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Performance-based Ratemaking

Fortnightly Magazine - July 15 1995

state intended to go from cost-of-service ratemaking when it approved a price cap and incentive rate plan for telephone local exchange carriers.

When the incentive regulation plan was approved last fall, Commissioner Hullihen Moore had said that the plan would not protect ratepayers because the commission had refused to make sure that initial price-cap rates were cost-based or to require adequate review of price increases. He concluded that the commission had decided to treat local exchange carriers "as if competition exists and yet the competitive pressures to reduce or hold down rates while improving infrastructure and service are not, and will not be present." Re Telephone Regulatory Methods, 157 PUR4th 465 (Va.S.C.C.1994).

Commissioner Moore objected again recently when Bell Atlantic-Virginia, Inc. won approval of certain "revenue neutral" tariff changes under its price-cap plan. In that case, the Virginia commission approved price increases for Centrex and switched data services to offset a revenue loss anticipated from expanding certain local calling areas. A small overall revenue decrease was predicted over a two-year period.

But Moore claimed that the plan would add to revenues beyond the two-year period because of rapid growth in the Centrex and data service markets. He noted his prediction that utilities might try to "game" the price-cap plans by offsetting price cuts for static services with price hikes for rapidly growing services, adding that he "simply did not expect to see it this soon." Re Bell Atlantic-Virginia, Inc., Case No. PUC940050, Apr. 3, 1995 (Va.S.C.C.) (separate dissenting opinion dated Apr. 20, 1995).

Price-cap plans might also leave some utilities longing for traditional rate cases. Last year the Tennessee Public Service Commission (PSC) finalized an $8.7-million rate cut for United Telephone-Southeast, Inc. (a subsidiary of Sprint Communications Co.) under an alternative regulation plan in place since 1991. The rate cut was the first under the plan's three-year earnings review. The company questioned whether forecasts of an earnings surplus should warrant prospective rate cuts. It argued that prospective rate cuts under the new regulatory plan would produce a result "worse" than traditional regulation.

The argument fell on deaf ears. According to the PSC, the plan was designed as a "substitute" for a competitive market, where firms must continually improve efficiency rather than trim operations one time and then reserve the added income indefinitely for stockholders. Re United Telephone-Southeast, Inc., 158 PUR4th 297 (Tenn.P.S.C.1994).t

Electric Rate Reform Plans


Re Pacific P&L Co., Decision 93-12-016, Dec. 3, 1993 (Cal.P.U.C.).

Re San Diego Gas & E. Co., 154 PUR4th 313 (Cal.P.U.C.).


Re Central Maine Pwr. Co., 159 PUR4th 209 (Me.P.U.C.).

Re Bangor-Hydro Elec. Co., 159 PUR4th 460 (Me.P.U.C.1995).


Re Incentive Regula. for Elec. & Gas Cos., 159 PUR4th 585 (Mass.D.P.U.1995).


Re Competitive Oppor. Avail. to Customers of Elec. & Gas Serv., 154 PUR4th 19 (N.Y.P.S.C.1994).


Re Wisconsin P&L Co., 158 PUR4th 80 (Wis.P.S.C.1994).


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