Opportunity New Jersey: An I-Way Failure
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)