PUC Orders Pacific Bell Rate Cut : Board Also Reduces Return on Shareholders Equity
Pacific Bell customers will save a penny or two on their monthly phone bills as a result of a state-ordered cut in the company’s 1986 rates, but shareholders may well see a more significant drop in earnings for the company’s parent, Pacific Telesis Group, according to analysts.
The Public Utilities Commission on Friday completed action begun Wednesday on a $124-million slash in Pacific Bell’s revenue. In doing so, it rejected the company’s final request for a $425.5-million increase. The PUC also reduced the company’s authorized return on shareholders equity to 15% from 16%; Pacific had sought to raise it to 16.75%. That percentage limits the actual prices that the utility can charge for its services. The new rates will take effect in 30 days.
For residential customers, the monthly local service charge will drop a penny as a 2.54% surcharge dips to 2.43%. Typical monthly bills will drop about 3 cents to $25.96, the PUC estimated. Business bills are expected to decline about 5 cents for each phone line.
For Pacific Telesis shareholders, on the other hand, the effect on annual earnings is expected to be more pronounced, some analysts said.
Brad Peery, who heads a telecommunications investment banking firm in Tiburon, Calif., dropped his 1986 earnings estimate to $8.60 a share from $9.40. Peery said he had expected the PUC to increase Pacific Bell revenue by about $240 million to make up for higher depreciation costs and reduced billing revenue from AT&T;, its former parent.
“That says to me that earnings are likely to go down substantially this year,” Peery said.
Robert B. Morris III of Montgomery Securities in San Francisco was less pessimistic. At the worst, he said, earnings will remain flat, compared to his estimated 1985 earnings of $9.30 a share.
Among positive features of the PUC order, Morris said, is the $94-million shift in access charges levied against long-distance carriers to local customers’ rates. That is significant to protect Pacific Bell’s revenue base by reducing economic incentives for major users to leave the local network, he explained. Morris also said he considers a 15% return to be reasonable in the present economy.
Dow Jones News Service quoted analysts for Shearson Lehman Bros. and Dean Witter as lowering their earning estimates. John Bain of Shearson said he has urged clients to sell Pacific Telesis stock for the last two months in anticipation of an award “on the wrong side of zero.” Dean Witter’s Joel Gross lowered his 1986 earnings projection to $9.15 from $9.60.
Pacific Telesis itself had no comment on the ruling’s likely effect on earnings since the PUC’s voluminous order is not yet available.
Pacific Telesis stock dropped $3.50 a share in New York Stock Exchange trading Thursday after first word of the intended rate cut became known, but it rebounded $1.125 on Friday to close the week at $79.625.
