PUC Opens Phone Deregulation Debate : Deukmejian Appointees Face First Test Over ‘Price Flexibility’

Outspoken consumer advocate Sylvia Siegel characteristically minced no words with the five men who control telephone rates in California. “You’re hot to deregulate telephones,” she declared, “and it’s going to be over my dead body!”

Siegel made her comment as the state Public Utilities Commission embarked last week on an exploratory hearing that could pave the way for far less regulation of local phone companies. Commissioners heard not only from consumers but also from the utilities eager for less regulation.

The hearing also marks the first clear test of the philosophy of a commission now dominated by appointees of Republican Gov. George Deukmejian.

The commission is not committed to abandoning its traditional cost-based regulatory process, which probes every aspect of the telephone business. But the fact that the hearing took place at all suggests that change is afoot.

And it is a prospect that seems to alarm the feisty Siegel. She went on to declare that nearly $1 billion in lower phone rates is overdue to consumers. And she charged the commission with dragging its feet and seeking to “cut deals” with Pacific Bell, General Telephone and long-distance phone companies--all of which are urging the commission to loosen its regulatory grip over their businesses.

Commissioner G. Mitchell Wilk, who presided over the hearing, has acknowledged an inclination, on his part, toward competition over regulation, “other things being equal.” But he advised Siegel that pending phone rate decisions involving both PacBell and General Telephone will be completed by Jan. 1. Moreover, he said, the PUC hearing that took place here last Thursday and Friday was only exploratory.

Among the five commissioners, only Donald Vial remains from the previous commission, whose members were appointed by former Gov. Edmund G. Brown Jr., a Democrat. That commission generally antagonized the phone companies and their investors by emphasizing the need to keep basic telephone rates low in order to extend service to all who wanted it.

The commission has wide authority over public utilities--power, gas, water companies and even ferry boats--but it is telecommunications that has dominated the PUC agenda since 1984. The commission has had to wrestle with local fallout from federal decisions that resulted from the breakup the old Bell System that year.

The PUC’s political coloration changed slowly in the 1980s as staggered commission terms expired, and Deukmejian appointees only assumed a majority less than a year ago. The present hearing on how to regulate phone service thus marks the majority’s first major initiative.

‘A Moving Target’

With national telecommunications regulation being altered by a market-oriented Federal Communications Commission and the more market-wary U.S. District Court Judge Harold H. Greene, who presides over the agreement that divested American Telephone & Telegraph of its local phone operations, state regulators have little choice but to change their procedures as well.

“You’re shooting at a moving target,” said Robert G. Harris, a regulatory expert with the UC Berkeley’s School of Business Administration. But he urged the commission to begin now to modify its traditional, cost-based system for setting rates before the need for change reaches the crisis stage.

“You don’t have all that much time to make the transition, so you’d better get started,” Harris warned.

The utilities wasted no time in making their proposals for reducing regulation and increasing “price flexibility” for a wide range of additional phone services. Both Pacific Bell and General Telephone of California proposed changes that would lift limits on their profits.

Now, the phone companies must refund to customers any profits they make above the limits set by the PUC. But this provides no incentive to operate more efficiently, the companies said. Instead, they suggested that additional profits be shared between their customers and their shareholders.

PacBell also proposed freezing residential rates for the next few years and gradually increasing the basic business rate, which it maintains is below actual cost.

At the same time, PacBell wants to lower the charge for local toll calls made within a customer’s service area. These rates now heavily subsidize both residential and business rates.

The commission’s public staff division, which represents utility customers, recommended that the commissioners retain their present regulatory system for basic phone service but provide pricing flexibility--a ubiquitous phrase at last week’s hearing.

But the flexibility must be limited to fields in which there is real competition, said William Aherne, the division’s director. “New services should be encouraged and nurtured.”

Aherne praised the traditional regulatory system. Low rates for basic service have made it possible for 95% of the state’s households to have phone service. The remaining 5%, Aherne quipped, “are either very poor or drug dealers who use pay phones.”

The hearing also featured some sparring between consumer advocate Siegel and PacBell. PacBell representatives bragged about the “low cost” of local phone service--$8.75 a month for residential customers. But Siegel called it “hokum.”