Incentive-Based Rate Plan Takes Phased Approach

The California Public Utilities Commission is expected this month to adopt an incentive-based system for regulating Pacific Bell and GTE California. As proposed, effective Jan. 1, the system would:

- Cut phone rates next year and then peg them in future years to a cost-adjustment formula. This formula would limit price increases to the rate of overall inflation minus 4% for assumed efficiencies due to cost-cutting and labor-saving technology. Thus, in a year in which the cost of living increased 5%, telephone prices should rise no more than 1%. If inflation rose less than 4%, phone prices would actually be cut.

- Reorganize regulation so that the PUC still would set rates for basic phone service, which on the local level remains a monopoly. Prices for most optional calling features would be capped, but the companies would be allowed to lower charges, within limits, if they wished to encourage usage. Prices would be deregulated for such services as yellow pages advertising where competitive alternatives already exist.

- Authorize the PUC, as part of its rate-setting procedure, to establish a target rate of return for the phone companies. For 1990, that rate would be 11.75%. As an incentive to improve efficiency, the companies could keep all profits for another percentage point, but earnings in excess of 12.75% would be split evenly between customers and the company. Earnings exceeding a 16.75% return would be refunded. For phone customers, the refunds would come as credits in future bills.

In a final phase of the regulatory revision to be completed next year, the proposal calls for the commission to revise all telephone rates to reflect the new system. This “rate design” phase would eliminate the bewildering array of credits and surcharges applied to customers bills. At that time, the proposal recommends that the PUC scrap a 20-year-old $1.20 monthly fee for “Touch Tone” service and also expand the local service area in which unlimited calls can be made at no extra charge from 8 miles to 12 miles.