PUC Staff Urges $500-Million Cut in Pac Bell Bills

Pacific Bell customers could save as much as $500 million on local telephone service next year under a recommendation by the California Public Utilities Commission staff. The proposal, made public Tuesday, would trim the typical residential phone bill of $26 a month by $1.35.

The recommended cut is much more drastic than the $135-million reduction proposed by Pacific Bell last month. The five-member commission is expected to order a cut somewhere between the two figures next month. The new rates would take effect on New Year’s Day.

The extent of the trim is especially important because a new system for setting rates is scheduled to begin Jan. 1. In each succeeding year, annual revenues for both Pacific Bell and GTE California--the state’s two largest local phone companies--will increase or decrease according to a formula coupling increased costs of living and savings from improved efficiency. So the PUC decision will set the base from which future changes will be calculated.

“Because this will establish the base (for the new regulatory procedure), ratepayers will be feeling the effects in the years to come,” said Terry Murray, director of the PUC’s division of ratepayer advocacy, which recommended the revenue cut.

The commission staff has no significant differences with GTE California, which proposed that its revenue be increased by about $31 million next year, said William D. Thompson, the PUC advocacy division’s project manager.

Traditionally, the PUC set company costs then added a profit to establish the annual revenue to be collected in telephone prices. The new system makes annual price adjustments automatic, gives Pacific Bell and GTE a chance to earn more than they presently do and caps prices of some optional services while allowing the companies to lower them if they wish.

Under the new scheme, prices will be set to allow an 11.5% profit margin next year, but the companies can earn up to 13% without penalty if they can trim operating costs. Beyond 13%, however, earnings must be shared equally with customers, and if profits top 16.5%, excess earnings must be refunded. On the other hand, if profit margins fall below 8.25%, the companies can petition the commission for relief.

The commission adopted this incentive-based regulatory framework last month.

Pacific Bell spokesman Lou Saviano said the company is “disappointed but not surprised” by the magnitude of the recommended cuts. Saviano acknowledged that company profit margins now run more than 13%, exceeding the current authorized limit of 11.34%. These excess earnings--whatever the commission determines them to be--will be returned next year as c redits on monthly bills.

Pacific Bell’s revenue in California totaled about $7 billion last year.