONJ, BA-NJ was required to accelerate the deployment of key network technologies to make available advanced intelligent network, narrowband digital, wideband digital, and broadband digital service capabilities in the public switched network and thereby transform BA-NJ's public switched network to one that would be capable of transporting video and high speed data service in addition to voiceband service. Plan, at 5. Back

3 See May 6th Order, mimeo at 87. Back

4 Exhibit BA-NJ-8. Back

5 Refers to Appendix of the Ratepayer Advocate separately bound and filed in support of this brief. Back

6 47 U.S.C. 251 et seq. Back

7 By recommending the modifications proposed herein, the Ratepayer Advocate does not suggest that BA-NJ discontinue deployment to the business community since the primary purpose of ONJ was to keep New Jersey open for business -- a worthy goal which should remain unchanged. However, the economic development goals of ONJ will be accomplished through market forces. The Telco Act has paved the way for competition in the local telephone market. Thus, with or without ONJ, the network would be upgraded to meet the needs of business. Businesses have enormous market power and as a group will be able to force competitive carriers to provide the services these entities need. If businesses demand full broadband before 2010, rest assured, someone will get it there. If BA-NJ is not that someone, then it will suffer the competitive losses. The recommended modifications recommended herein will help those without this same market power to realize a measure of these same technological advances. Back

 8 For a detailed description of the Board's jurisdictional powers over public utilities see N.J.S.A. 48:2-13, which provides in pertinent part that "[t]he Board shall have general supervision and regulation of and jurisdiction and control over all public utilities ... and their property, property rights, equipment, facilities, and franchisees so ...."; Township of Deptford v. Woodbury Terrace Sewerage Corp., 54 N.J. 418, 424 (1961) (holding that in enacting Title 48, the Legislature intended to delegate to the Board "the widest range of regulatory power over public utilities..."; and Petition of Elizabethtown Water Co., 107 N.J. 440, 449 (1987) (holding that the Board has been given "considerable discretion in exercising those powers.")

As to the Board's power to modify its own orders, see N.J.S.A. 48:2-40, which provides, inter alia, that the Board "at any time ... [may]order a rehearing and extend, revoke or modify an order made by it;" and Central Railroad Co. Of New Jersey v. Department of Public Utilities, 7 N.J. 247, 255 (1951), citing N.J.S.A. 48:2-40 and holding as follows:

The comprehensive legislative design is one of continuous supervision, with a mandate to the Board to resolve initial investigations, expeditiously, and yet granting to it concomitant authority to institute corrective proceedings and especially where experience furnishes evidence of failure of an earlier order to accomplish its intended purpose. Back

 9 The other aspects of the legislative intent underlying Alternative regulation was to allow the Board to modify the regulation of competitive services; and to promote economic development." N.J.S.A. 48:2-21.16a(5). To approve a plan for an alternative form of regulation, the Board must find that the plan:

(1) will ensure the affordability of protected telephone services;
(2) will produce just and reasonable rates for telecommunications services;
(3) will not unduly or unreasonably prejudice or disadvantage a customer class of providers of competitive services;
(4) will reduce regulatory delay and costs;
(5) is in the public interest;
(6) will enhance economic development in the State while maintaining affordable rates;
(7) contains a comprehensive program of service quality standards, with procedures for board monitoring and review; and
(8) specifically identifies the benefits to be derived from the alternative form of regulation.

N.J.S.A. 48:2-21.18a. Back

10 RPA Exh. 8 (RPAa8). BA-NJ concedes that earnings have been much better than projected since the adoption of the Plan. Lauer Cross, February 11, 1997, Morning Session, Tr. at 79. Back

11 RPA Exh. 10. (RPAa5,7) BA-NJ admits that dividend payments have well exceeded the original projections. Lauer Cross, February 11, 1997, Morning Session, Tr. at 78. Back

12 While BA-NJ was not required to share any earnings because its Group I services did not exceed 13.7%, this information is important in order to evaluate the financial benefits realized by BA-NJ under the Plan. No other utility has been permitted to earn at such high levels and BA-NJ was only permitted to do so because some of the earnings would be flowed back to the State through network upgrades. These excess earnings are part of the consideration that was bargained for by the Board in the Plan. However, due to structural changes in the telecommunications industry BA-NJ selectively upgraded some of its network at a lower cost allowing it to prepare for competition. (RPAa55). Back

 13 Indeed, BA-NJ has favored the business communities while neglecting these traditionally under served customers. Notably, however, the data submitted by BA-NJ's regarding usage of advanced telecommunications to businesses is flawed. BA-NJ admitted into evidence a Deloitte & Touche Consulting Group survey prepared at BA-NJ's request to demonstrate the importance of telecommunications to businesses in terms of their operations, efficiency, and competitiveness and how their usage of advanced technologies has increased dramatically.

Deloitte & Touche Consulting Group conducted a survey of 45 business in the State of New Jersey. BA-NJ Exh. 8. The survey indicated that 97% of the businesses surveyed believe that telecommunications is critical to their business' ability to compete. Id. The survey also showed that the businesses' usage of telecommunications increased by 80% over the last three years. Id. Among all the businesses surveyed, 75% used ISDN, 60% used frame relay, 41% had dedicated lines, and 30% used SONET rings. The survey of small business showed that 100% used ISDN, 75%, used frame relay service, 41% had dedicated lines, and 30% used SONET rings. Id.

The study presented to the Board cannot be relied upon because it is fatally flawed. The study is of only 45 businesses in the State, which is not a representative of sample of the businesses in the this State. Furthermore, the 45 business selected by Deloitte & Touche were drawn from a list supplied by BA-NJ, which was comprised of BA-NJ customers. Afternoon Session, February 18, 1997, Tr. at 134-45 at 135. Thus, the businesses used in this survey were BA-NJ customers, customers that BA-NJ knew would have particular services. The survey, therefore, was done not only with an inadequate sample number but with a tainted pool of businesses. This survey cannot be considered a snapshot of what the state of telecommunications is in the business sector. The businesses surveyed were handpicked by BA-NJ and the number of businesses surveyed is too small from which to reach accurate conclusions.

BA-NJ acknowledges that this study cannot relied upon. BA-NJ admitted that "[t]he research was not intended to be statistically significant in terms of extrapolation to all of New Jersey." RPA Exh. 42. Afternoon Session, February 18, 1997, Tr. at 172. Counsel for BA-NJ also conceded that BA-NJ "quite clearly said the research was not intended to be statistically significant in terms of extrapolation of all of New Jersey." Id. at 174. Counsel for BA-NJ further stated that BA-NJ "did not in any shape or form try to indicate to this informed board that a sample of forty-five companies could be used for any statistical reliability...." Id. at 175. Accordingly, the Board should give no weight to the study because the conclusion in the study cannot be relied upon as accurate information. Back

14 BPU Docket No. 8312-1096, Decision and Order (November 1, 1984). Back

15 See also I/M/O the Proposed Transfer of Realty consisting of a 365.42 Acre Piece of Property Located in Bridgewater Township by Elizabethtown Water Company, BPU Docket No. WM8602235 (July 2, 1987). Back

 16 Specifically, the Board held as follows:

". . . [T]he Company's ratepayers are equitable entitled to a fair share of the gain potentially realizable on the fair market value of the subject property in return for their contribution toward the cost of maintaining this property during the period in which it was included in rate base. Toward this end, we determine a 50% sharing of the potential net gain on the fair and equitable sharing between the Company's ratepayers and the shareholders of its parent corporation. We believe that such distribution will adequately compensate the ratepayers for their past contributions towards the maintenance of the property and will allow the Company its fair share commensurate with the risks borne by its shareholders . . ."

Hackensack Water, mimeo at 2. Back

17 "[T]he first Restatement of Contracts defined consideration with no mention of benefit or detriment, exclusively in terms of bargain. The Restatement Second does the same and adds a definition. Something is said to be bargained for 'if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.' " (emphasis added) E. Allen Farnsworth, Contracts s.2.3 at 44 (2d ed. 1990). In the case at bar BA-NJ has not given the accelerated deployment of advanced technologies. Back

18 The capital expenditures planned for the Freehold Data Center in 1997 is $37 million. Transcript Request, TR-1-1. Back

19 BA-NJ projects that 29-32% of the State will have broadband by the year 2000. Lauer Cross, February 11, 1997, Afternoon Session, Tr. at 153. Back

20 Had BA-NJ been subject to continued rate base/rate of return regulation between 1992 and 1997, the Company's current financial condition would have compelled reduction in rates because of BA-NJ's enhanced financial performance. As stated previously, BA-NJ's rate of return on equity has been approximately 21% since 1992. That fact alone would have warranted rate reductions because the rate of return authorized by the BPU in all rate cases concluded between 1992 and 1996 has been between 10% to 11%. Over this period of time BA-NJ has also experienced greatly increased revenues, a substantial reduction in its annual cost of debt, and a substantially diminished rate base which have contributed to substantially increased earnings. Any or all of these factors would have resulted in rate reductions, had the company been subject to classical rate base/rate of return regulations. However, BA-NJ was permitted to operate under an alternative form of price cap regulation and therefore, ratepayers have not been given a reduction in rates that otherwise would have almost certainly occurred. Back

21 IDLS is a two-way, full motion interactive video and audio distance learning service that provides customers with the capability to interact with up to three other locations simultaneously. RPA Exh. 24. Back

22 The annual cost for a school district currently is approximately $115,000 with a 5% discount for special needs districts. Lauer Cross, February 11, 1997, Afternoon Session, Tr. at 174-75, 179-80; see also RPA Exh 24. Back

23 In the first phase of ONJ, BA-NJ focused on making technology available in the business and education sectors, with an emphasis on deploying narrowband, wideband, and broadband services in those marketplaces. Lauer Cross, February 11, 1997, Morning Session, Tr. at 28. Back

24 In BPU Docket No. TX94090388, it was reported that New Jersey had 2,549 customers participating in the Link-Up-America program. Tr. at 1272, May 15, 1995. Back

25 Notice of Proposed Rulemaking, CC Docket No. 95-115 at 5 (FCC No. 95-281, Adopted July 13, 1995). Back

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