PUC Drops Formula for Phone Rates : Telecom: The action is a victory for Pacific Bell, which would have been forced to credit ratepayers millions of dollars.
In a major victory for Pacific Bell, the California Public Utilities Commission on Wednesday dropped the use of a complex formula that could have forced the phone company to return hundreds of millions of dollars to ratepayers every year.
“They have effectively handed the state’s largest telephone company an $880-million Christmas present,” said Regina Costa, analyst at TURN (Toward Utility Rate Normalization), a consumer watchdog group.
The decision does not affect GTE because the company did not ask for similar relief. But PUC analysts say Pacific Bell won such a good deal that they expect GTE to demand the same before year-end.
The PUC adopted the “New Regulatory Framework” in 1989 to provide California phone companies with incentives to increase efficiency. Phone prices were set based on the rate of inflation minus the phone company’s increase in productivity. In the past, rates were based primarily on cost, providing phone companies little incentive to cut costs.
Because inflation rates are estimated at about 3% this year and Pacific Bell was expected to show a 5% increase in productivity, under this formula the phone company would have had to return about 2% of what ratepayers spent in the form of a credit. The productivity increase for GTE was estimated at 4.6%.
Pacific Bell asked the PUC to drop the formula early this year, arguing that it was losing revenues and market share as a result of the new system. An administrative law judge, however, upheld the formula in a 57-page opinion issued in November that argued Pacific Bell had not provided sufficient evidence to support its position.
Two PUC commissioners offered an “alternate order” earlier this month arguing in favor of dropping the formula and imposing instead a straight three-year freeze on basic phone rates.
“This policy offers an opportunity of fair returns to shareholders by moving regulation of local exchange carriers in a market direction,” the commissioners said in a 66-page opinion.
In its meeting Wednesday, the PUC unanimously supported the alternate order, overturning the decision by the administrative judge.
“This dismantles the enforcement process you have to ensure local competition,” says Lee Selwyn, a Boston-based communications consultant who testified against Pacific Bell in the hearings. Selwyn estimates the decision will cost California ratepayers $1.2 billion over four years.
“We were taking a double hit from regulation and competition,” said Pacific Bell spokesman Jerry Kimatad. The PUC’s dropping of the productivity formula “is a recognition that competition is here.”
