Phone deregulation plan aimed at easing mergers’ path

An attempt sponsored by Verizon to cut into the state Public Utilities Commission’s power over telephone-company mergers is drawing fire from unlikely bedfellows—the PUC itself and an array of consumer groups. The effort, which partisans describe as a related piece of California’s 2-year-old deregulation of the telephone industry, is the second of two high-stakes measures related to telephone companies this year that are potentially worth hundreds of millions of dollars.

The latest bill is the most important communications deregulation bill to go before lawmakers since the cable deregulation bill authored by former Assembly Speaker Fabian Núñez in 2006. The freeze on phone rates contained in that bill expires in January.

Like the Núñez bill, the new legislation, by Sen. Alex Padilla, D-Los Angeles, is supported by a number of grass-roots community and civil rights groups, including the NAACP, some of whom have received financial support from Verizon’s charitable foundation. Thus far, the bill has received limited public attention.

At issue is a 19-year-old law that requires the California PUC to review and approve telephone-company mergers. In the case of big mergers, those worth $500 million or more, the PUC must make sure that at least half of the merger benefits go to ratepayers, that competition remains robust and that the merger is in the public interest. The Padilla bill, SB 1389, eliminates those rules.

Padilla says the change is necessary. “The bottom line is that the same process has been in place since 1989, but the industry has changed tremendously during the past 20 years. Back in 1989, nobody even knew what broadband or the Internet was.” The bill, he added, retains the PUC’s overview function “without compromising an inch” of public protection.

Padilla’s bill “would allow the PUC to review mergers and acquisitions based on the competitive marketplace. And the public’s right to have input would be unchanged,” said Charisse Bremond, president and CEO of the Brotherhood Crusade.

The PUC, quick to protect its regulatory turf, isn’t so sure.

By repealing those requirements, “a strong argument could be made that the Legislature intended to prohibit the CPUC from even considering such criteria in its deliberations. This outcome would be detrimental to the public interest itself,” PUC Deputy Director Pam Loomis wrote the Senate energy committee, which earlier approved the bill.

Loomis said a PUC subcommittee—composed of PUC President Michael Peevey and Commissioner Dian Grueneich—recommended opposing the bill unless it was changed to remove the limits on the PUC’s discretion. At the same time, she made it clear that Peevey and Grueneich believed that the 50-percent rule, the core of the public protections in the current merger law, might have to go—but only with the PUC’s blessing on a case-by-case basis.

The PUC should have the authority to decide “what percentage, if any, should be allocated to ratepayers. The current 50 percent requirement may not be appropriate for every telephone utility merger (or) acquisition,” Loomis said.

Verizon said the PUC would continue to exercise its review authority, and that the bill was intended to modernize old regulatory rules.

"The California Public Utilities Commission would continue to review mergers and acquisitions in the telecommunications industry and order any remedies it felt were in the public interest," said Verizon spokesman Jon Davies. "The bill simply streamlines many of the outdated requirements that can stifle the kind of new technologies consumers want in a competitive market where wireless phones, cable companies and broadband connections offer alternatives to traditional landline service."

Supporters, including Padilla, as well as opponents of the bill said they were not aware of any pending sale or merger involving Verizon, which owns scattered exchanges in California and which was formed in 2000 by the merger of GTE-California and Bell Atlantic. Three years ago, Verizon merged with MCI in 2005.

But the bill, coming on the heels of a major effort to by the telephone companies to block a bill that would stop them from charging customers to keep their land-line numbers unlisted, is a viewed by consumer groups and other critics as the second phase of the 2006 Núñez deregulation bill. In addition, the two-year freeze on telephone rates that was imposed as part of Núñez’ AB 2987 expires next January. The convergence of the three factors – the mergers, the unlisted numbers and the expiration of the rate freeze – has raised critics’ concerns. The unlisted numbers’ bill alone is worth an estimated $70 million annually to the industry.

“Every word in this bill is pandering to the telephone companies, every single word,” said Mindy Spatt of The Utility Reform Network, which opposes Padilla’s bill. “In the SBC-PacBell merger, we won rate reductions, commitments to createnew jobs in California, commitments to keep the company headquarters in California, and we got expanded supplier and customer diversity. We got money for community partnership and consumer education.”   

“Without it, we would have lost jobs, public education programs,” she added.

The opponents include AARP, the Peevey-Grueneich subcommittee on the PUC, Consumer Watchdog, Consumer Action, the Latino Issues Forum, former PUC Commissioner Geoffrey Brown and the PUC’s Division of Ratepayer Advocates.

Existing law governing mergers has “resulted in very real benefits to the consumer,” said Cher McIntyre of Consumer Action. “We believe that this process should remain intact and undisturbed.” Brown passage of the bill would mean that “large carriers, such as AT&T and Verizon, will be free of any review in California as they acquire the few remaining local exchanges and wireless carriers. These acquisitions, mergers and takeovers can result in higher prices and poorer service.”

The backers of Padilla’s proposal are equally adamant, and include nearly three groups–most local, community-based advocacy organizations. Many of those same groups also supported the Núñez deregulation bill, which repealed local cable operator franchising and set up a state franchise process instead. Then supporters include the United Cambodian Community, Sisters at the Well, the National Black Business Council, the Brotherhood Crusade, the California NAACP and others.

“The policies impacted by this legislation were developed nearly 20 years ago to oversee a rate-regulation field where rate regulation was necessary to protect California’s telephone customers,” the NAACP’s California president, Alice Huffman, told the Senate. “Today, as the telecommunications market has become more competitive, these regulations are outdated.”

Consumer critics note that several of the supporters of the bill have received funding from Verizon. The national NAACP received $1.5 million in 2006 to strengthen its technology systems. Three of the supporters – the Black Business Association, the California Black Chamber of Commerce and the National Black Business Council—were part a business consortium funded with a $250,000 Verizon grant in March.  Verizon is a strategic partner with the United States Hispanic Chamber of Commerce, another supporter of the bill, and is listed as a corporate partner with the California Small Business Association.

The issue of community groups supporting bills sponso
red by their corporate benefactors or partners is not a new one in the Capitol. But the practice has drawn increasing attention in recent years because the financial and political stakes are so high legislation dealing with telecommunications, energy, education, transportation and other issues.

“The absolute assumption is that these groups that come forward to testify have been given contributions by those for whom they are testifying. It doesn’t make them illegitimate. It’s just that they are needy, as most small groups are. This dynamic has been going on for years, but because of the regulatory battle now, what is interesting is that the companies have found a way to cover themselves, in terms of the effect on consumers,” Dugan said.