[BETA] Fortnightly

State regulators continue to update methods of pricing telecommunications services, using price caps for local exchange carriers (LECs) while expanding existing pricing flexibility for interexchange carriers (IXCs). The emerging trend toward inviting competitors to serve the local market, including basic local exchange service, also continues. Some of the activity mirrors ongoing developments at the federal level, such as major regulatory reforms under debate in the Congress and court-supervised modifications to existing service restrictions stemming from the AT&T divestiture.

Somes states, like Alabama, have launched a full program of regulatory reform with pure price-cap regulation for all local carriers and a newly announced opening of the local exchange market to full competition. Other states, like Iowa, are straightening out the details of the price-cap trend as LECs test the limits of pricing flexibility and the meaning of price cap promises under existing regulatory reform plans.

The parallel nature of reforms at the state and national levels is evident in a recent decision by the California Public Utilities Commission (CPUC) directing Pacific Bell, an LEC, to seek a federal court waiver of the restrictions on full provision of interexchange services by LECs.

Noting its goal of opening all telephone markets to competition by 1997, the CPUC blamed the restrictions imposed by the federal courts as a part of the AT&T divestiture for preventing local service reforms from reaching the interLATA toll calling market. Regulatory reforms are further restricted by a requirement under state law that local competition must precede or accompany the opening of the inter-LATA market, the CPUC explained. Re Alternative

Regulatory Frameworks for Local Exchange Carriers, I.87-11-033 et al., Decision 95-09-072, Sept. 7, 1995 (Cal.P.U.C.).

The Alabama Public Service Commission (PSC) has implemented a price regulation plan with no earnings sharing for the state LECs, while also opening the local telephone market to competition. According to the PSC, the state legislature resolved any legal impediment by passing Act 95-210 during its 1995 regular session. The pricing plan incorporates a proposal submitted by South Central Bell Telephone Inc., and is optional for other LECs.

The plan divides LEC services among three categories (basic, nonbasic, and interconnection). Rates for basic services are capped for five years, and then adjusted based on the Gross Domestic Price Index and reduced by an efficiency factor and any penalties for missing service-quality parameters. LECs that opt for the plan can decrease prices for nonbasic services at any time, but no increases are allowed for 12 months and thereafter are limited to a maximum of 10 percent in the aggregate. Pricing for intrastate access services provided by LECs will mirror interstate prices approved by the Federal Communications Commission, with all access-charge reductions flowed through to long-distance users.

The PSC's reforms are also designed to encourage competition in the local telephone market. While all new market entrants must apply for a certificate of service, the PSC said that regulatory requirements will be kept to a minimum, at least initially. Nevertheless, it required all new entrants to provide: 1) access and interconnection at reasonable rates, 2) access to emergency and hearing