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Opportunity New Jersey, the first of the
Opportunity alternate regulation plans, turned out
to be nothing more than an opportunity for Bell
Atlantic to make more money. Using this as a case
study, we would like to demonstrate how the broken
regulatory fabric and the massive Bell lobbying
efforts, specifically Bell Atlantic, all worked in
conjunction to overcharge customers without serious
retribution from the state commission, the
Advocate's office, or even the state
legislature.
Though we will return to all of these topics in
future chapters, what happened in New Jersey pretty
much sums up the process of regulation nationwide
÷ a failure of the regulators to control Bell
profits or monitor Bell's technology deployment
promises.
What Happened to the Info Bahn in New Jersey?
According to a brief filed by the New Jersey's
consumer advocate (Division of the Ratepayer
Advocate) with the New Jersey Board of Regulatory
Commissioners (BRC), NJ's state utility commission,
on March 21, 1997: (76)
"Bell Atlantic-New Jersey (BA-NJ) has
over-earned, underspent and inequitably deployed
advanced telecommunications technology to business
customers, while largely neglecting schools and
libraries, low-income and residential ratepayers
and consumers in Urban Enterprise Zones as well as
urban and rural areas."
So much for the promise of the Info Bahn. Before
delving into the telecom muck and how the Bell has
prospered by not fulfilling promises and thus
overcharging customers, let's go back to 1991, when
New Jersey Bell presented a new plan created by
Deloitte & Touche to move New Jersey into the
future.
Background
In March of 1991, the findings of a report
written by Deloitte & Touche on behalf of New
Jersey Bell were presented to politicians and
government regulators, from the Governor on down.
Dubbed "Opportunity New Jersey", it stated that New
Jersey needed to implement "policies that encourage
development of an advanced telecommunication
infrastructure." In fact, the study stated, this
was essential for New Jersey's future. (77)
"(fiber optics is) essential for New Jersey to
achieve the level of employment and job creation in
that state", would "advance the public agenda for
excellence in education", and "improve quality of
care and cost reduction in the healthcare
industry".
And this rhetoric was also repeated by the phone
company. For example, Alfred C. Koepee, Vice
President of New Jersey Bell, said the plan was New
Jersey's future, building new networks to create
jobs. (78)
"You have a choice as a regulator. You can move
into the future, or you can put through a 10-cent
reduction in somebody's bill. It makes a lot of
sense to build the new technology to create new
jobs."
According to an article by Rick Linsk titled
"All the Right Connections, ÷ New Jersey Bell
and the Wiring of a Regulatory Bonanza", from The
New Jersey Reporter, the entire series of events
that led up to the passage of Opportunity New
Jersey by the state legislature and endorsed by the
state utility commission, was one of the most
masterful lobbying jobs in the state's history.
According to Rick Linsk:
"Above all, though, credit goes to a combination
of muscle and merit and to one of the savviest,
most complete and aggressive lobbying efforts ever
to accompany a public issue in New Jersey. For
nearly a year, Bell missionaries had swarmed over
the state spreading the gospel of fiber-optics to
doctors, teachers, labor leaders, the (Governor)
Florio Administration and the Legislature. It is
now clear, in retrospect, that the hard-sell worked
so well, and the connections forged by top-flight
influence-peddling ran so deep, that Bell had won
long before the first vote was cast.
"When the dust had settled, the Bell had spent
$640,000 on lobbying, a huge sum by New Jersey
standards. For comparisons sake, Bell spent $79,079
the year before." (Note: This figure does not
include the Deloitte & Touche study.)
Others, such as Nancy Becker of the New Jersey
Cable Association, believed that even the Deloitte
& Touche study, at a cost of $1.2 million
dollars, was nothing more than a lobbying document.
(80)
"It was basically a lobbying document with the
imprimatur of the board (Utility board) on it... It
was a million-dollar lobbying document. "
According to Linsk, other critics made it clear
that the Board of Regulatory Commissioners, (BRC),
specifically Edward Salmon, Chairman, was perceived
as "too tight" with the Bell company. (81)
"Arthur Cooper, president of a pay-phone company
that competes with the Bell: This is my opinion,
but if everybody in the room was blindfolded, and
without being introduced he (Salmon) read his
testimony, they would have thought he was not from
the BRC; they would've thought he was from
Bell."
In May of 1993, the New Jersey Commission
officially implemented Opportunity New Jersey.
The Outcome ÷ Opportunity for the
Bell
According to the NJ Advocate, the original
rate-of-return regulation was replaced by
Opportunity New Jersey, an alternate regulation
plan based primarily on the promise of "greatly
accelerated deployment of advanced technologies...
approximately $1.5 billion dollars above current
expenditures." (82)
"The ONJ (Opportunity New Jersey) Plan replaced
traditional rate-base/rate of return regulation
with an incentive ratemaking system in exchange for
a commitment from BA-NJ to greatly accelerate
deployment of advanced technologies in its
communications network to the entire State by the
year 2010 at an estimated additional capital
expenditure of approximately $1.5 billion above
"business as usual" from 1992 through 1999. Through
the incentive of alternative regulation under the
ONJ Plan, BA-NJ was given the financial flexibility
to operate in the new competitive
telecommunications market in exchange for
commitments to upgrade the network in order to
realize "positive benefits" to the New Jersey
economy."
In fact, according to the Advocate, the Bell
company only spent $79 million dollars, not the
$1.5 billion promised. (83)
"Although BA-NJ projected that it would expend
approximately $1.5 billion in network investment
above "business as usual" by the end of
1999...However, the Ratepayer Advocate has
calculated that BA-NJ has spent a total of $79
million above "business as usual" over these
years."(1992-1995)
More to the point, the actual dollars spent on
construction dropped below normal levels. (84)
"BA-NJ can hardly be characterized as having
made capital expenditures beyond "business as
usual" during the first three years of ONJ.
(1992-1995) Indeed, in constant 1987 dollars, the
company's capital expenditures have actually
decreased. "
And how has Bell Atlantic prospered from the
plan? ÷ Almost one billion dollars of excess
profits, and a return on equity almost twice what a
regulated monopoly should be making. (85)
"Since the time of the adoption of the ONJ Plan,
BA-NJ has received enormous financial benefits,
greatly in excess of the Company's original
projections. The gains captured by BA-NJ, which
probably would not have been achievable but for the
Plan, as set forth immediately below, involve
earnings, dividends, return on equity, cost of debt
and additional benefits."
During this period:
"BA-NJ paid out an additional $954.8 million in
dividends* over what was projected in 1992"
(1992-1995)
"the Company is earning a return on equity in
excess of 21%, well above the average New Jersey
State utility rate of return (11.25%) and
substantially higher than any rate of return
authorized by the Board in recent memory."
"net earnings have increased by $85 million, its
cost of debt has declined substantially resulting
in an annual savings of $22 million in interest
expense."
NOTE: *Dividends, in this case, are the monies
that New Jersey Bell paid to Bell Atlantic, the
holding company.
The Other Dark Secrets to
Opportunity New Jersey
Besides the obvious overcharging of customers,
the Advocate in two other documents, one discussing
the Bell Atlantic/NYNEX merger, and the second
being the Advocate's annual report, (86) clearly
showed that Bell Atlantic/New Jersey business
practices were filled with problems. They ranged
from the company's customer service provisioning,
or the price of ISDN service, to low-telephone
subscribership due to non-existent low income
options.
Customer Service Provisioning: According
to the Advocate, numerous customer services, from
meeting appointments to even properly answering
directory assistance calls, have all had a decrease
in the standard measurements of good service.
(87)
"BA-NJ's performance in the following categories
was lower in the year ending September 1996 than in
1993, 1994 and 1995:
(1) percentage of service order provisioning
completed within 5 working days;
(2) percentage of service order provisioning
appointments met; and
(3) percentage of directory assistance calls
answered within 10 seconds."
"In addition, the service standards regarding
the percentage of BA-NJ customers having no
difficulty reaching repair were below the targeted
levels in July and September 1996. These standards
also dropped from 1995 to the year ending 1996 by
approximately 450 to 500 basis points. In addition,
the service standard regarding the percentage of
service trouble reports cleared within 48 hours
experienced a percentage decrease of approximately
480 basis points from 1995 to the year ending
September 1996 and this service standard was below
the exception and surveillance levels in July 1996
and August 1996. "
Lack of Low-Income Options: New Jersey
has had a steady decline in the number of telephone
subscribing households, and the Advocate believes
that this can be attributed, in part, to the fact
that the state had not implemented proper low
income options. (88)
"The Ratepayer Advocate has continually pointed
to the fact that BA-NJ fails to provide adequate
measures to ensure the availability of affordable
telephone service for the state's low income
consumers.
"In 1995, New Jersey was identified as the only
state that experienced a statistically significant
decrease in residential penetration, and in 1996,
New Jersey was only one of three states (plus the
District of Columbia) to have experienced a
decrease in subscribership.
"Although New Jersey's annual average
penetration rate rose slightly from 92.3% in 1995
to 93.6% in 1996, the fact still remains that New
Jersey has experienced a declining subscribership
for the past several years, and that, despite the
increase reflected in the most recent monitoring
report, we continue to fall below the national
average."
ISDN Rates: According to the Advocate,
BA-NJ's ISDN rates are "excessive" and this is
stifling deployment of ISDN. (89)
"The Advocate argues that Bell's proposed
residential ISDN rates are excessive and will
stifle deployment and expansion of this valuable
technology...Bell's proposed revised tariff
submitted to the Board on April 19, 1996, offers
residential ISDN service in New Jersey for prices
ranging from $23.50 to $249 per month, with full
bandwidth usage charges of $0.04/minute from 7 a.m.
to 7 p.m. and $0.02/minute from 7 p.m. to 7 a.m.
Over the ensuing four months, the Ratepayer
Advocate and Bell attempted to negotiate a
settlement to set mutually acceptable rates, but
Bell did not propose an ISDN pricing structure
which the Ratepayer Advocate could support. "
"Fatally Flawed" Research ÷ Another
Deloitte & Touche Study
The Advocate also discussed a new survey
prepared for Bell Atlantic by Deloitte &
Touche, stating that it was "fatally flawed". The
survey attempted to "demonstrate the importance of
telecommunications to business in terms of their
operations, efficiency and competitiveness and how
their usage of advanced technologies has
dramatically increased.". (90)
"Deloitte & Touche Consulting Group
conducted a survey of 45 businesses in the State of
New Jersey. The survey indicated that 97% of the
businesses surveyed believe that telecommunications
is critical to their business' ability to compete.
The survey also showed that business usage of
telecommunications increased by 80% over the last
three years. Among all the businesses surveyed, 75%
used ISDN, 60% used frame relay, 41% had dedicated
lines, and 30% used SONET rings. The survey of
small business showed that 100% used ISDN, 75%,
used frame relay service, 41% had dedicated lines,
and 30% used SONET rings." (91)
Reviewing the methodology and findings clearly
shows just how flawed this self-serving study is.
First, probably only 2-5% of business users use
ISDN services today, not 75%-100%. Worse, Bell
Atlantic created the list to be surveyed, knowing
full well these were heavy users of new
technologies. According to the Advocate: (92)
"The study presented to the Board cannot be
relied upon because it is fatally flawed. The study
is of only 45 businesses in the State, which is not
a representative sample of the businesses in the
this State. Furthermore, the 45 business selected
by Deloitte & Touche were drawn from a list
supplied by BA-NJ, which was comprised of BA-NJ
customers."
Advocate Solutions ÷ A slap on the wrist
would have been nice.
While the Advocate has tried to help
subscribers, a recent agreement between the phone
company and the regulators pertaining to
Opportunity New Jersey clearly demonstrates just
how broken the regulatory system is.
As just outlined, the Advocate found that Bell
Atlantic had not delivered on the Opportunity New
Jersey Plan. There was no interactive services nor
any massive fiber-optic deployment. More to the
point, almost $1 billion dollars of excess dividend
profits was accrued by the Bell company from
1992-1995.
Yet the agreement made between the Bell company
and the state clearly shows that the regulators are
either unwilling or unable to step up to the plate.
Here's the details.
A press release from the New Jersey Advocate
titled "New Jersey Consumer to See $176 Million in
Benefits from Bell Atlantic Agreement with
Ratepayer Advocate and BPU" was released on April
21, 1997. (93) And though the rhetoric says that
schools will be wired and low income residents can
receive discounted rates for phone service...
"As a result of the modification of ONJ, Bell
Atlantic will accelerate its schedule to provide
New Jersey's 3,557 public and not-for-profit
schools and public libraries with broadband service
by the end of 2001, offer up to 225,000 low-income
residents a discounted rate for phone service,
accelerate its schedule to provide Urban Enterprise
Zones with access to high-speed telecommunications
services, and create up to 800 new jobs in New
Jersey by the end of 1997."
...the details reveal that the rewards are
mostly handwaving. There are virtually no
quarantees of any monies returning to subscribers.
The release states: (94)
"establish a "Lifeline" fund for eligible
low-income New Jersey residents, which will provide
a credit of up to $7.00 per month/customer,
with an estimated total value of $18 million";
"forego seeking rate increases through 1999 that
could have totaled $28 million; and",
"use best faith efforts to achieve a net
job gain of 800 full-time employees in New Jersey
by the end of 1997."
What's wrong with this picture? All of the
savings and new service promises are based on
'conditional' phrases: "use its best efforts to get
jobs", "offer a credit up to", and forgo rate
increases that "could have totaled $28 million".
There is not one concrete dollar. From a legal
standpoint, if the company spends only $2 dollars
it qualifies as an "up to" amount.
Meanwhile, customers are paying hard money, by
having to pay excessive prices, and therefore Bell
profits, while all that's been agreed upon is soft
money ÷ there is no cash, no refunds, and even
no legal promises.
More to the point, in 1997, New Jersey Bell
still charged for Touchtone Service, and its Toll
call prices were still some of the highest in the
country. Also, the company's returns were 100%
higher than a utility should be earning.
And then there's the amount of excess ÷
almost $1 billion dollars of excess profits. This
means that customers paid over $300+ million a year
in excess dividends, and yet this agreement calls
for nothing more than a 'value of $176 million in
benefits" with no payback for over $1 billion
dollars and no reductions of $300 million
annually!.
To put this into perspective: New Jersey had
approximately 5.4 million phonelines at the end of
1995, so the overcharging comes to approximately
$175 per line (counting interest) for just those
three years.
The author's position is that the Bell company
should have been re-regulated, all of the monies
accrued that were not spent on the fiber-optic
service provision should have been returned,
penalties should have been imposed, including
interest, and prices should have been slashed to
the appropriate level of a company who's regulated
rate-of-return should be 11%; i.e., a utility rate
, not the current 21%+.
In this case we fault, not the Advocate, though
they may have been able to get more concessions
from the Bells, but the New Jersey Board of
Regulatory Commissioners for not adequately
protecting the public interests.
Oh-Oh, Another Billion Owed? What About
Massive Network Write-offs?
The Advocate found that Bell Atlantic-NJ
dividends were excessive and that the return on
equity had doubled, but there was another billion
dollars of extra profits that they didn't include.
It was accrued from a massive network write-off,
based on a change in accounting, a change that was
implemented because of Opportunity New Jersey.
In Chapter 18 we detail "depreciation", a
business accounting term that describes how a
company writes-off its construction expenses, and
we explain that by accelerating the write-offs the
Bell companies were garnering billions in basically
free cash. This cash was supposed to be used
specifically to build the fiber-optic highway, but
virtually nothing was ever built.
More to the point of our story, in examining the
1994 Bell Atlantic-New Jersey Annual Report, we
find that with the implementation of Opportunity
New Jersey, the telephone company changed its
accounting principles and took additional
write-offs, adding over $1 billion in free money.
This accounting's obscure name is "FAS 71", for
Financial Accounting Standard 71. (95)
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