Plan to Reward Efficient Phone Firms OKd by PUC

The California Public Utilities Commission on Thursday adopted sweeping regulatory reforms that will offer profit incentives for the state’s two biggest phone companies to improve their technology and become more efficient.

The reform package also will provide a small cut in rates for many phone customers on Jan. 1, and it ensures that in future years charges will rise far more slowly than inflation.

Under the new system, customers of Pacific Bell in January will get a rate reduction of at least $100 million, which would translate into a cut of about 60 cents on the average residential customer’s monthly bill of $29.

GTE California’s customers will likely see even less, if any, immediate change in their monthly phone bills, however. The PUC last year chopped the Thousand Oaks-based company’s annual revenue by $330 million, or 20%, bringing its rates more closely in line with the new regulatory setup.

The action by the PUC is part of a broader effort to streamline regulation and permit utilities and other state-regulated businesses to respond more quickly to changes in the marketplace. In another reform along those lines, the commission unanimously on Thursday adopted a system of more flexible pricing for the trucking industry--both for common carriers serving regular routes and for contract freight haulers.

All five commissioners also voted for the new telephone regulatory system, which they described as historic and far-reaching.

Pacific Bell, GTE and investment analysts hailed most of the reforms, but they complained that the plans assume unrealistically fast improvements in efficiency. Consumer advocates, however, were upset by the decision and expressed concern that under the new setup phone rates will not decline as much as they would under current regulation. Computer technology has sharply reduced phone company costs in the 1980s, and this trend is expected to continue into the 1990s.

As Audrie Krause, executive director of the consumer group Toward Utility Rate Normalization, or TURN, put it, the plan would promote “an unproven economic theory at the expense of California telephone customers.”

With the new system, rates for basic phone service will be adjusted annually for rising costs. However, the PUC imposed a 4.5% “productivity factor” that assumes that new labor-saving technology will reduce costs by that much each year. So if the cost of living rises 5% in a year, Pacific Bell and GTE California would be permitted to boost prices by no more than 0.5%.

The reform package, by placing limits on how quickly phone rates can rise, is designed to give the phone companies an incentive to cut costs and thus increase their profits. Until now, the PUC has set rates by determining what the phone companies’ costs would be and then adding on an allowable profit margin. Under that approach, higher costs translated into higher profits, so the phone companies have had no incentive to make their operations more efficient.

The new system also seeks to encourage competition for providing certain kinds of telephone services by dividing services into three categories, each subject to different regulatory treatment:

- Basic services, such as local calling, will remain a monopoly with prices set by the commission.

- Optional services, such as call forwarding, will have price ceilings imposed by the PUC but the companies can lower their prices if they wish, for example, to encourage greater use.

- Services that have been deregulated by the federal government, such as repair of phone wires within homes and businesses, will have unregulated prices. As competition spreads to other services, these prices will be deregulated as well.

The commission will reassess the new system after three years, PUC President G. Mitchell Wilk said. But he emphasized that the old regulatory procedure has been buried for good.

“This is not an experiment,” Wilk said. “We didn’t spend two years on this to come up with an experiment.”

But the first step will be to adjust present rates on the basis of the companies’ actual financial experience in the first eight months of 1988. For Pacific Bell, which has had a record level of earnings, this adjustment is expected to cut $100 million, or roughly 2%, in annual revenue--and perhaps a lot more.