ORDER NO. 98-112

ENTERED MAR 24 1998

This is an electronic copy. Appendices may not be included.

BEFORE THE PUBLIC UTILITY COMMISSION

OF OREGON

UX 19

DISPOSITION: PETITION GRANTED

Procedural Background: On October 22, 1997, GTE Northwest Incorporated (GTE) filed a petition to exempt Automated Information Service from regulation. Cost support was provided on November 13, 1997. Under ORS 759.030(7), the Commission had 60 days from the filing date (that is, until December 21, 1997) to determine whether to accept the filing or suspend it for further investigation. At its December 16, 1997, public meeting, the Commission suspended the filing for five months to allow Staff to conduct a comprehensive investigation with public comment period. See Order No. 97-493. No comments were received on the filing. OAR 860-032-0025(7) permits the Commission to waive the requirement for hearing when no objections are filed.

Automated Information Service (AIS): AIS is a new service offering that is not currently tariffed. AIS enhances GTE’s deregulated messaging service and offers Information Bulletin Board, Overflow Attendant, and Automated Attendant subservices. Information Bulletin Board delivers prerecorded messages to callers, while Overflow Attendant and Automated Attendant answer incoming calls with a prerecorded menu and direct callers to another number, information box, voice mailbox, or attendant.

AIS equipment is located in GTE’s central office, rather than on a customer’s premises, relieving the customer of the expense of purchasing and maintaining equipment. The customer pays an installation fee and a monthly fee. AIS is sold by the port. The monthly fee for a customer choosing month-to-month service is $70. If a customer chooses the 12-month option, the monthly fee drops to $60. For the 36-month option, the monthly fee is $50. The nonrecurring installation charge, designed to recover application development and installation costs, is $495.

Applicable Law: ORS 759.030 allows the Commission to exempt a telecommunications service from regulation if price and service competition exist. The statute requires the Commission to consider the following factors before making its decision:

The extent to which services are available from alternative providers in the relevant market;

The extent to which the services of alternative providers are functionally equivalent or substitutable at comparable rates, terms, and conditions;

Existing economic or regulatory barriers to entry;

Any other factors deemed relevant by the Commission.

OAR 860-032-0025(1) and (3) provide that:

Upon petition by a public utility and, except as provided in section (7) of this rule, upon notice and hearing, the Commission shall exempt in whole or in part from regulation a service, if the Commission finds the rate the public utility proposes for the service covers its full long range incremental cost:

(a) Price and service competition exists; or

(b) The service is subject to competition.

Prior to making a finding under sections (1) or (2) of this rule, the Commission shall consider:

The extent to which services are available from alternative providers in the relevant market;

The extent to which the services of alternative providers are functionally equivalent of substitutable at comparable rates, terms, and conditions;

Existing economic or regulatory barriers to entry;

Any other factors deemed relevant by the Commission.

OAR 860-027-0052 provides a requirement for the allocation of costs between regulated and nonregulated utility operations. The public utility company must convince the Commission that its proposed treatment of interoperational transactions is proper.

Staff’s Analysis: In its analysis, Staff addressed each of the factors listed above.

Long-Run Incremental Costs (LRIC). The requirement that the price of a service cover its LRIC, found in OAR 860-032-0025(1), ensures that the company’s proposed price for the service is not predatory. The LRIC and pricing information that GTE provided with its petition indicate that GTE plans to price its AIS above the LRIC of providing the service.

Price and Service Competition. The Commission must consider the extent to which services are available from alternative providers in the relevant market and the extent to which the services of alternative providers are functionally equivalent or substitutable at comparable rates, terms, and conditions for the service in question. GTE indicated to Staff that the relevant market includes the exchanges in GTE’s service territory where it plans to offer AIS: the Portland area exchanges and Coos Bay. The Extended Calling Areas of those exchanges are also included in GTE’s description of the relevant market.

In its petition, GTE states that many suppliers in its Oregon service territory currently provide automated information services. The largest source of competition for AIS is stand-alone equipment on a customer’s premises. Advanced telephone answering machines by AT&T, Sharp, Brother, GE, Panasonic, and Casio sell for $50 to $500 at retail outlets. Modems and software priced from $40 to $200 sell at the same outlets. Multiple mailboxes, announcements, and call routing, which AIS offers, are standard features on this equipment.

Answering services also provide competition for AIS. GTE’s petition supplies copies of yellow page advertisements illustrating the availability of answering services in the relevant market. Charges for answering services offering features comparable to AIS range from $65 to $150 a month.

Moreover, in December 1997, the Commission approved U S WEST Communication, Inc.’s (USWC) petition to deregulate residence and business voice messaging services (UX 18). USWC’s Business Voice Messaging Service includes a call routing feature similar to the call routing included in AIS.

Economic or Regulatory Barriers to Entry. GTE’s petition identified no regulatory or economic barriers to entry into the AIS market. Voice trunks, remote maintenance lines, SMDI/SMSI data links and Centranet Lines, which are components of AIS service, will remain available from GTE at tariffed rates.

Affiliate Transactions. Local exchange companies like GTE have certain inherent advantages in marketing services. These advantages stem from the companies’ status as providers of basic local exchange service. A local exchange company routinely has the first customer contact and maintains ongoing communications with most potential service customers. It can also use current facilities and employees in its marketing and provision of AIS, and can use its current customer record base to identify potential AIS customers. OAR 860-027-0052, 860-035-0080, 860-035-0090, and 860-035-0100 address affiliate transaction. OAR 860-035-0090 and 860-035-0100 address the permitted use of customer proprietary network information. Staff review indicates that these OARs adequately minimize the local exchange company’s inherent advantages.

Other Considerations. OAR 860-027-0052 provides a requirement for the allocation of costs between regulated and nonregulated utility operations. GTE was convincing as to the propriety of their proposed treatment of interoperation transactions. AIS capital is booked to the same account as GTE’s Voice Messaging, a deregulated capital account. AIS software is booked to a deregulated expense account which accumulates all deregulated digital switching expense. The accounts had the following year-end balances:

Plant in Service $1,734,228

Accumulated Depreciation Reserves 1,025,503

Net Book $ 708,725

Deferred Tax Reserves __14,319

Net Rate Base $ 694,406

Commission Disposition: Staff reviewed GTE’s filing and drew the following conclusions.

The proposed prices for GTE’s AIS exceed the LRIC of providing those services. Many alternative providers are available to furnish automated information services in varying forms in the relevant market. Answering services, voice messaging services, and switchboard services substitute for GTE’s AIS at comparable rates. The Commission deregulated similar menu and call routing features for USWC in UX 18. No economic or regulatory barriers to entry have been identified.

ORS 756.568 permits the Commission to amend or revoke any order resulting from this investigation. That statute gives GTE ratepayers additional protection in combination with the statutes and rules set out above. Should GTE engage in predatory pricing or directly or indirectly subsidize its nonregulated operations through its regulated operations, or should any other circumstance significantly change, the Commission is able to exercise its statutory authority to protect ratepayers.

Staff concluded that GTE has satisfied the statutory requirements for exempting a telecommunications service from regulation under ORS 759.030. Staff also concluded that GTE has satisfied the requirements of OAR 860-032-0025 and OAR 860-027-0052 for exempting a telecommunications service from regulation. Staff recommended that the Commission accept GTE’s filing, with three conditions (set out in the ordering paragraphs).

At its March 13, 1998, public meeting, the Commission accepted Staff’s recommendations in toto.

ORDER

IT IS ORDERED that GTE’s petition to exempt AIS from regulation is granted with the following conditions:

1. In accordance with OAR 860-027-0052, after deregulation GTE will:

a. Charge its existing tariffed billing and collection rates to its unregulated AIS operation for any billing and collection services rendered;

b. Record all purchases by GTE’s regulated operations in the accounting books at the lower of cost or market price; and

c. File with the Commission appropriate changes to its previously filed cost allocation manual.

2. GTE shall not provide to its unregulated AIS operations any customer lists or information not available to the general market, and GTE will charge the unregulated AIS operations the Commission-approved tariff rate for any customer information provided.

3. GTE will adhere to OAR 860-035-0090 in any customer proprietary network information access provided to its AIS unregulated operations.

Made, entered, and effective ________________________.

A party may request rehearing or reconsideration of this order pursuant to ORS 756.561. A request for rehearing or reconsideration must be filed with the Commission within 60 days of the date of service of this order. The request must comply with the requirements in OAR 860-014-0095. A copy of any such request must also be served on each party to the proceeding as provided by OAR 860-013-0070(2). A party may appeal this order to a court pursuant to applicable law.