PUC Staff Asks $480-Million Pacific Bell Cut

Pacific Bell’s annual revenue should be cut $480 million next year--a 7.6% drop--and not increased $935 million as the company requests, the California Public Utilities Commission staff recommended Tuesday.

The announcement apparently jolted investors: The stock of Pacific Telesis Group, Pacific Bell’s parent, fell $2 to close at $68 on the New York Stock Exchange after having been up $1 just before the announcement.

“It looked like a typo,” quipped analyst Neil Yelsey about the recommended rate cut. But, Yelsey, who follows the company for Salomon Brothers, said Wall Street’s reaction was premature, since hearings on Pacific Bell’s 1986 rate case began only this week and will continue for several months. The five commissioners are not expected to decide how much to boost or cut rates until late this year.

New Division

The recommendation for a cut came from the PUC’s new public-staff division, formed in a reorganization last summer. The division’s responsibility is to advocate the long-term interests of utility customers before the commission, said Bill Ahern, the division’s director. But, he added, commission auditors, engineers, lawyers and economists applied the same analytical techniques traditionally used in reviewing company rate proposals.

“This is the same report the Public Utilities Commission staff would have sent out if it had not been reorganized,” Ahern said.

(The reorganization divided the staff between public and evaluation-and-compliance divisions. The latter ensures compliance with PUC orders and helps the commission resolve technical and legal issues.)

Pacific Bell initially sought $1.36 billion in additional revenues for 1986, but later trimmed that request to $935 million. Thus, the staff recommendation that revenues be slashed by $480 million puts the two sides $1.4 billion apart as hearings begin.

Pacific Bell spokesman Doug Cambern called the recommendation “very, very shortsighted,” adding: “It would be disastrous to reduce rates at this magnitude. It would be disastrous to reduce rates at all.”

The company is prepared to rebut the findings at the public hearing, Cambern said.

In arriving at its position, the commission’s staff said that, among other items, Pacific Bell overestimated its maintenance costs by $244 million, underestimated revenues from local service by $150 million and overestimated the cost of capital it will need next year by $177 million. It also recommended that Pacific’s authorized profit be trimmed to 15.25% from the presently authorized 16%. The company seeks 16.75%.

The company has yet to achieve its authorized return on equity, however, with a 13.2% rate in 1984 and 13.6% in the first quarter of 1985.

Other Disputed Costs

The commission’s staff also disputed PacBell’s estimates for depreciation expenses, staffing and payroll costs.

Robert B. Morris III of Montgomery Securities in San Francisco estimated that a cut of the magnitude recommended would trim earnings by $2 a share. Because the two sides are so far apart, Morris added, the commissioners might seek a middle ground.

Nonetheless, Louis Andrego, who headed the public staff’s 30-member review team, said its recommendation “should keep Pacific Bell financially healthy and able to continue to modernize its plant and equipment.”

“We are now seeing benefits in productivity from Pacific Bell’s investments in more efficient equipment,” Andrego added, “and the ratepayers should share in these benefits. In our view, this means a reduction in rates for 1986.”