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BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA
Order Instituting Investigation into the State of Competition Among Telecommunications Providers in California, and to Consider and Resolve Questions raised in the Limited Rehearing of Decision 08-09-042
Investigation 15-11-007 (filed November 5, 2015)
RESPONDENT COALITION'S REPLY BRIEF
Mark P. Schreiber Patrick M. Rosvall Sarah J. Banola Cooper, White & Cooper LLP 201 California Street, 17th floor San Francisco, CA 94111 Phone: 415-433-1900 Email: [email protected] For Citizens Telecommunications Company of California, Frontier California Inc., Frontier Communications of America, Inc. and Frontier Communications of the Southwest Inc. Leon M. Bloomfield Law Offices of Leon M. Bloomfield 1901 Harrison Street, Suite 1400 Oakland, CA 94612 Phone: 510-625-8250 Email: [email protected] For T-Mobile West LLC dba T-Mobile James W. McTarnaghan Anne B. Beaumont Perkins Coie LLP 505 Howard Street, Suite 1000 San Francisco, CA 94105 Phone: (415) 344-7000 Email: [email protected] Attorneys Time Warner Cable Information Services (California) LLC
Suzanne Toller Zeb Zankel Davis Wright Tremaine LLP 505 Montgomery Street, Suite 800 San Francisco, CA 94111 Phone: 415-276-6500 E-mail: [email protected] For Comcast Phone of California, LLC Lesla Lehtonen California Cable & Telecommunications Assoc. 1001 K Street, 2nd Floor Sacramento, California 95814 Phone: 916.446.7732 Email: [email protected] For California Cable & Telecommunications Assoc. John L. Clark Goodin, MacBride, Squeri & Day, LLP 505 Sansome Street, Suite 900 San Francisco, California 94111 Phone: (415) 392-7900 Email: [email protected] For Charter Fiberlink CA-COO, LLC Isabelle Salgado Gregory L. Castle David P. Discher David J. Miller AT&T Services, Inc. 430 Bush Street, 3rd Floor San Francisco, CA 94108 Phone: (415) 268-9492 Email: [email protected]
FILED8-26-1604:59 PM
Margaret L. Tobias Tobias Law Office 460 Pennsylvania Ave. San Francisco, CA 94107 Phone: (415) 641-7833 Email: [email protected] For Cox California Telcom, LLC
Christian F. Binnig J. Tyson Covey Mayer Brown LLP 71 South Wacker Drive Chicago, IL 60606 Phone: (312) 782-0600 For AT&T California and New Cingular Wireless PCS, LLC
i
TABLE OF CONTENTS
Page(s)
INTRODUCTION ......................................................................................................................... 1
DISCUSSION ................................................................................................................................ 3
I. DEFINING THE RELEVANT VOICE MARKET ........................................................... 3
A. Wireless Voice Service Is Part of the Voice Market ............................................. 4
B. VoIP Service, Including OTT VoIP, Is Part of the Voice Market ......................... 8
C. UNE-Based Service Is Part of the Voice Market................................................. 10
D. Bundles Are Part of the Voice Market ................................................................. 10
E. The Geographic Market for Voice Service is Statewide ..................................... 12
F. Demographic Subgroups Do Not Constitute Separate Markets .......................... 13
II. ANALYZING THE VOICE MARKET .......................................................................... 15
A. The Retail Voice Communications Market Is Indisputably Competitive ............ 15
B. Intervenors’ Miscellaneous Claims Regarding the Voice Market Have No Factual or Economic Basis................................................................................... 17
C. Traditional Wireline Voice Prices Are Restrained by Effective Competition, Which Ensures They Are Just and Reasonable.............................. 20
D. Claims Regarding Wholesale Inputs Are Both Irrelevant and Unsupported ....... 21
E. The Market for Business Voice Service Is Competitive ...................................... 22
III. BROADBAND SERVICE............................................................................................... 23
A. Any Further Action in This Proceeding Must Respect Limits on the Commission’s Jurisdiction ................................................................................... 23
1. Intervenors Misconstrue the Commission’s Authority to Expand this Investigation to BIAS ........................................................................ 23
2. BIAS Providers Are Not Public Utilities Subject to the Commission’s Jurisdiction ....................................................................... 27
B. Intervenors’ Attempt to Define the Broadband Market Narrowly Is Contrary to Sound Economics and Should Be Disregarded ................................ 28
1. Intervenors’ Proposal to Define the Broadband Market by Speed is Flawed ...................................................................................................... 29
2. Intervenors’ Attempt to Segment the Market by Technology Is Improper ................................................................................................... 32
a. Mobile Broadband ....................................................................... 33
b. Satellite and Fixed Wireless Broadband ...................................... 36
Page
ii
3. Intervenors’ Proposal to Define The Broadband With a Narrow Geographic Focus is Unsupported ........................................................... 37
C. Intervenors’ Market Share Calculations Are Erroneous and Misleading ............ 38
D. Intervenors Mischaracterize Performance in the Broadband Market .................. 39
IV. PROPOSALS FOR NEW REGULATIONS ARE BEYOND THE SCOPE OF THE OII AND IMPROPER............................................................................................. 41
CONCLUSION ............................................................................................................................ 42
iii
TABLE OF AUTHORITIES
Page(s)
Cases
Assembly of State of California v. Public Utilities Commission, 12 Cal. 4th 87, 906 P.2d 1209 (1995) ......................................................................................26
City of New York v. FCC, 486 U.S. 57 (1988) ...................................................................................................................28
Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010) .................................................................................................26
Motion Picture Ass’n of Am., Inc. v. FCC, 309 F.3d 796 (D.C. Cir. 2002) .................................................................................................26
Pac. Tel. & Tel. Co. v. Pub. Util. Comm’n, 62 Cal. 2d 634, 401 P.2d 353 (1965) .......................................................................................23
Pacific Bell v. Pac-West Telecomm, Inc., 325 F.3d 1114 (9th Cir. 2003) .................................................................................................22
Southern California Edison v. Pub. Util. Comm’n, 140 Cal.App.4th 1085 (2006) ..................................................................................................41
TEC Cogeneration Inc., RRD v. Florida Power & Light Co., 76 F.3d 1560 (11th Cir. 1996) .................................................................................................18
Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014) .................................................................................................26
Administrative Decisions
Application of Ameritech Michigan Pursuant to Section 271 of the Communications Act, 12 FCC Rcd. 20543 (1997) ..................................................................10
In the Matter of the Board Investigation Regarding the Reclassification of Incumbent Local Exchange Carrier (ILEC) Services as Competitive Phase II, Docket No. TX11090570, at 29-31 (N.J. B.P.U., May 19, 2015) .............................................4
In the Matter of Commission Consideration of Effective Competition Areas & the Classification of Basic Local Exch. Serv. Pursuant to 4 CCR 723-1-2213, No. 13M-0422T, 2014 Colo. PUC LEXIS 196 (Feb. 21, 2014) ................................................4
In the Matter of Connect America Fund, 26 FCC Rcd. 17663 (rel. Nov. 18, 2011), aff’d, In re: FCC, 763 F.3d 1015 (10th Cir. 2014) ........................................................................................................................20
Page
iv
Decision Adopting Phased Transition Plan for Pricing Basic Telephone Service, Order Instituting Rulemaking Into the Review of the California High Cost Fund B Program, Decision 08-09-042 (Sept. 24, 2008)..................................................6, 7, 21
Ill. Commerce Comm’n v. Ill. Bell Tel. Co., No. 08-0569, 2009 Ill. PUC LEXIS 122 (June 11, 2009) ..........................................................4
Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 14-126, 30 FCC Rcd. 1375 (2015) ...................................29
Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 15-191, 31 FCC Rcd. 699 (2016) .....................................30
In the Matter of Petition of Frontier Commc’ns. Nw. Inc., Docket No. UT-121994, 2013 WL 3864201 (Wash. U.T.C. July 22, 2013) .......................4, 11
In re Petition of S.C. Tel. Coalition for a Determination that Wireless Carriers are Providing Radio-Based Local Exchange Servs. in S.C. that Compete with Local Telecomm. Serv. Providers, Docket No. 2015-290-C, 2016 WL 337712 (S.C. P.S.C. Jan. 26, 2016)...................................4
In re Possible Extension of Bd. Jurisdiction Over Single Line Flat-Rated Residential and Bus. Rates for Local Exch. Carriers, No. INU-08-1, 2008 Iowa PUC LEXIS 265 (June 27, 2008) ....................................................4
In re Sw. Bell Tel., L.P., 243 P.U.R.4th 20, 2005 Okla. PUC LEXIS 159 (July 28, 2005) ..............................................4
Order Instituting Rulemaking on the Commission’s Own Motion to Assess and Revise the Regulation of Telecommunications Utilities, Decision 06-08-030 (Aug. 30, 2006) ......................................................................................................... passim
Petition of SBC Wisconsin for Suspension of Wisconsin Statute sec. 196.196(1) with Regard to Basic Local Exchange Service, No. 6720-TI-196, 2005 Wis. PUC LEXIS 760 (Nov. 25, 2005) .........................................4, 11
Petition of Verizon Penn. LLC & Verizon N. LLC for Competitive Classification of All Retail Servs. in Certain Geographic Areas & for a Waiver of Regulations for Competitive Servs., Nos. P-2014-2446303, P-2014-2446304, Opinion and Order at 36 (Penn. P.U.C. Mar. 4, 2015) ..............................................................4
Page
v
Proceeding on Motion of the Comm’n to Examine Issues Related to the Transition to Intermodal Competition in the Provision of Telecomm. Servs., 248 P.U.R.4th 71, 2006 N.Y. PUC LEXIS 193 (Apr. 11, 2006) .........................................4, 11
Protecting and Promoting the Open Internet, 30 FCC Rcd. 5601........................................................................................................26, 27, 28
Unbundled Access to Network Elements, 20 FCC Rcd. 2533 (2005) ........................................................................................................18
Statutes and Regulations
26 Del. Code § 705(d)(1) .................................................................................................................4
47 U.S.C. § 154(i) ..........................................................................................................................25
47 U.S.C. § 218 ..............................................................................................................................27
47 U.S.C. § 219 ..............................................................................................................................27
47 U.S.C. § 271(c)(1)(A) ...............................................................................................................10
47 U.S.C. § 706(a) .................................................................................................................. 23, 26
47 U.S.C. § 706(b) .........................................................................................................................29
Iowa Code Ann. § 476.1D(1)(b)(1) .................................................................................................4
Neb. Rev. St. § 86-143(2) ................................................................................................................4
Ohio Rev. Code § 4927.12(C)(3)(a) ................................................................................................4
Pub. Util. Code § 216(a) ................................................................................................................23
Pub. Util. Code § 216(b) ................................................................................................................26
Pub. Util. Code § 314(a) ..........................................................................................................23, 24
Pub. Util. Code § 314(b) ..........................................................................................................24, 25
Pub. Util. Code § 451 .....................................................................................................................23
Pub. Util. Code § 581 .....................................................................................................................27
Pub. Util. Code § 582 .........................................................................................................23, 24, 27
Pub. Util. Code § 701 ...............................................................................................................24, 26
Page
vi
Pub. Util. Code § 709 ...............................................................................................................24, 25
Pub. Util. Code § 710 .....................................................................................................................24
Pub. Util. Code § 1708 ...................................................................................................................41
Pub. Util. Code § 1708.5 ................................................................................................................41
Pub. Util. Code § 1794 ...................................................................................................................28
South Dak. Comp. L. § 49-31-1.3 ....................................................................................................4
Tenn. Code Ann. § 65-4-101(1) .......................................................................................................4
Tenn. Code Ann. § 65-5-109(o)(2) ..................................................................................................4
Tex. Code Ann., Utilities Code § 65.052(b)(2)(B) ..........................................................................4
Other Authorities
Assembly Committee on Utilities and Commerce (Hearing June 18, 2012), ................................25
Assembly Bill No. 116 (1985-1986 Reg. Sess.) Concurrence in Senate Admendments ..........................................................................................................................25
CalSPEED: California Mobile Broadband – An Assessment – Fall 2014, Ken Biba, Managing Director and CTO Novarum, Inc. .................................................................33
Comments of the California Public Utilities Commission, GN Docket No. 15-191 (filed Sept. 15, 2015) ...............................................................................................................35
CPUC Communications Division, “Market Share Analysis of Retail Communications in California June 2001 through June 2013,” (Jan. 5, 2015) .......................15
CPUC Communications Division, “Market Pricing Survey of Retail Communications Services in California” (Dec. 2, 2014) ........................................................20
FCC Report, Internet Access Services: Status as of December 31, 2014 (March 2016) ........................................................................................................................................31
FCC Report, Local Telephone Competition: Status as of December 31, 2006 (rel. Dec. 2007) ..................................................................................................................................2
FCC Report, Voice Telephone Services: Status as of June 30, 2015 (rel. Aug. 2016) ..........................................................................................................................................1
FCC Report, 2015 Measuring Broadband America Fixed Broadband Report .............................39
Page
vii
Frank K. Easterbrook, Workable Antitrust Policy, 84 Mich. L. Rev. 1696 (1986) .......................17
Health Statistics, “National Health Interview Survey Early Release Program,” (rel. Aug. 2016) ..........................................................................................................................5
Herbert Hovenkamp, United States Competition Policy in Crisis: 1890–1955, 94 Minn. L. Rev. 311, 314 (2009) ................................................................................................17
I P. Areeda & H. Hovenkamp, Antitrust Law, ¶ 202b (3d ed. 2006) ..............................................6
National Center for Health Statistics, “National Health Interview Survey Early Release Program,” (rel. Aug. 2016) ...........................................................................................5
Newton’s Telecom Dictionary (23d ed., 2007) .............................................................................10
Wireline Competition Bureau Announces Results of 2016 Urban Rate Survey for Fixed Voice and Broadband Services, Posting of Survey and Explanatory Notes, and Required Minimum Usage Allowance for ETCs Subject to Broadband Public Interest Obligations,” WC Docket No. 10-90, Public Notice DA 16-362 (rel. Apr. 5, 2016) .................................................................................................21
1
Pursuant to the July 1, 2016 Scoping Memo (“Scoping Memo”), the Respondent Coalition
hereby submits its Reply Brief.1
INTRODUCTION
As stated in the Scoping Memo (at 2), the focus of this investigation is on competition for
traditional wireline voice service. The record proves that the voice services market is even more
competitive today than it was when the Commission granted pricing flexibility in the 2006 URF
Decision (D.06-08-030).2 Most notably:
The number of wireless subscriptions in California has increased from 29.7 million lines to 40.7 million lines.
The number of interconnected VoIP subscriptions in California has increased from 2.14 million lines in December 2008 to 6.73 million lines in June 2015.
The percentage of adults living in wireless-only households in California has increased from approximately 8% to almost 47%.
Meanwhile, the number of ILEC switched access lines in California has decreased from 18.9 million lines to 6.9 million lines, and total subscriptions provided by ILECs – both switched access and VoIP – has decreased from 37% of all California voice lines/subscriptions to less than 15%.3
1 The Respondent Coalition consists of Pacific Bell Telephone Company d/b/a AT&T California (U 1001 C) (“AT&T California”), New Cingular Wireless PCS, LLC (U 3060 C) (“AT&T Mobility”) (together, “AT&T”), California Cable & Telecommunications Association, (“CCTA”), Charter Fiberlink CA-CCO, LLC (U 6878 C), Comcast Phone of California, LLC (U 5698 C), Cox California Telcom, LLC (U 5684 C), Citizens Telecommunications Company of California (U 1024 C), Frontier California Inc. (U 1002 C), Frontier Communications of America, Inc. (U 5429 C), and Frontier Communications of the Southwest Inc. (U 1026 C), T-Mobile West LLC (U 3056 C), and Time Warner Cable Information Services (California), LLC (U 6874 C) (collectively, the “Respondent Coalition”). This brief sometimes refers to services offered by the respondents or their affiliates. Rather than individually naming the legal entity that provides the services, the brief refers to them generically by their corporate name, e.g., Comcast. That said, Respondent Coalition members reserve the right to object to the naming of non-utility affiliates as respondents. See Motion by Cox to Modify List of Named Respondents (filed December 18, 2016). 2 Order Instituting Rulemaking on the Commission’s Own Motion to Assess and Revise the Regulation of Telecommunications Utilities, Decision 06-08-030 (Aug. 30, 2006) (“URF Decision”). 3 Respondent Coalition’s Opening Brief, at 4, 6, 12-20, 30-32 (“Coalition Br”). See also FCC Report, Voice Telephone Services: Status as of June 30, 2015, Supplemental Table 1, California subscriptions tab (rel. Aug. 2016) (California total switched access lines plus wireless and VoIP subscriptions equaled 55.9 million; ILEC switched access and VoIP lines equal 7.15 million, less than 15% of the total) (“FCC June
The following chart shows the tre
Several more figures, tables, grap
competition since 2006 are inclu
(Figures 1-12) and Dr. Topper’s
37, and 41 (Exhibits 1-6).
Even in the face of these
and seek to reimpose rate regulat
2015 Voice Report”), available at htreport; FCC Report, Local TelephonDec. 2007) (ILEC and CLEC switchmillion as of December 2016, with I4 Data for 2006-2013 come from thedata for 2014 through June 2015 coThe Local Competition Reports conReports contain Supplemental Tablethese reports are available on the FC(Topper/Joint Respondents 6/1 Test
2
ends in voice subscription in California since 20
phs, and maps further illustrating the growth in v
ded in Dr. Aron’s June 1 Testimony for AT&T
June 1 Testimony for the Joint Respondents (Ex
facts, Intervenors assert that the voice market is
tion on retail landline voice service. In doing so
ttps://www.fcc.gov/wireline-competition/voice-telepne Competition: Status as of December 31, 2006, Tahed access lines plus wireless subscriptions in CalifoILEC lines (18.9 million) accounting for about 37%)
e FCC’s Local Competition Reports issued from 200me from the FCC’s Voice Telephone Services report
ntain tables with state-specific data and the Voice Teles that have Excel spreadsheets with tabs for each staCC website, www.fcc.gov/reports-research; see also timony).
006: 4
voice
(Ex. 5) at 15-41
x. 41) at 16-21,
not competitive
o, however, they
phone-services-bles 7 and 14 (rel.
ornia totaled 51.7 ).
07 to 2014, and ts for those years. lephone Services ate’s data. All of Ex. 41 at 16
3
simply repackage the same arguments the Commission rejected in the URF Decision. For
example, they seek to exclude wireless and over-the-top VoIP service from the voice market,
even though URF included them5 and even though wireless and non-ILEC VoIP service account
for about 85% of voice subscriptions in California today. See supra n.2; Coalition Br. at 32.
Intervenors also point to a range of considerations that they think might show a lack of
competition, but none bear on the actual evidence of competition in the California voice market
today. In addition, Intervenors advance misguided policy proposals that exceed the scope of this
data-gathering exercise. The Commission should reject Intervenors’ positions. The record
cannot support a reversal of URF, and Intervenors’ suggestions to micromanage the competitive
voice market would inevitably distort incentives and impede competition, thereby disserving the
public interest.
Some Intervenors also propose that the Commission reach findings regarding competition
in the market for broadband internet access services (“BIAS”). As discussed below in Section
III.A, however, these issues remain outside the proper scope of this proceeding, and any attempt
to regulate such services would exceed the Commission’s jurisdiction.
DISCUSSION
I. DEFINING THE RELEVANT VOICE MARKET6
As shown in the Respondent Coalition’s Opening Brief (at 11-20), the relevant market for
voice service includes all competing offerings of voice service over all technologies, and
5 URF Decision at 4 (referring to the “voice communications market” as “include[ing]” “pure-play VoIP providers” that “will add a voice communications service to any broadband connection”) and at 74-76, 128. 6 Although parties were directed to use a common briefing outline in the Scoping Memo, several Intervenors deviated significantly from that outline in their opening briefs, in some cases using only the broadest headings. Accordingly, in this Reply Brief, the Respondent Coalition utilizes headings that appropriately reflect the arguments to which they are responding.
4
competition occurs statewide for all consumers. Accord, URF Decision at 74, 127, 157.
Intervenors, however, seek to define the voice market very narrowly in terms of services,
geography, and consumer characteristics. Their arguments ignore the undisputed marketplace
facts, which show there continues to be a single voice market. Coalition Br. at 32.
A. Wireless Voice Service Is Part of the Voice Market
The Respondent Coalition already detailed the extensive marketplace data and evidence
of actual consumer behavior proving that consumers can and do view wireless voice service as a
competitive alternative to wireline voice service. Coalition Br. at 12-17, 30-32. Accordingly,
just as the Commission found in the URF Decision (at 74-76, 128-29) and as several states have
discussed,7 wireless voice service is a competitive alternative to wireline voice service. Even
7 See, e.g., Conn. G.S.A. § 16-247f(d)(2); 26 Del. Code § 705(d)(1); Iowa Code Ann. § 476.1D(1)(b)(1); Neb. Rev. St. § 86-143(2); Ohio Rev. Code § 4927.12(C)(3)(a); South Dak. Comp. L. § 49-31-1.3; Tenn. Code Ann. §§ 65-4-101(1) & 65-5-109(o)(2); Tex. Code Ann., Utilities Code § 65.052(b)(2)(B); In re Petition of S.C. Tel. Coalition for a Determination that Wireless Carriers are Providing Radio-Based Local Exchange Servs. in S.C. that Compete with Local Telecomm. Serv. Providers, Docket No. 2015-290-C, 2016 WL 337712, at *20 (S.C. P.S.C. Jan. 26, 2016) (“South Carolina Order”); In the Matter of the Board Investigation Regarding the Reclassification of Incumbent Local Exchange Carrier (ILEC) Services as Competitive Phase II, Docket No. TX11090570, at 29-31 (N.J. B.P.U., May 19, 2015) (“New Jersey 2015 Order”); Joint Petition of Verizon Penn. LLC & Verizon N. LLC for Competitive Classification of All Retail Servs. in Certain Geographic Areas & for a Waiver of Regulations for Competitive Servs., Nos. P-2014-2446303, P-2014-2446304, Opinion and Order at 36 (Penn. P.U.C. Mar. 4, 2015) (“Pennsylvania Order”); In the Matter of Commission Consideration of Effective Competition Areas & the Classification of Basic Local Exch. Serv. Pursuant to 4 CCR 723-1-2213, No. 13M-0422T, 2014 Colo. PUC LEXIS 196, ¶¶ 29-41 (Feb. 21, 2014) (“Colorado Order”); In the Matter of Petition of Frontier Commc’ns. Nw., Inc., Docket No. UT-121994, 2013 WL 3864201, at *14 (Wash. U.T.C. July 22, 2013) (“Washington Order”); Ill. Commerce Comm’n v. Ill. Bell Tel. Co., No. 08-0569, 2009 Ill. PUC LEXIS 122, at *241 (June 11, 2009) (“Illinois Order”); In re Possible Extension of Bd. Jurisdiction Over Single Line Flat-Rated Residential and Bus. Rates for Local Exch. Carriers, No. INU-08-1, 2008 Iowa PUC LEXIS 265, at *14 (June 27, 2008) (“Iowa Order”); Proceeding on Motion of the Comm’n to Examine Issues Related to the Transition to Intermodal Competition in the Provision of Telecomm. Servs., 248 P.U.R.4th 71, 2006 N.Y. PUC LEXIS 193, at *64 (Apr. 11, 2006) (“New York Order”); In re Sw. Bell Tel., L.P., 243 P.U.R.4th 20, 2005 Okla. PUC LEXIS 159, at *100 (July 28, 2005) (“Oklahoma Order”); Petition of SBC Wisconsin for Suspension of Wisconsin Statute sec. 196.196(1) with Regard to Basic Local Exchange Service, No. 6720-TI-196, 2005 Wis. PUC LEXIS 760, at *6 (Nov. 25, 2005) (“Wisconsin Order”). See also Fla. Pub. Serv. Comm’n, Report on the Status of Competition in the Telecommunications Industry, at 29 (Dec. 31, 2013).
5
TURN’s Dr. Roycroft agreed that “wireless voice services place a competitive constraint on
wireline voice service providers.” Ex. 54 at 33:1-4 (Roycroft/TURN 6/1 Testimony).
Nevertheless, TURN and ORA seek to exclude wireless voice service from the voice
market because less than 50% of all adults in California households rely exclusively on wireless
voice service and many consumers use both wireless and wireline. ORA Br. at 21; TURN Br. at
10. But that overlooks basic economic principles. “The fact that two goods are consumed
simultaneously does not imply that they are not substitutes.” Ex. 42 at 11:9-10 (Topper/Joint
Respondents 7/15 Testimony). Moreover, under TURN/ORA’s logic, nothing could count as a
competitive alternative until it captured more than 50% of the market, which is absurd.
Intervenors simply ignore the facts that as of the end of 2015 only 5.5% of adults in California
lived in households that exclusively used a landline phone, whereas almost 47% of adults in
California lived in households that exclusively used a wireless phone (up from just 8% in 2006.8
Given those facts, no one could reasonably deny that wireless voice service vigorously competes
with wireline voice service.
TURN asserts that wireless voice cannot be counted as a competitive alternative to
landline voice service because there is not “symmetric substitution,” i.e., although consumers
readily use wireless voice service in place of wireline, they are less likely to use wireline voice
service in place of wireless. TURN Br. at 10. But TURN’s theory misses the only relevant issue
here, i.e., do consumers view wireless as a competitive alternatives to traditional wireline voice
service? Scoping Memo at 2; 7/20/16 Tr. at 69 (Katz); Ex. 29 at 8:18-9:6 (Gillan/Cox 7/15
Testimony). The record proves they do. Furthermore, none of the sources Dr. Roycroft cites
8 National Center for Health Statistics, “National Health Interview Survey Early Release Program,” Table 1 (rel. Aug. 2016) (issued by Centers for Disease Control), available at www.cdc.gov. See Coalition Br. at 14-16 and associated graphs, presenting FCC data on wireline subscriptions in California and CDC data on wireless/wireline service in California.
6
supports his theory on “one-way substitution.” The Department of Justice complaint he cites
(Ex. 54 at 30:17-31:11) says nothing about whether wireless voice service is a competitive
alternative to wireline service, because that was not the issue in that case. And the academic
article and Finland document he cites support the Respondent Coalition’s position, stating that
“[o]ne can substitute (for) a fixed-line phone by a mobile phone,” and that “retail mobile access
is a distinct adjacent product market which gives rise to competitive constraints being exercised
on operators in the fixed access market.”9 Id.
In addition, Dr. Roycroft alleges that wireless voice service should be excluded because
he does not believe consumers would switch from wireline voice to wireless voice if the price for
wireline service increased. TURN Br. at 8-9. But Dr. Roycroft based that assertion entirely on
how the “SSNIP” test has been applied “in other venues” and on his personal “expectations.” Id.
at 9 (emphasis added). In other words, Dr. Roycroft (i) did not do any actual data analysis, and
(ii) chose to ignore the undisputed marketplace evidence of actual consumer behavior, as well as
the multiple academic studies demonstrating a positive cross-elasticity of demand between
wireline and wireless voice service. See Ex. 5 at 31 n.53 (Aron/AT&T 6/1 Testimony); Ex. 28 at
9, n.9 (Gillan/Cox 6/1 Testimony).
ORA contends that wireless voice service is not a competitive alternative to wireline
service because the pricing trends for the two services have moved in different directions. ORA
Br. at 21-22. But ORA overlooks that the reason wireline voice prices have increased since 2011
is that they were kept artificially low for so long (from 1995 to 2011) to fulfill regulatory goals
9 Dr. Roycroft claims Dr. Katz has supported his “one-way substitution” theory, but that claim is false. Ex. 57 at 10:6-11:10 (Roycroft/TURN 7/15 Testimony). The cited testimony from Dr. Katz dealt only with whether wireline service is a competitive alternative for wireless service, which is not the question here. Dr. Katz’s testimony in that case did not discuss or consider the opposite question of whether wireless voice service is a competitive alternative for wireline voice service.
7
of the time. Ex. 7 at 5:11-15 (Aron/AT&T 7/15 Testimony); 7/20/16 Tr. at 86-87 (Aron). The
Commission recognized this fact in the URF Transition Decision,10 noting that expecting rate
increases during and after the transition period in 2009 and 2010 would be “sensible in light of
market conditions” and that “it is reasonable to allow basic rates to adjust to levels dictated by
competitive market forces, thereby promoting economic efficiency.”11 URF Transition Order at
25, 30-31.
ORA’s argument ignores several other important points as well. First, as Dr. Katz
explained, the decline in wireless prices, driven by technological change, only makes wireless an
even stronger competitive alternative to landline voice service. Ex. 8 at 7:1-4 (Katz/AT&T 7/15
Testimony). Second, wireline and wireless voice service are differentiated products with
different features and cost structures. Thus, even while competing closely, their prices do not
need to closely follow each other’s. To use Dr. Topper’s example, consider movie theater tickets
and Netflix. While they likely act as competitive constraints to each other, we would not expect
the price of one product to closely mirror the price of the other product. Ex. 42 at 12:6-12
(Topper/Joint Respondents 7/15 Testimony). Third, as Dr. Aron noted, wireless and wireline
prices are not one-dimensional, but rather vary on a range of service and term dimensions that
preclude any easy assumption that wireline prices are routinely above or below wireless prices.
Ex. 7 at 6:1-9:2 (discussing varied service options in California).
10 Decision Adopting Phased Transition Plan for Pricing Basic Telephone Service, Order Instituting Rulemaking Into the Review of the California High Cost Fund B Program, Decision 08-09-042 (Sept. 24, 2008) (“URF Transition Order”). 11 As noted in the URF Transition Decision (at 8), from 1995-2011, with one minor adjustment, the URF ILECs’ basic service voice rates were frozen “at a level set to recover one-half of the ILEC’s costs.”
8
B. VoIP Service, Including OTT VoIP, Is Part of the Voice Market
No party disputes that facilities-based VoIP service12 is a competitive alternative to
traditional wireline voice service and should be included in the relevant market definition for
voice services. See, e.g., TURN Br. at 24; ORA Br. at 42; URF Decision at 75-76, 129-30. In
fact, since 2006 “VoIP providers have further established themselves as significant competitive
alternatives to wireline voice providers, as evidenced by dramatic growth in the number of VoIP
subscriptions in California.” Ex. 41 at 23:13-15 (Topper/Joint Respondents 6/1 Testimony).
The large growth in all interconnected VoIP lines is depicted in the following chart:
Source: FCC Report, Local Telephone Competition: Status as of December 31, 2013 (rel. Oct. 2014).13
12 Although Respondent Coalition agrees that the Commission should consider competition from VoIP service when analyzing the voice market, the Coalition continues to reserve its objections (outlined in numerous other pleadings filed in this proceeding) to the Commission’s authority to regulate VoIP services, compel information regarding such services, and/or to name VoIP providers as respondents to the OII. See, e.g., Coalition Motion for Reconsideration by the Full Commission of the February 4, 2016 Ruling of the Assigned Administrative Law Judge (filed March 8, 2016). 13 This FCC chart only goes through the end of 2013, but the general upward trend in VoIP subscriptions and share of wireline (switched access and VoIP) lines has continued. The FCC June 2015 Voice Report, at 3 (Figure 2), shows that as of June 2015, on a national basis, VoIP lines accounted for 56% of residential wireline voice lines, 28% of business wireline voice lines, and 45% of all wireline voice lines.
9
ORA, however, seeks to exclude over-the-top (“OTT”) VoIP service from the voice
market, arguing that providers of OTT VoIP depend on another entity to provide the underlying
facility and broadband connection and therefore do not provide any additional competition for
traditional voice service providers. ORA Br. at 34-35. In support of its position, ORA asserts
that the FCC does not view competition over resold lines as a material competitive constraint.
Id. at 34.
ORA is incorrect. The FCC now collects data specific to OTT VoIP and includes it in its
reports about voice services, which shows that OTT VoIP should not be treated differently than
other alternatives to landline voice services. For example, the FCC reports that “[a]s of
December 2014, OTT VoIP services comprised 15% of all interconnected VoIP subscriptions in
California.” Ex. 42 at 22:16-17 (Topper/Joint Respondents 7/15 Testimony).14 Further, ORA
misinterprets a statement the FCC made in its special access proceeding (i.e., business data
services) about resold lines not being counted as a material competitive restraint. The FCC’s
statement is limited to the scenario where there is a “facility-based supplier with market power.”
ORA Br. at 34. That simply is not the case here.
Moreover, broadband at the speeds necessary to support OTT VoIP is widely available in
California through a host of intermodal providers. Indeed, almost three-quarters of California
households already have the broadband connections necessary for OTT VoIP, and therefore
could switch to OTT VoIP for only the small incremental cost of the voice service. See Coalition
Br. at 27-28; Ex. 8 at 12:14-16 (Katz/AT&T 7/15 Testimony). Thus, as the Commission
recognized in the URF Decision (at 76), and contrary to ORA’s claim here (at 35), the fact that
14 And even that figure understates the true importance of OTT VoIP, for it excludes non-interconnected OTT VoIP services like Skype and WhatsApp, which continue to grow rapidly. Ex. 41 at 23:17-24:6 (Topper/Joint Respondents 6/1 Testimony).
10
OTT VoIP requires a broadband connection in no way prevents it from being a competitive
alternative to traditional wireline voice service.
C. UNE-Based Service Is Part of the Voice Market
ORA asserts that CLECs providing UNE-based services are not “facilities-based” carriers
and therefore cannot count as a competitive alternative to the ILECs’ traditional wireline voice
services. ORA Br. at 33-34. Rather, ORA claims, CLEC voice lines count only if they are
provided over “independent local loop facilities.” Id. ORA’s position lacks merit. The FCC
determined long ago that a carrier using UNEs qualifies as a “facilities-based competitor” under
47 U.S.C. § 271(c)(1)(A).15 Indeed, if one used ORA’s definition no carrier would qualify as
“facilities-based,” because all carriers lease at least some facilities from other providers.16
TURN does not seek to exclude UNE-based competition, but argues that there is not as
much UNE-based competition today as in 2006. TURN Br. at 22-23, 52. That argument misses
the point. A decline in the number of UNE loops over time does not affect the relevance of
UNE-based competition. As the Commission found in the URF Decision, it is not just the use of
UNEs, but their ready availability that makes them constrain ILECs’ wireline voice rates. URF
Decision at 118-19.
D. Bundles Are Part of the Voice Market
The URF Decision treated bundles as part of the voice services market. See URF
Decision at 75; Coalition Br. at 17 n.24 (collecting state commission decisions from around the
country that have made similar findings regarding bundles). The facts here compel the same
15 Application of Ameritech Michigan Pursuant to Section 271 of the Communications Act, 12 FCC Rcd. 20543, ¶¶ 91-103 (1997). 16 CALTEL Br. at 11; NEWTON’S TELECOM DICTIONARY at 384 (23d ed., 2007) (definition of “facilities-based carrier”) (“There are probably no 100% facilities based carriers in the world, since even the old government monopoly phone companies leased international lines and all today’s competitive carriers lease circuits from each other.”).
11
result. As Dr. Aron showed, California consumers today have access to and subscribe to a wide
array of competing bundles from different carriers that either include voice service or are voice-
only. See Ex. 5 at 43-52 (Tables 13A-13I) (Aron/AT&T 6/1 Testimony). Thus, “regardless of
whether the customer seeks a voice-only service offering (such as a local-and-long distance
package) or multiple services in a bundle, the customer has multiple options.” Id. at 42. Bundles
therefore “increase consumer choices for voice services” and constrain prices. Ex. 41 at 33:12-
13 (Topper/Joint Respondents 6/1 Testimony); Ex. 42 at 23:6-12 & n.57 (Topper/Joint
Respondents 7/15 Testimony).
ORA and TURN attempt to exclude bundles from the voice market, but their arguments
fail. For example, they contend that traditional cable/landline triple-play bundles “can” foreclose
entry by stand-alone voice providers or inhibit consumers from switching voice providers (ORA
Br. at 33-34; TURN Br. at 59-60), or that bundles do not constrain the rates for stand-alone voice
service (TURN Br. at 47). Yet ORA and TURN cite no evidence in support of those claims.
They also ignore the array of stand-alone and voice-only offerings in the market at a range of
price points and service options, all of which compete with one another. Ex. 5 at 43-52 &
Appendix 1 (Aron/AT&T 6/1 Testimony); Ex. 7 at 7:15-9:2 (Aron/AT&T 7/15 Testimony); Ex.
41 at 33:1-19 (Topper/Joint Respondents 6/1 Testimony). Moreover, the relevant market here is
the market for all voice services, not just stand-alone service.17 Given that many customers have
switched from stand-alone service to bundles over the years, there can be no doubt that bundles
are a competitive alternative and part of the voice services market. See Coalition Br. at 17.
17 Accord, e.g., New York Order, 2006 WL 1005054; Washington Order, 2013 WL 23112334, at *14; Wisconsin Order, 2005 Wis. PUC LEXIS 760, at *5-6.
12
E. The Geographic Market for Voice Service is Statewide
ORA and TURN briefly address whether the retail voice market should be defined by
geography. Although ORA and TURN contend that the voice market should be defined and
analyzed at a census block or census tract level, neither provides any substantive or economic
support for this contention. ORA Br. at 21; TURN Br. at 26-27, 38.
ORA argues that the market should be analyzed “at the most granular geographic levels
available . . . [b]ecause wireline services are not portable.” ORA Br. at 21. But ORA fails to
establish any analytical connection between the fixed nature of wireline service and the level at
which competition should be measured. See Ex. 42 at 35:13-18 (Topper/Joint Respondents 7/15
Testimony). Whether services are fixed or mobile, their competitive impacts should be
considered based on the scope of the market in which they arise. ORA’s argument appears to
assume that wireline services should be measured at the census block level just because they can
be isolated to those locations. But that bears no relation to any valid market analysis. ORA’s
view is inconsistent with the actual market conduct of providers and customers, as detailed in the
Respondent Coalition’s Opening Brief (at 22-25).18
TURN recognizes that competition operates at a broader level than the census block. For
instance, TURN notes that ILECs maintain uniform statewide rates for basic service, and that
carriers have established rates for wireline services consistent with national pricing strategies and
without regard to local market conditions. TURN Br. at 51, 54; see also Ex. 6 at 8:18-9:21
(Katz/AT&T 6/1 Testimony); Ex. 41 at 3:21-4:4, 54:14-19 (Topper/Joint Respondents 6/1
Testimony); Ex. 42 at 14:3-14 (Topper/Joint Respondents 7/15 Testimony). Yet despite that
18 ORA’s argument is also inconsistent with the Commission's finding in the URF Decision that “it is clear the relevant market encompasses telecommunications broadly,” including all intermodal voice offerings, such as wireless voice service, VoIP service from cable companies, and other VoIP providers. ORA Br. at 7 (acknowledging Commission’s finding).
13
acknowledgement, TURN illogically argues that the market should be analyzed at a granular
level. TURN Br. at 38-40. It is simply improper to define a market using small geographic areas
(i.e., a census block) that do not reflect competitive reality.
TURN and CforAT advance additional arguments for considering geographic factors,
such as alleged differences in offerings based on the location of customers’ residences, rural
versus urban areas, and terrain, foliage, and weather, but none of these reasons justifies defining
the market at a census block or similarly granular level. TURN Br. at 26; CforAT Br. at 5.
Competitive conditions are similar throughout the state and so, as the Commission found in the
URF Decision, the proper geographic market is statewide. Coalition Br. at 24.
F. Demographic Subgroups Do Not Constitute Separate Markets
Greenlining and CforAT assert that the market for voice service should be divided into
“sub-markets” based on individual groups, specifically communities of color and the disabled.
Greenlining Br. at 6-13; CforAT Br. at 3-10. They allege that competitive alternatives like
wireless voice and VoIP may not be as attractive to certain groups, and that wireline voice
should therefore be re-regulated and priced differently for those groups than for everyone else.
These claims have no merit.
As a threshold matter, the Commission rejected the same type of claims in the URF
Decision, finding that “there is no compelling reason to segment the market further by user
characteristics, such as income or use characteristics[.]” URF Decision at 76. Moreover, price-
constraining competition takes place at the margin of a market, so as long as there are options
attractive enough to consumers at the margin to keep prices in check (as there undeniably are for
voice service), all consumers are protected from unjust or unreasonable rates. URF Decision at
132; Coalition Br. at 25-26. That is especially true in the voice communications market, where
14
providers use uniform statewide or nationwide pricing.19 Consequently, as the URF Decision
recognized (at 263 (Finding of Fact 25)), “[a]ll consumers, including the disabled, can benefit
from the expansion of consumer choice in a competitive marketplace.” Moreover, contrary to
Intervenors’ claims, competing carriers do seek to serve the Intervenor-designated groups in a
variety of ways. See, e.g., Ex. 28 at 31, n.35 (Gillan/Cox 6/1 Testimony); Ex. 41 at 22:1-4
(Topper/Joint Respondents 6/1 Testimony) and Ex. 5 at 26 (Aron/AT&T 6/1 Testimony) (both
noting that MVNOs specifically market to low-income consumers, seniors, and the Latino
population).
Ultimately, it is more appropriate, more consistent with legislative directives, and more
efficient and effective to address the needs of specified communities through targeted programs
like Lifeline, the high-cost funds, or the Deaf and Disabled Telecommunications Program
(“DDTP”), which already exist.20 See URF Decision at 131 (arguments regarding special needs
of subgroups were “not critical to our inquiry in this more generic proceeding” and should be
addressed separately). Thus, there is no foundation for the radical new programs Greenlining
and CforAT seek to impose on carriers here.
19 Ex. 42 at 13:16-18 (Topper/Joint Respondents 7/15 Testimony) (the record contains no “real-world evidence supporting that it is a viable and profit-maximizing strategy to discriminate against communities of color or consumers with disabilities”); Ex. 7 at 11:18-19 (Aron/AT&T 7/15 Testimony) (“[T]here is no evidence that ILECs or any other carriers charge higher prices in different geographic areas or to different customer demographics.”); Ex. 29 at 12:11-12 (Gillan/Cox 7/15 Testimony). 20 See URF Decision at 2, 77-78, 156, 194; see also URF Transition Order, D.08-09-042, at 45 (“The Commission can best assure the continued affordability of telecommunications services through targeted programs and policies”); Ex. 6 at 5:15-20 (Katz/AT&T 6/1 Testimony) (if competition does not address a public policy concern, “there is broad consensus among economists and public policy makers that those additional concerns are most effectively addressed through targeted policies that address those specific concerns.”); Ex. 42 at 13:8-14:2 (Topper/Joint Respondents 7/15 Testimony). See also OII at 21 (noting that “[t]he question of the “affordability” of telecommunications services in California will be considered in the Lifeline proceeding (R.11-03-013).”).
15
II. ANALYZING THE VOICE MARKET
A. The Retail Voice Communications Market Is Indisputably Competitive
ORA and TURN both insinuate that the voice market is not competitive. E.g., ORA Br.
at 21, 41; TURN Br. at 9-10. That position flies in the face of the facts regarding the state of
voice competition in California.
Without exception, every report issued by this Commission, the FCC, the CDC or any
other entity examining the voice telecommunications market over the past decade confirms that
the number of ILEC voice subscriptions has decreased significantly while the number of wireless
and non-ILEC voice subscriptions continues to rise.21 The trend started prior to 2006 (when the
URF Decision was adopted) and is entirely consistent with the trend anticipated by the
Commission at that time as well as with common experience across the nation. It has proceeded
unabated. Every measure that the URF Decision relied on to find effective competition in the
voice market in 2006 only confirms that competition is even more robust today and includes a
broad array of intermodal options. See Coalition Br. at 4, 6, 30-32.22
The Intervenors do not offer any evidence to the contrary. Instead, ORA’s assertions
about a “duopoly” rely on an analysis of the voice market that improperly fails to account for
wireless voice subscriptions or OTT VoIP service.23 Moreover, ORA’s claim (at 41) that the
21 See, e.g., Ex. 5 at 5-14, 19 (Figure 3), 21 (Figure 4) and 29-30 (Fig. 8), and Appendix 1 (Aron/AT&T 6/1 Testimony); Ex. 42 at 8:13-9:14 (Topper/Joint Respondents 7/15 Testimony); Ex. 41 at 17:11-20:25 and 24:13-17 (Topper/Joint Respondents 6/1 Testimony); see also Coalition Br. at 14 and 16. 22 See, e.g., CPUC Communications Division, “Market Share Analysis of Retail Communications in California June 2001 through June 2013,” at 7 (Jan. 5, 2015) (“CD 2015 Report”) (“The subscribership trends are illustrative. Traditional wireline telephone service is shrinking in absolute terms and relative to the total subscriptions market. Further, subscribership in all technologies but traditional wireline telephone service is increasing, though some at a small rate.”). 23 ORA Br. at 42 (referencing FCC data on switched access and VoIP subscriptions from 2014 without any reference to wireless voice subscriptions for that same time period). See FCC 2014 Voice Report, State-Level Subscriptions, Supplemental Table 1 (March 2016) available at https://www.fcc.gov/wireline-competition/voice-telephone-services-report.
16
“dominant carriers provide[] 88.6% of the total switched access lines” is baseless. ORA’s figure,
which comes from page 15 of Dr. Selwyn’s June 1 testimony, both (i) ignores all voice lines
provided by wireless and VoIP technology, which leaves out more than 85% of the market (as
noted above at page 1), and (ii) treats voice service provided by resale of ILEC service or use of
UNEs as if it were provided by the ILEC rather than the competing carrier that actually provides
the retail service. The relevant figure, based on the most recent FCC report, is that in California
ILEC switched access and VoIP lines account for less than 15% of all voice lines/subscriptions.
See supra at 1 & n.2.
By the same token, TURN’s allusion to the idea that wireline and wireless voice are not
competitive because only “42.8% [now almost 47%] of California households have cut the cord”
while “55% [now about 53%] of California households continue to utilize wireline voice
services” misses the point.24 Whether some customers still use wireline and wireless together
has nothing to do with whether the services are competitive alternatives to one another, as
explained above in Sections I.A-C. California consumers clearly have competitive choices with
respect to voice services and they are – and have been – freely exercising those choices over the
past decade.25
24 See TURN Br. at 9-10; see also ORA Br. at 21. TURN seems to be focused on whether wireless and wireline are “complete substitutes” for one another. Its logic, however, is misguided. By TURN’s logic, wireless and wireline are only “substitutes” if all California customers “cut the cord.” There is no credible analysis that would require such a finding in order to support a conclusion that the voice market is competitive. And the CDC reports show that 47% of adults in California live in households that already use wireless voice as a “complete substitute” for wireline voice service. 25 Greenlining’s comments about the competitive nature of the voice communications market are equally confused. For example, Greenlining freely concedes that “communities of color tend to have high levels of wireless use.” Greenlining Br. at 2. However, like TURN, Greenlining seems to imply that voice services are not competitive because such consumers would likely not choose to switch back to wireline in the face of a wireless price increase. Id. at 3. Again, even if Greenlining were correct as to how consumers might act, such actions do not suggest that the market is not otherwise competitive or that wireline carriers have acquired market power they did not have in 2006.
17
B. Intervenors’ Miscellaneous Claims Regarding the Voice Market Have No Factual or Economic Basis
Intervenors make various claims regarding other “considerations” or “metrics” that they
believe the Commission should consider in assessing competition for traditional landline voice
service. Those claims should be rejected. Where effective competition exists, as it does in the
California voice market, that competition ensures just and reasonable market rates. Ex. 1.5 at
4:2-5, 8:23-9:4 (Katz/AT&T 3/15 Testimony); Ex. 5 at Appendix 1 (Aron/AT&T 6/1
Testimony); Ex. 41 at 3:18-20 (Topper/Joint Respondents 6/1 Testimony). The alleged
“considerations” or “metrics” proposed by Intervenors ignore the marketplace evidence and shed
no light on whether effective competition exists or whether voice prices are just and
reasonable.26 Because they are not relevant to a proper economic analysis of the market, these
ancillary arguments are only briefly addressed below.
Financial measures or costs. ORA and Greenlining claim the Commission should look
at earnings or profits or costs of service. ORA Br. at 43; Greenlining Br. at 13-14. The
Commission rejected any such approach in the URF Decision (at 279 (Conclusion of Law 61)),
noting that a key purpose of adopting URF was to “end all the vestiges of . . . rate-of-return
regulation.” Greenlining’s and ORA’s proposals have no more merit today. As the Commission
found in the URF Transition Order (at 22), “[t]here simply is no basis in the record to consider
that price regulation based on cost studies is necessary to ensure that the prices [for basic service]
26 It is important to note that ORA pins its arguments for its proposed measures on Dr. Selwyn’s application of the “Structure-Conduct-Performance” model (“SCP”). ORA Br. at 36-38; Ex. 15 at 22-89 (Selwyn/ORA 3/15 Testimony). Over the past 20 years or so the SCP model has been recognized as having serious problems. E.g., 80 Antitrust Law Journal 377, 383-84 (2015) (“The SCP paradigm is now dead and has been for quite some time. Its intellectual influence on modern economics is nil. It is no longer taught in graduate economic courses in economics.”); Herbert Hovenkamp, United States Competition Policy in Crisis: 1890–1955, 94 Minn. L. Rev. 311, 314, 350–67 (2009) (detailing the rise and decline of the now “largely discredited” SCP analysis); Frank K. Easterbrook, Workable Antitrust Policy, 84 Mich. L. Rev. 1696, 1698 (1986) (by the mid-1980s, “it [was] hard to find an economist who believe[d] in the old structure-conduct-performance paradigm.”).
18
are just and reasonable.” Indeed, any proposals based on such financial or accounting measures
only serve to distort incentives and behavior, thus undermining the operation of a competitive
market. Ex. 1.5 at 15:9-16:20 (Katz/AT&T 3/15 Testimony); Ex. 6 at 16:20-19:12 (Katz/AT&T
6/1 Testimony); Ex. 41 at 13:7-14:5 (Topper/Joint Respondents 6/1 Testimony). Furthermore, as
AT&T witness Dr. Katz explained, there are many problems with relying on earnings, profits, or
cost measures when trying to assess rates or effective competition among multi-product firms.
Ex. 1.5 at 15:9-16:20 (Katz/AT&T 3/15 Testimony); Ex. 6 at 16:20-19:12 (Katz/AT&T 6/1
Testimony).
Alleged anticompetitive behavior. ORA and Greenlining also accuse the ILECs of
“anticompetitive behavior” or a “refusal to deal” with CLECs. ORA Br. at 45-46; Greenlining
Br. at 12-13. But there is no record evidence of anticompetitive behavior, so ORA and
Greenlining resort to alleging that certain Respondents have engaged in “refusals to deal” by
lobbying lawmakers or appealing FCC or other regulatory decisions with which they disagree. It
is well-established, however, that a carrier’s exercise of its First Amendment right to petition the
government cannot be characterized as anticompetitive conduct or a “refusal to deal.”27 In
addition, the ILECs were largely successful in litigation regarding the imposition of certain
27 See Reply of CTIA to the Response of Greenlining Institute to Information Requests, dated June 1, 2016. This principle is known as the Noerr-Pennington immunity doctrine, which protects a party from liability or adverse consequences based on conduct during litigation, including regulatory proceedings. TEC Cogeneration Inc., RRD v. Florida Power & Light Co., 76 F.3d 1560, 1570-72 (11th Cir. 1996).
19
unbundling requirements by the FCC28 and in other litigation referred to by ORA and
Greenlining, which renders the claims of improper behavior even more absurd.29
Service quality. Service quality is the topic of another docket and is not properly
considered here.
Alleged market power. TURN contends that because the ILECs have suffered such a
steep decline in their number of voice lines, they somehow have gained market power since
2006, and are abusing that market power to impose supra-competitive rates on any remaining
consumers that may find it hard to switch “to bundles or wireless.” TURN Br. at 53-55. TURN
further argues that companies like AT&T California, with a wireless affiliate, do not care if they
lose wireline voice customers, because some customers will go to AT&T Mobility. Id. at 55.
This argument defies logic, ignores the economic principle that competition occurs at the margin,
and ignores the fact that customers have many options other than the ILEC wireless affiliates.
There also is no evidence that any carrier could reasonably identify customers who “cannot
easily substitute” to another provider, much less increase prices specifically for such customers.
Coalition Br. at 24-26.
“Metrics.” TURN also proposes a slate of “metrics” for “measuring competition” and
“evaluating whether rates are just and reasonable” (TURN Br. at 34-49), but fails to apply any of
those considerations to the evidence or logically explain how they relate to effective competition
in the voice market today. TURN’s musings on abstract ideas add nothing to the analysis of
voice competition here.
28 For example, the U.S. Supreme Court and D.C. Circuit struck down most or all of the FCC’s first three sets of unbundling rules as being overbroad and inconsistent with the 1996 Act. See Unbundled Access to Network Elements, 20 FCC Rcd. 2533, ¶¶ 6-19 (2005) (subsequent history omitted) (recounting history of FCC unbundling rules). 29 The applicability of Noerr-Pennington immunity “is most obvious when the petitioner actually obtains the result it seeks.” I P. Areeda & H. Hovenkamp, ANTITRUST LAW, ¶ 202b at 165 (3d ed. 2006).
20
C. Traditional Wireline Voice Prices Are Restrained by Effective Competition, Which Ensures They Are Just and Reasonable
Although ORA performed no substantive analysis of wireline voice pricing trends or
levels, it asserts that current wireline voice prices must be unjust and unreasonable. ORA Br. at
60-61. ORA’s claim rests entirely on the flawed premise that the voice services market is not
competitive, which is refuted above.
In addition, when the Commission’s Communications Division examined pricing for
voice service in 2014, it found that:
• “The price of traditional wireline voice service is comparable to other voice services available in the market,” and that
• “Though market prices for sampled services vary, there is no discernible trend up or down in the market.”
CD 2014 Pricing Report at 4.30 Dr. Aron likewise presented extensive evidence of the myriad
voice offerings in California at prices below, near, and above the URF ILECs’ prices. Ex. 5 at
42-52 and Appendix 1 (Aron/AT&T 6/1 Testimony).
Indeed, all of the URF ILECs’ basic service rates (including AT&T California’s basic
service rate, which ORA and TURN singled out for criticism) are well within what the FCC has
said constitutes a range of reasonable rates for basic wireline voice service.31 Based on a recent
national survey, the FCC established a benchmark to determine whether Eligible
Telecommunications Carriers (“ETCs”) are offering service “at rates that are reasonably
30 CPUC Communications Division, “Market Pricing Survey of Retail Communications Services in California” (Dec. 2, 2014) (“CD 2014 Pricing Report”). 31 The Respondent Coalition emphasizes that it does not propose or support any “metric” for assessing voice prices, including those discussed in the text, and presents the discussion in this section only to provide the Commission with additional information that Intervenors have ignored in asserting that wireline voice service rates are not just and reasonable.
21
comparable to urban rates.”32 The FCC concluded that “a [wireline ETC] voice rate is within a
reasonable range if it falls within two standard deviations above the national average.” Connect
America Order, ¶ 84. The FCC found the “reasonable comparability benchmark” for fixed
wireline voice service to be $41.07 (including subscriber line charges (“SLCs”), state universal
service, and mandatory extended area charges).33 Thus, the FCC considers any wireline basic
service rate of $41.07 or less to be reasonably comparable to the national average for wireline
voice urban rates. Id. AT&T California’s analogous rate (with all added charges included) is
$31.95 – $9 less than the FCC’s figure – and all of the URF ILECs’ fixed-rate basic service
offerings are similarly well below $41.07.34
D. Claims Regarding Wholesale Inputs Are Both Irrelevant and Unsupported
Certain Intervenors addressed the role of wholesale inputs on retail voice competition.
Their comments focus on UNEs and special access services offered by ILECs. The two key
points here, however, are that (i) the retail voice market is competitive (as demonstrated above),
which shows that there are many retail providers with sufficient access to wholesale inputs to
compete, and (ii) the rules regarding access to and pricing of UNEs and special access are almost
32 In the Matter of Connect America Fund, 26 FCC Rcd. 17663, ¶ 81 (rel. Nov. 18, 2011) (“Connect America Order”), aff’d, In re: FCC, 763 F.3d 1015 (10th Cir. 2014). 33 “Wireline Competition Bureau Announces Results of 2016 Urban Rate Survey for Fixed Voice and Broadband Services, Posting of Survey and Explanatory Notes, and Required Minimum Usage Allowance for ETCs Subject to Broadband Public Interest Obligations,” WC Docket No. 10-90, Public Notice DA 16-362 (rel. Apr. 5, 2016). 34 As of 2014, when the SLC and all other mandatory add-on charges were included, the stand-alone voice rates for the four URF ILECs were as follows: $29.44 for AT&T California; $28.55 for Verizon; $31.22 for SureWest, and $29.65 for Frontier. See 7/20/16 Tr. at 88 (Aron), relying on Opening Testimony of Dr. Debra J. Aron on Behalf of AT&T California, CPUC Case No. 13-12-005 (filed Aug. 22, 2014) at 68 (Table 3). The Commission can take official notice of this testimony, which is part of the official record in Case No. 13-12-005. These figures also show that TURN’s claim (at 56-57) that AT&T’s and Verizon’s basic voice rates as of 2014 were “more than 20% higher than Consolidated and Frontier rates” when the Subscriber Line Charge (“SLC”) was included is simply false. Also, all of the URF ILECs’ fixed-rate basic service prices today remain below the top transitional rate authorized in the URF Transition Decision, Appendix 2.
22
entirely defined by the FCC. Even Intervenors agree that any UNE-related disputes would have
to be addressed by the Commission in its role as a “deputized federal regulator” that oversees
specific interconnection agreements to ensure they comply with federal requirements,35 and that
the vast majority of special access circuits are interstate and therefore subject to exclusive FCC
jurisdiction. In fact, the FCC is in the midst of a detailed evaluation of special access service
(now referred to as “Business Data Service”), and Intervenors agree that the Commission should
not duplicate the FCC’s efforts. TURN Br. at 76-77 (“The CPUC should not seek to replicate
[the FCC’s] federal efforts[.]”); CALTEL Br. at 19-20 (“there is also no reason for the
Commission to try to replicate the FCC’s efforts”).36
E. The Market for Business Voice Service Is Competitive
As demonstrated by the Respondent Coalition (Br. at 20-21), the business voice market,
although distinguishable from the residential voice market, has likewise grown even more
competitive since the URF Decision. Even the filings by TURN and CALTEL show there is
robust competition for business voice service. For example, CALTEL pointed out that cable
companies and other CLECs collectively have approximately 35% of the voice business market.
CALTEL Br. at 15-16. TURN acknowledged that competition in the business market exceeds
competition in the residential market. TURN Br. at 25. There is no dispute that competition to
35 Pacific Bell v. Pac-West Telecomm, Inc., 325 F.3d 1114, 1126 (9th Cir. 2003), quoting MCI Telecomms. Corp. v. Illinois Bell Tel. Co., 222 F.3d 323, 344 (7th Cir. 2000); TURN Br. at 73 (referring to Commission’s “role as a referee” regarding interconnection agreements); CALTEL Br. at 22 (referring to Commission’s “delegated role under federal law” to oversee interconnection agreements). 36 CALTEL implies (but never actually states) that UNE rates are too high, ignoring that it recently voluntarily negotiated and agreed to a mutual settlement on UNE rates. Coalition Br. at 32 & n.40. CALTEL cannot disavow its own agreement. CALTEL also argues that there are “threats” to the continued availability of UNE loops. CALTEL Br. at 21. But those alleged “threats” are entirely hypothetical (none are pending and none may ever arise) and refer to situations (e.g., an ILEC forbearance petition to the FCC) where a regulator would need to take action before anything “adverse” could happen to CALTEL’s members.
23
provide voice service to business customers is vigorous, and nothing in the record warrants any
change in the Commission’s approach. Coalition Br. at 20-21 (citing record data).
III. BROADBAND SERVICE
A. Any Further Action in This Proceeding Must Respect Limits on the Commission’s Jurisdiction
1. Intervenors Misconstrue the Commission’s Authority to Expand this Investigation to BIAS
As the OII established and the Scoping Memo confirmed, this proceeding is a “data
gathering and data analysis exercise” focused on “whether intermodal competition, in the decade
after URF, has offered sufficient discipline to produce just and reasonable prices for traditional
landline services.” Scoping Memo at 2, 7; OII, Ordering Paragraph 1. Intervenors nevertheless
urge a broader scope, including most notably an analysis of competition in the market for BIAS.
See, e.g., ORA Br. at 10, 12; TURN Br. at 13-18; WGAW Br. at 1-2. The Commission should
reject these arguments and limit its exercise of regulatory authority to the “express legislative
directions to it, or restrictions upon its power found in other provisions of the [Public Utilities
Code] or elsewhere in general law.” Pac. Tel. & Tel. Co. v. Pub. Util. Comm’n, 62 Cal. 2d 634,
653, 401 P.2d 353 (1965).
Members of the Respondent Coalition previously explained why the Commission’s
authority over broadband services is limited and why it lacks authority to name non-utility
affiliate providers of broadband service as respondents to this OII.37 Because Intervenors’ briefs
largely repeat arguments that Coalition members already addressed,38 we briefly summarize, and
37 See, e.g., Coalition Motion for Reconsideration by the Full Commission of the February 4, 2016 Ruling of the Assigned Administrative Law Judge (filed March 8, 2016). This pleading also details why the Commission’s authority to require the production of data regarding VoIP services or to name VoIP entities as respondents is limited. 38 Many of the Intervenors fail to cite any legal authority for the Commission’s purported jurisdiction over broadband and VoIP services or the unregulated affiliates of utilities. ORA, however, asserts that the
24
incorporate by reference, previous arguments establishing that none of the provisions cited by
Intervenors provides the requisite authority to examine competition in the BIAS market.
Public Utilities Code § 451. The OII principally cites to Section 451 (regarding just and
reasonable rates) as the source of its authority. See OII at 2; ORA Br. at 3, 6. By its express
terms, however, Section 451 applies only to “public utilities.”39 Nothing in that provision
expands the Commission’s ratemaking authority to include unregulated affiliates of public
utilities or other entities.40
Public Utilities Code § 710. Section 710(a) provides that “[t]he commission shall not
exercise regulatory jurisdiction or control over [VoIP] and Internet Protocol enabled services
except as required or expressly delegated by federal law or expressly directed to do so by statute
or as set forth in subdivision (c).” None of the exceptions in Section 710 overcomes this clear
prohibition or provides any basis – let alone an “express” basis – for the Commission to assert
regulatory jurisdiction or control over broadband services in this proceeding. This includes the
two exceptions cited by ORA (at 11), namely Section 710(c)(4) (which only preserves the
Commission’s authority to require certain data in connection with forbearance petitions to the
Commission has “multiple sources of authority” to investigate the telecommunications market as a whole, including the activities of VoIP and broadband providers. In support of this argument, ORA cites to Pub. Util. Code §§ 314(a) and (b), 451, 581, 582, 701, 709 and 710. ORA also relies on Section 706(a) of the federal Telecommunications Act of 1996, as well as the FCC’s 2015 Open Internet Order. See ORA Br. at 7, 10-13. Each theory fails, as described in the text. 39 See Pub. Util. Code § 451; see also id. § 216(a) (defining “public utility” to include telephone corporations, telegraph corporations, and other gas, electric, and water utilities that are not relevant to the OII). 40 ORA’s reliance on certain reporting requirements for public utilities under Pub. Util. Code §§ 581-582 fails for similar reasons, and also on independent federal preemption grounds as discussed in the text below.
25
FCC), and Section 710(f) (which only preserves the Commission’s ability to “monitor and
discuss VoIP services” with respect to tracking and monitoring consumer complaints).41
Public Utilities Code § 314(a)-(b). ORA contends that “Section 314(a) provides specific
authority to inspect the documents of any public utility at any time, and Section 314(b)
specifically extends the Commission’s data gathering authority to utility subsidiaries and
affiliates.” ORA Br. at 10. Section 314(a), however, pertains only to “public utilities,” and
Section 314(b) extends only to the inspection of certain subsidiaries’ and affiliates’ documents
“with respect to any transaction between [the utility and affiliate] on any matter that might
adversely affect the interests of the ratepayers.”42 No such transactions are at issue here.
Public Utilities Code § 709. ORA also urges the Commission to take action to fulfill its
“legislative mandate in Section 709 to encourage affordable and high-quality
telecommunications services to all Californians.” ORA Br. at 12. That section, however,
contains no such “mandate,” but only an aspirational statement of “policies for
telecommunications in California.” Courts have recognized that such policy statements “do not
41 See Assembly Committee on Utilities and Commerce at 9 (Hearing June 18, 2012), http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_1151-1200/sb_1161_cfa_20120618_110522_asm_comm.html (“To the extent the Legislature can ensure consumers of VoIP and IP-enabled services have a venue other than the FCC to raise complaints, the author and this committee may wish to amend Section 710(f) as follows …”). Nor could subjecting VoIP and broadband services to extensive OII Information Requests and mandating their participation in this proceeding reasonably be viewed as an appropriate means to “monitor” and “discuss” VoIP services. 42 Legislative history also confirms that Section 314(b) was intended to “limit[] the PUC’s investigative authority to matters involving intercompany transactions, or to information directly related to cross-subsidization of unregulated activities by ratepayers.” See Assembly Bill No. 116 (1985-1986 Reg. Sess.), Concurrence in Senate Amendments at 2. While the Assembly’s version of the bill would have extended the CPUC’s authority “to a subsidiary or affiliate of a telephone corporation regarding any matter reasonably connected with the PUC’s jurisdiction over the telephone corporation,” Senate amendments were adopted to “[l]imit the expanded authorization to inspection of materials documenting transactions between the telephone corporation and the affiliate, or matters affecting rates or expenses of the telephone corporation.” Id.
26
create ‘statutorily mandated responsibilities,’” Comcast Corp. v. FCC, 600 F.3d 642, 644 (D.C.
Cir. 2010) (citation omitted), or confer regulatory jurisdiction where it is otherwise lacking.
Public Utilities Code § 701. ORA states that Section 701 “empowers the Commission to
‘do all things, whether specifically designated in this part or in addition thereto, which are
necessary and convenient in the exercise of such power and jurisdiction.’” ORA Br. at 10. But
this catch-all provision is not an independent grant of authority. Rather, it must be linked to
more specific, statutorily authorized responsibilities.43 The Commission therefore could not rely
on Section 701 to, for example, override the express prohibitions in Section 710(a) described
above.
Telecommunications Act of 1996, Section 706. Implicitly recognizing the absence of
state-law authority for asserting regulatory jurisdiction or control over broadband services, ORA
argues that Section 706 of the 1996 Act “provides independent federal authority for state
commissions to encourage the deployment of advanced telecommunications capability.” ORA
Br. at 13. As an initial matter, ORA misconstrues the D.C. Circuit’s holding in Verizon v. FCC,
740 F.3d 623, 628 (D.C. Cir. 2014), which did not establish that Section 706(a) provides a
blanket grant of authority to state commissions. Even assuming arguendo that Section 706(a)
conferred any authority on state commissions, such authority would have to be exercised within
the jurisdictional limits established by state law.44 Any such authority could not override the
43 See Assembly of State of California v. Public Utilities Commission, 12 Cal. 4th 87, 103-04, 906 P.2d 1209 (1995) (“Whatever may be the scope of regulatory power under this section, it does not authorize disregard by the commission of express legislative directions to it, or restrictions upon its power found in other provisions of the act or elsewhere in general law.”); Motion Picture Ass’n of Am., Inc. v. FCC, 309 F.3d 796, 806 (D.C. Cir. 2002) (observing that an equivalent provision of the federal Communications Act, 47 U.S.C. § 154(i), “is not a stand-alone basis of authority and cannot be read in isolation” and that it “is more akin to a ‘necessary and proper’ clause” than an affirmative grant of authority). 44 See Verizon, 740 F.3d at 639-40 (identifying “at least two limiting principles inherent in section 706(a),” including limits on delegated subject matter jurisdiction); Protecting and Promoting the Open
27
California Legislature’s express determination in Section 710(a) that this Commission “shall not
exercise regulatory jurisdiction or control” over broadband services.
2. BIAS Providers Are Not Public Utilities Subject to the Commission’s Jurisdiction
ORA claims (at 11) that the FCC’s reclassification of BIAS as a “telecommunications
service” under Title II of the federal Communications Act transforms BIAS providers into
“public utilities” or “telephone corporations” within the meaning of Public Utilities Code §
216(b). That claim has no legal basis. The FCC specifically disclaimed any intent for its 2015
Open Internet Order to be read so expansively, emphasizing that “we are not regulating
broadband Internet access service as a utility or telephone company.” 2015 Open Internet Order,
¶ 430 n.1274 (emphasis added). In addition, the FCC announced its “firm intention to exercise
our preemption authority to preclude states from imposing obligations on broadband service that
are inconsistent with the carefully tailored regulatory scheme we adopt,” adding that “we will act
promptly, whenever necessary, to prevent state regulations that would conflict with the federal
regulatory framework or otherwise frustrate federal broadband policies.” Id., ¶ 433. The FCC
also “ma[d]e clear that the states are bound by our forbearance decisions,” id., ¶ 432, which
declined to subject BIAS providers to “a swath of utility-style provisions,” including 27
provisions of Title II of the federal Communications Act and more than 700 FCC regulations.
Id., ¶¶ 38, 51.45
Internet, 30 FCC Rcd. 5601, at ¶ 281 (“2015 Open Internet Order”) (noting that “Section 706 regulations must be within the scope of the [FCC’s] subject matter jurisdiction”). 45 ORA’s citation to various cases regarding regulation of VoIP providers in other states does not change this analysis. See ORA Br. at 11-12. Each case predates the regulatory framework announced in the 2015 Open Internet Order, and whether other states treat VoIP connections as “telephone lines” has no bearing on the prohibition of regulatory jurisdiction or control over BIAS in California.
28
Similarly, any attempt to apply utility-style reporting requirements to BIAS under Public
Utilities Code §§ 581 and 582 would be preempted by the FCC’s comprehensive regulatory
framework and associated forbearance decisions.46 Sections 581 and 582 are generalized
reporting provisions equivalent to Sections 218 and 219 of the federal Communications Act.
Compare Pub. Util. Code §§ 581-582 with 47 U.S.C. §§ 218-219. In its 2015 Open Internet
Order, the FCC specifically forbore from applying “provisions of the [Communications] Act that
provide ‘discretionary powers to compel production of useful information or the filing of regular
reports,’” including sections 218 and 219. 2015 Open Internet Order, ¶ 508 (citation omitted).
Thus, even apart from the express prohibition in Section 710(a), this Commission would be
“bound by [the FCC’s] forbearance decisions,” id., ¶ 432, which would preclude it from relying
on analogous provisions of California law to impose reporting requirements on BIAS providers
in conflict with the FCC’s carefully tailored regulatory scheme. See, e.g., City of New York v.
FCC, 486 U.S. 57, 64 (1988) (“The statutorily authorized regulations of an agency will pre-empt
any state or local law that conflicts with such regulations or frustrates the purposes thereof.”).
B. Intervenors’ Attempt to Define the Broadband Market Narrowly Is Contrary to Sound Economics and Should Be Disregarded
The Respondent Coalition has objected to the Commission’s examination of the
broadband market on jurisdictional and other grounds, and has asserted that if the Commission
looks at broadband at all it should do so only to the extent that broadband (at low speeds)
functions as the underlying technology certain providers rely on for OTT VoIP. Coalition Br. at
28. However, as noted above, several Intervenors request that the Commission separately
examine the market for BIAS and make findings about the general competitiveness of that
46 See ORA Br. at 10 (asserting that “Section 582 provides additional authority” for this proceeding while citing – without explanation – to Section 581 and the Commission’s authority to “cause the deposition of witnesses” under Public Utilities Code § 1794).
29
market – beyond its use to support OTT VoIP services. See WGAW Br. at 10; ORA Br. at 22-
23; TURN Br. at 13-14. Without waiving any rights under applicable law as described above,
the Respondent Coalition responds to Intervenors’ arguments to demonstrate that, even if the
Commission had the requisite jurisdiction to examine the broadband market in this proceeding,
Intervenors mischaracterize that market.
In recommending that the Commission define a broadband market, ORA, TURN and
WGAW propose an overly narrow definition that severely understates broadband availability and
the rates at which consumers subscribe to various broadband service offerings in California. In
particular, Intervenors would limit the market to residential BIAS at a speed of 25 Mbps
download and 3 Mbps upload (“25/3 service”), would exclude wireless broadband, and would
limit the geographic market to a consumer’s specific location. None of these limitations adhere
to established principles of economic market definition. Adopting any of these limitations (much
less all of them) without conducting any analysis of the set of substitute technologies that
customers would switch to in response to a hypothetical price increase would provide a wholly
inaccurate, and therefore meaningless, view of the competitive market for BIAS in California.
1. Intervenors’ Proposal to Define the Broadband Market by Speed is Flawed
ORA, TURN, and WGAW rest their proposed BIAS market definition on the FCC’s use
of 25/3 service in defining “advanced telecommunications capability.” ORA Br. at 20, 23. That
proposal has no merit and should be disregarded for several reasons.
First, the FCC did not adopt the 25/3 benchmark as part of undertaking a market
definition or competition analysis. Rather, the FCC adopted its benchmark for the limited
purpose of fulfilling its reporting obligations under Section 706(b) of the federal
Telecommunications Act. Specifically, under Section 706(b), the FCC is required to collect data
30
for purposes of annually reporting to the U.S. Congress on the status of broadband deployment
nationally. The FCC decided, based on the record it developed for that purpose, to utilize the
25/3 service benchmark.47 It would be wholly inappropriate to adopt and apply on a more
general basis a 25/3 service-based market definition simply because the FCC adopted 25/3
service reporting benchmark for one specific and limited purpose.
Second, even ORA’s economist cautioned against defining a market too narrowly and
thereby “understat[ing] the presence of effective competition by defining competing firms as
falling in different markets.” See Ex. 16 at 33:3-5 (Selwyn/ORA 6/1 Testimony); Ex. 54 at
19:14-15 (Roycroft/TURN 6/1 Testimony). Yet that is exactly what Intervenors do in
recommending that the broadband market be defined as 25/3 service only. Intervenors ignore the
wide availability of broadband services at lower speeds that are more than adequate for most
consumer applications.48 Intervenors also present no evidence of consumers drawing a hard line
at 25/3 service and refusing to switch to any slower speeds regardless of price differences. Nor
could they, because that is not how the marketplace actually works. Intervenors also ignore the
fact that a substantial number of people – at least tens of millions – have access to 25/3 service
yet elect to purchase lower broadband speeds.49
47 See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 14-126, 30 FCC Rcd. 1375, ¶ 26 (2015) (“2015 Broadband Progress Report”). 48 For example, the FCC has found that 15 Mbps is more than enough for three or more users who all need access to basic functions (“mail, web, surfing, basic streaming video”) and more than one high demand application (“streaming HD, videoconferencing, OR online gaming”). Ex. 42 at 33:2-5 & n.89 (Topper/Joint Respondents 7/15 Testimony) (citing the FCC Household Broadband Guide). The record also reflects that “10 Mbps is more than enough bandwidth for simultaneous use of VoIP and most broadband uses, including high-quality video” and that “‘consumers are unlikely to experience much if any improvement in basic web browsing from increased speed – i.e., moving from a 10 Mbps broadband offering to a 25 Mbps offering.’” Id. at 32:17-33:2. 49 According to the FCC’s 2016 Broadband Progress Report, around 90% of the U.S. population had access to 25/3 Mbps as of December 2014. Inquiry Concerning the Deployment of Advanced
31
Third, TURN fails to consider customers’ willingness and ability to substitute among
broadband service offerings at different speeds in response to a price increase for 25/3 service. 50
This is a fundamental error because such an analysis is an essential part of defining a relevant
product market and because competition occurs at the margins of a market. Ex. 41 at 6:8-11
(Topper/Joint Respondents 6/1 Testimony); see Ex. 28 at 7:8-14 (Gillan/Cox 6/1 Testimony).
Finally, TURN’s advocacy for a 25/3 service market definition based on public policy
grounds is misplaced and, again, contrary to economic principles that guide market definition.
TURN refers to the increasing number of devices per person increasing, the growth in devices
demanding more bandwidth, and the “Internet of Things” as driving up internet traffic from non-
PC devices. TURN Br. at 16. These topics do not provide any basis for defining the broadband
Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 15-191, 31 FCC Rcd. 699, 732, Table 1 (2016) (“2016 Broadband Progress Report”). At the same time, approximately half of fixed residential broadband connections – some 47 million – had download speed below 25 Mbps, indicating that a significant number of consumers with access to 25/3 Mbps chose to purchase broadband at lower speeds. See FCC Report, Internet Access Services: Status as of December 31, 2014, at 17, Fig. 9 (March 2016), https://apps.fcc.gov/edocs_public/attachmatch/DOC-338630A1.pdf. 50 See also Ex. 42 at 32:2-14 (Topper/ Joint Respondents 7/15 Testimony) (footnote omitted):
In order to analyze the state of competition, it is useful to go back to the market definition principles I laid out in my answer to [Q.] 7. These principles support including all broadband services that consumers view as alternatives. They do not support making arbitrary distinctions between technologies and services that consumers view as substitutes based on arbitrary standards that were put forth as aspirational policy goals in an entirely different context. In this regard, lower-speed broadband services such as legacy DSL can meet many consumers’ needs and compete with higher-speed broadband services. Price acts as a compensating differential that allows lower-speed broadband services to compete with higher-speed but also higher-priced broadband services. Artificially limiting a competition analysis to broadband service with speeds greater than 25 Mbps down and 3 Mbps up distorts the competitive landscape by ignoring competitive alternatives with speeds less than 25 Mbps down and 3 Mbps up.
See also id. at 34:7-8 (“[A]ll broadband technologies and speeds should be taken into account when assessing the competitiveness of broadband services.”).
32
market generally, let alone in terms of 25/3 service alone. It would be arbitrary and unreasonable
for the Commission to rely on TURN’s policy objectives as a basis for broadband market
definition.
2. Intervenors’ Attempt to Segment the Market by Technology Is Improper
Intervenors also seek to exclude wireless broadband services from their vision of the
broadband market. TURN Br. at 17; ORA Br. at 22-33; WGAW Br. at 6. They assert that
wireless and fixed broadband services are complements rather than substitutes – in large measure
because mobile broadband differs from fixed broadband in terms of speeds, mobility, and other
factors. TURN Br. at 17-18. Intervenors’ attempt to segment the market in this manner is
flawed. To begin with, the Intervenors’ assertions misuse the economic term “complements.”
As the Commission explained in the URF Decision, “[w]hen services are complements, then the
increased use of one service leads to the increased use of the other.”51 URF Decision at 128.
There is nothing in the record indicating that an increased use of wireline broadband would lead
to an increase in the use of wireless broadband service.
Moreover, the fact that fixed and mobile broadband have some different service
characteristics does not mean that wireless broadband can be ignored – even if the Commission
had the jurisdiction and there were some basis to examine the competitive nature of the
broadband market. To the contrary, as noted above, “products need not be identical to assert
competitive pressure on one another.” Ex. 6 at 8:9-10 (Katz/AT&T 6/1 Testimony). Rather,
from an economic standpoint, the key question that must be analyzed is whether the products or
services offered are an acceptable substitute to a significant portion of the market, in the event of
51 In economic terms when services are considered complements it is generally understood to mean that if the price of one good goes down, the demand for the other, complementary good goes up. Ex. 42 at 11:14-18 (Topper/Joint Respondents 7/15 Testimony).
33
a hypothetical price increase. See Ex. 42 at 4:17-10 (Topper/Joint Respondents 7/15 Testimony).
The Intervenors conducted no such analysis.
a. Mobile Broadband
The record establishes, and Intervenors do not dispute, that mobile broadband is offered
at speeds sufficient for many broadband uses, is widely available, and is widely used. Today,
four nationwide wireless providers offer average download speeds ranging from 6.56 Mbps to
12.26 Mbps. Ex. 41 at 29:12-14 (Topper/Joint Respondents 6/1 Testimony). Moreover, these
are just the carriers’ average speeds. A report to the California Broadband Council52 indicates
that wireless carriers in California today are offering speeds faster than 12 Mbps – which, as
explained above, are speeds sufficient for many broadband applications (see supra n.49):
52 See CalSPEED: California Mobile Broadband – An Assessment – Fall 2014, Ken Biba, Managing Director and CTO Novarum, Inc., available at http://broadbandcouncil.ca.gov/uploadedFiles/Content/Meeting_and_Event_Information/Mobile%20Broadband%20in%20California%20-%20Novarum%20to%20CA%20BB%20Council%20Nov%202014.pdf; cited by and available at https://ecfsapi.fcc.gov/file/60001324116.pdf.
34
Moreover, the quality and speed of wireless broadband also continue to increase. As Dr. Topper
noted:
The quality of broadband connections offered by mobile providers is also increasing rapidly as providers build out their 4G LTE networks, and most consumers live in areas where LTE service is available from multiple providers. Speeds and coverage from 4G LTE mobile broadband are continuing to increase, and 5G is slated to accelerate the competitive convergence of mobile and fixed broadband.
Ex. 42 at 30:23-31:4 (Topper/Joint Respondents 7/15 Testimony) (footnotes omitted).
35
In addition, mobile broadband is widely available. As of the fourth quarter of 2015, most
consumers lived in areas where LTE service is available from multiple providers. Ex. 42 at 25:1-
5 (Topper/Joint Respondents 7/15 Testimony); see also Consolidated Br. at 1.
Moreover, notwithstanding certain parties’ assertions that wireless data differs from
wireline broadband in terms of higher prices and data caps (see ORA Br. at 29; see also WGAW
Br. at 5), significant numbers of customers in the state already subscribe to mobile broadband.
Ex. 5 at 33-34 (Aron/AT&T 6/1 Testimony); ORA Br. at 30. In fact, as of June 2015, 73% of
broadband connections in California were mobile broadband connections. See Coalition Br. at
28 (citing FCC data). Intervenors’ own testimony agrees that a number of consumers
exclusively obtain broadband access via mobile broadband. Greenlining Br. at 5 (citing to Ex.
71 at 2:19-21).
In support of its recommendation that mobile should not be considered as part of the
relevant market, ORA also argues that the FCC has concluded that wireless broadband and
wireline broadband are not functional substitutes. ORA Br. at 22-24 (citing 2016 Broadband
Progress Report). 53 ORA, however, takes the FCC’s language out of context for all purposes
relevant to the OII. The FCC’s Report is intended to define and measure “the availability of
advanced telecommunications capability to all Americans.” 2006 Broadband Progress Report,
¶¶ 13-14. Thus, for purposes of the Report, the FCC relied on the 25/3 benchmark it adopted for
53 ORA also asserts that the Commission in both the OII and comments filed with the FCC already has found that wireless broadband and wireline broadband are not substitutes. ORA Br. at 23. This is patently false. Contrary to ORA’s assertion, neither the OII nor the Commission’s comments filed with the FCC state that wireless broadband and wireline broadband are not substitutes. Rather, in the OII (at 13) the Commission asked “whether and to what extent wireless and wireless services are substitutes in the data and/or voice markets.” Similarly, in its comments filed with the FCC, the Commission stated outright that the “CPUC does not take a position [here] on the question of whether both fixed and mobile services should be included in the definition of advanced telecommunications service.” Comments of the California Public Utilities Commission, GN Docket No. 15-191, at 3 (filed Sept. 15, 2015).
36
these reporting purposes in 2015. Although the FCC found that fixed and mobile broadband
“each provide essential components of advanced telecommunications capability, and that, as
such, advanced telecommunications capability should be deemed deployed only in areas where
consumers have access to both services,” that policy judgment is distinct from the economic
analysis required to determine whether a market is competitive or how the relevant market
should be defined. See id., ¶ 24. The relevant question for a competition analysis is whether, on
the margin, enough consumers would switch from product A (wireline broadband) to product B
(wireless broadband) in response to a price increase in product A. Ex. 42 at 4:14-6:19
(Topper/Joint Respondents 7/15 Testimony); see also id. at 31:4-6. The FCC’s discussion of
functional substitution in the context of its policy judgment as to what should be considered
“advanced telecommunications capability” for purposes of its reporting obligations to Congress
simply has no bearing on whether the California broadband market is competitive or even how to
analyze such a market.
b. Satellite and Fixed Wireless Broadband
Intervenors’ proposal to exclude satellite and fixed wireless from the broadband market is
similarly flawed. Again, Intervenors assert that satellite and fixed wireless broadband should be
excluded from the broadband market but have performed no economic analysis to support that
assertion. Moreover, satellite service is ubiquitously available (Ex. 5 at 33-34 (Aron/AT&T 6/1
Testimony); Ex. 42 at 26:1-3 (Topper 7/15 Reply Testimony)), and fixed wireless service offers
an important option for customers in rural locations. Ex. 18 at I-1:4-6 (Tully/ORA 6/1
Testimony).
37
3. Intervenors’ Proposal to Define The Broadband With a Narrow Geographic Focus is Unsupported
For the same reasons discussed in Section I.E above regarding the voice market,
Intervenors fail to support their proposal to define the relevant broadband “market” at highly
granular geographic levels. The extreme degree of granularity and the consideration of
consumer subgroups urged by Intervenors violate established economic principles and are not
appropriate for any broadband market analysis. See Ex. 29 at 12:9-18 (Gillan/Cox 7/15
Testimony); Ex. 42 at 13:8-14 (Topper/Joint Respondents 7/15 Testimony). Defining the market
using the narrow focus promoted by Intervenors would ignore the following marketplace
realities:
• First, as even TURN admits, no one can seriously dispute that carriers price their broadband service at the state or national level, not on the local level. TURN Br. at 51, 54. See Ex. 41 at 10:7-8 (Topper/Joint Respondents 6/1 Testimony); id. at 23:4-7. Even ORA appears to recognize that the census block level is too granular to be practical for assessing broadband competition. See Ex. 21 at 6:32-36 (Selwyn/ORA 7/15 Testimony); Ex. 16 at 5:38-6:2 (Selwyn/ORA 6/1 Testimony).
• Second, attempting to impose customized pricing at the census block or individual premises level, even if otherwise a rational strategy, would be cost-prohibitive. See Ex. 41 at 42:5-10 (Topper/Joint Respondents 6/1 Testimony). Service providers’ pricing policies are not tailored to such small geographic areas. See Ex. 6 at 8:22-9:5 (Katz/AT&T 6/1 Testimony).
• Third, ORA has not provided the analysis needed to geographically divide the market, and neither the census block nor individual premises is the level at which competition actually occurs. See Ex. 42 at 35:13-18 (Topper/Joint Respondents 7/15 Testimony). Such hyper-granular geographic “markets” have no independent economic basis; for example, there is no evidence that an analysis at the census block level would yield materially different results than a more aggregated analysis. Id. at 14:3-13.
Accordingly, because providers’ pricing decisions are not and cannot reasonably be made
at a census block or other similarly granular geographic unit level, and competition occurs on a
38
much broader level, it would be unreasonable and contrary to economic principles and sound
public policy to define the relevant “market” in the arbitrary manner urged by Intervenors.
C. Intervenors’ Market Share Calculations Are Erroneous and Misleading
Intervenors’ analysis of market share in the broadband market is fundamentally flawed
because, as shown above, they improperly confine their market share analysis to fixed broadband
at 25/3 or above and improperly exclude some broadband technologies altogether.
Consequently, Intervenors’ use of various analytical tools, such as the Herfindahl-Hirshman
Index (“HHI”) and Dr. Selwyn’s self-designed Market Dominance Index (“MDI”), to support
their argument that the broadband market is extremely concentrated and is not effectively
competitive, is meaningless.54 See ORA Br. at 50-54; TURN Br. at 61-64.
Additionally, the Commission should “be cautious about relying on mechanical
concentration measures, especially when, as has been done by consumer group witnesses, market
boundaries are defined by technology, rather than consumer substitution possibilities.” Ex. 42 at
35:3-5 (Topper/Joint Respondents 7/15 Testimony).55 This is especially true with respect to
Dr. Selwyn’s newly created MDI which, as Dr. Katz states, has never been validated as a tool for
54 To the extent that ORA includes any HHI and MDI analysis and corresponding results that Dr. Selwyn developed based on his having access to Commission Only Information that he returned to the Commission in response to the federal court order, Respondent Coalition does not concede that those portions of ORA’s briefs should be included in the record of this proceeding. 55 TURN’s Brief accuses Dr. Topper of “providing contradictory testimony” about the relationship of market share and competition – relying on the market to explain the impact of competition on ILECs while at the same time stating that there is “no clear relationship between market share . . . and the strength of competition.” TURN Br. at 36-37. However, TURN mischaracterizes Dr. Topper’s testimony. Dr. Topper did not suggest that there is no relationship between market share and competition. Rather, Dr. Topper urged the Commission to exercise caution and avoid rigidly applying concentration thresholds because (i) concentration statistics such as the HHI depend on market definition boundaries that can rarely be defined with precision, and (ii) there is no clear relationship between any given level of HHI (or the changes in HHI) and the strength of competition. See Ex. 41 at 34:18-23 (Topper/Joint Respondents 6/1 Testimony); Ex. 42 at 35:3-12 (Topper/Joint Respondents 7/15 Testimony).
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measuring competition and may lead to misleading conclusions.56 Ex. 8 at 4:23-28 (Katz/AT&T
7/15 Testimony); see also Ex. 42 at 37:9-39:3 (Topper/Joint Respondents 7/15 Testimony).
Moreover, an overreliance on market share analysis can improperly cloud the fact that vigorous
competition can and does exist in markets with small numbers of firms – particularly in those
industries, like broadband, with large fixed costs. Ex. 42 at 36:14-37:6 (Topper/Joint
Respondents 7/15 Testimony).
D. Intervenors Mischaracterize Performance in the Broadband Market
Intervenors claim that alleged poor performance in the areas of broadband speed, service
quality, and investment and innovation indicate insufficient competition in the broadband
market. TURN Br. at 65-67; ORA Br. at 55-58.57 As explained above (Section III.A), these
matters are not properly before the Commission. In addition, Intervenors’ characterization of the
broadband market is inaccurate. Broadband speeds have steadily increased, service quality has
improved, and innovation in the broadband market is occurring.
It is undisputable that fixed broadband speeds have increased significantly over time, to
the benefit of consumers. Ex. 42 at 31:2-3, 34:9-16 (Topper/Joint Respondents 7/15 Testimony);
Ex. 5 at 33-35 (Aron/AT&T 6/1 Testimony). For example, in the four-year period from 2011 to
2014, actual download speeds more than tripled for cable companies and approximately doubled
for fiber providers.58 Moreover, mobile broadband speeds are increasing.59
56 Dr. Selwyn developed the MDI specifically for his own analysis in this proceeding. 7/20/16 Tr. at 50:8-16. 57 ORA also cites to increasing broadband prices as evidence of a non-competitive marketplace. However, as Dr. Topper pointed out, Dr. Selwyn’s analysis does not seem to have been adjusted for quality (most notably speed increases). Ex. 42 at 34:17-22, 35:1-2 (Topper/Joint Respondents 7/15 Testimony). 58 See FCC Report, 2015 Measuring Broadband America Fixed Broadband Report, at 10, 12, available at http://data.fcc.gov/download/measuring-broadband-america/2015/2015-Fixed-Measuring-Broadband-America-Report.pdf. Many other measures underscore how broadband speeds have increased substantially since the URF decisions. In December 2008, for example, only 15.8% of fixed residential
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These statistics and the reality of the broadband market belie ORA’s unsubstantiated
allegation that speed increases have been “incremental” and driven solely by the FCC’s
occasional increases in its definition of advanced services. ORA Br. at 55. To the contrary, as
the FCC correctly recognizes, consumers ultimately drive “demand for broadband connections,
and consequently encourag[e] more broadband investment and deployment.” 2015 Open
Internet Order, ¶ 464. And the fact that broadband speeds have increased in response to that
consumer demand demonstrates the functioning of a competitive market.60
TURN’s argument that AT&T’s alleged failure to pursue investments in state-of-the-art
broadband technologies (i.e., those with faster speeds) has diminished competition in the
broadband market in California is similarly flawed and based on an overly narrow definition of
the broadband market, as discussed above in Section III.B.1. TURN Br. at 65-67. TURN’s
argument also discounts the facts that nearly 100% of census blocks in AT&T’s territory are
covered by broadband service of at least 10/1 Mbps and that AT&T provides 18 Mbps in the
majority of the state. Ex. 5 at 34-35 (Aron 6/1 Testimony); TURN Br. at 65.
ORA also asserts that low customer satisfaction ratings and poor quality of service are
indicative of a broadband market that is not competitive. ORA Br. at 56-57. ORA relies on two
national consumer customer satisfaction surveys to argue the point. However, neither the
broadband connections nationwide had download speeds greater than 10 Mbps, compared with 57% in December 2012 and 77.3% in June 2015. Meanwhile, fixed residential broadband connections with speeds greater than 25 Mbps increased from 0.1% in December 2008 to 13.3% in December 2012 and 52% in June 2015 (including 13.1% of connections exceeding 100 Mbps – a speed scarcely available in December 2012 ). See FCC Report, High-Speed Services for Internet Access: Status as of December 31, 2008, at 18, Ch. 13 (Feb. 2010), https://apps.fcc.gov/edocs_public/attachmatch/FCC-10-129A7.pdf; FCC Report, Internet Access Services: Status as of June 30, 2015, at 15, Fig. 9 (Aug. 2016), http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0805/DOC-340664A1.pdf. 59 See supra, Section III.B.2.a. 60 See 2015 Broadband Progress Report, ¶ 28 (describing how consumer demand for more bandwidth has not only caused providers to offer higher speeds, but has also encouraged competitive providers, like Google Fiber, to enter the market to support the increased demand).
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evidence presented nor economic theory supports such a claim. See Coalition Br. at 37-38.
Indeed, even leaving aside the reliability of the cited studies,61 ORA fails to establish any
correlation between the measure of customer satisfaction and levels of competition. Ex. 37 at
12:17-18 (Vasington/Verizon 7/15 Rebuttal Testimony). Rather, the record evidence
demonstrates that broadband market has all the hallmarks of a competitive marketplace. See Ex.
42 at 34:15-16 (Topper/Joint Respondents 7/15 Testimony).62
IV. PROPOSALS FOR NEW REGULATIONS ARE BEYOND THE SCOPE OF THE OII AND IMPROPER
As the Intervenors acknowledge and as the Commission has confirmed, this proceeding is
solely “a data gathering and data analysis exercise” and “no rules or regulations will be adopted
(or repealed) in this phase of the proceeding.”63 Scoping Memo at 7; ORA Br. at 5, 68; CALTEL
Br. at 21. Therefore, the Intervenors’ various proposals for new regulations and policies should
not be considered because they are outside the undisputed focus of this proceeding. See
Southern California Edison v. Pub. Util. Comm’n, 140 Cal.App.4th 1085 (2006) (annulling
Commission decision where it deviated from the issues defined in the Scoping Memo).
Moreover, as demonstrated above and in our Opening Brief, the voice market remains intensely
competitive and there is no basis for imposing (or reimposing) regulation that, contrary to state
and federal policy, would only impede the working of the open market and the benefits it brings
61 For example, the ORA witness sponsoring the testimony concerning these studies was not subject to cross-examination. See 7/20/16 Tr. 182:17-183:24. 62 For example, the evidence is clear that ongoing investment by both wireline and wireless providers in their infrastructure has steadily increased broadband service quality and speeds. Ex. 41 at 29:10-12 (Topper/Joint Respondents 6/1 Testimony); Ex. 42 at 31:2-4, 34:12-14 and 34:9-16 (Topper/Joint Respondents 7/15 Testimony). 63 Although the Scoping Memo notes that the Commission will not adopt or repeal rules in this “phase” of the proceeding, the Respondent Coalition objects to the adoption or repeal of rules in any phase of this proceeding as exceeding the scope of the OII and violating Public Utilities Code Sections 1708 and 1708.5, which require evidentiary hearings before findings or rules can be altered from prior Commission decisions that were adopted following hearings.
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to consumers. Regulation imposed for the sake of regulation can never be in the public interest.
In addition, some of the Intervenors’ proposals address issues that are being addressed in
separate proceedings, such as service quality and wholesale. See, e.g., ORA Br. at 67, 70-72;
TURN Br. at 80-81; CALTEL Br. at 22-23.
CONCLUSION
For the reasons stated in the Respondent Coalition’s briefs, the Commission should find
that the voice services market remains subject to effective competition and close this proceeding.
Dated: August 26, 2016 Respectfully submitted,
/s/ Christian F. Binnig J. Tyson Covey Mayer Brown LLP 71 South Wacker Drive Chicago, IL 60606 Phone: (312) 782-0600
Isabelle Salgado Gregory L. Castle David P. Discher David J. Miller AT&T Services, Inc. 430 Bush Street, 3rd Floor San Francisco, CA 94108 Phone: (415) 268-9492 Email: [email protected]
For AT&T California and New Cingular Wireless PCS, LLC64
64 Pursuant to Rule 1.8(d), counsel for each of the entities listed as Coalition Respondents at the beginning of this brief authorize AT&T to sign and file this brief on their behalf.