PUC Judge Proposes Overhaul of Rules Governing Phone Rates

In a move opposed by business and consumer groups, a California Public Utilities Commission administrative law judge Thursday recommended a major overhaul in the way the telephone industry is regulated in California.

The recommendations, which are expected to be formally adopted with minor modifications in the fall, would link future telephone rate changes by Pacific Bell and General Telephone of California to the inflation rate and grant the companies greater cost-cutting incentives and pricing flexibility.

Consumer and business groups representing telephone users criticized the general thrust of the decision by Administrative Law Judge Charlotte L. Ford, but declined to comment in detail before reviewing the 350-page judgement. “We don’t think any of these changes are necessary,” said Audrie Krause, executive director of the consumer advocacy group Toward Utility Rate Normalization (TURN). “These recommendations don’t benefit residential customers.”

Over the past several years, local telephone rates have fallen steadily, and groups representing telephone users say capping rates is thus of little benefit to consumers and could ultimately result in higher costs. “I want to make certain there are guarantees and safeguards in place,” said State Senator Herschel Rosenthal (D-Los Angeles).

Large businesses that are heavy users of telecommunications services also oppose changes in the current regime, and fear they will be forced--through the rates charged for special business services--to shoulder the costs of continued telephone network modernization.

Pacific Bell Executive Vice President Gary McBee lauded the judge’s “recognition of the need for change,” and said that although the decision differed substantially from a plan Pacific Bell had proposed, it “seems like an acceptable way” to reach the company’s goals.

GTE, in a prepared statement, called the proposed ruling “a positive step towards streamlining the regulatory process and allowing telephone utilities to be more competitive.”

The judge’s decision follows nearly two years of debate over how to reform the complicated process by which telephone rates are regulated in the state. It aims to establish so-called incentive regulation and limits all future telephone rate increases to the rate of inflation minus a 4% “productivity factor,” eliminating the need for the telephone companies to justify all changes through rigorous rate cases. If inflation in 1990 is 5%, the maximum phone rate increase would be 1%.

Approval Expected

In return, Pacific Bell and GTE would be able to earn up to a 12.75% rate of return on investment. Beyond that level, they could keep 50% of any profits, with the balance refunded to customers.

Although the judge’s decision is only a recommendation, Commission President G. Mitchell Wilk called it a “balanced proposal that goes in the right direction and benefits the infrastructure of the California economy.” The full commission is expected to approve the proposal with minor modifications following the three-week comment period, and the new plan would go into effect Jan. 1.

In California and elsewhere, telephone rates have traditionally been regulated on the basis of the telephone company’s profits, or rate-of-return. Thus, Pacific Bell and GTE were allowed to charge whatever rates would allow them to earn a fixed return on investment, typically between 11% and 12%.

Price Caps for AT&T;

Since the 1984 breakup of American Telephone & Telegraph and the introduction of competition for many telecommunications services, however, the telephone companies have maintained that such a system is inappropriate because it gives them no incentives to improve productivity and requires time-consuming regulatory approvals for all price changes and investment decisions.

At the national level, the Federal Communications Commission has already abandoned rate-of-return regulation of AT&T;’s long-distance business in favor of so-called price caps, under which the company agrees to hold basic long-distance rates stable in return for flexibility on investment and pricing decisions.