LEC Gets Price-cap Plan and Service Penalty

Fortnightly Magazine - February 15 1996
This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.

While reducing rates by $5.7 million for Citizens Utility Co. of California, a telecommunications local exchange carrier (LEC), the California Public Utilities Commission (CPUC) has also: 1) approved a new regulation plan for the LEC, 2) restructured rates to better position the LEC to operate in a competitive market, and 3) penalized the LEC 15 basis points on return on equity for failing to report ongoing service-quality problems.

The new regulatory framework contains the same price-cap formula, inflation index, and "exogenous factors" as the plan adopted for Pacific Bell and GTE California Inc. But the formula for earnings sharing between shareholders and ratepayers (equal sharing between the benchmark and ceiling rates of return; all earnings over the ceiling paid to ratepayers) mirrors the original plan adopted for Pacific Bell and GTE, rather than an updated version that eliminates sharing of earnings between the benchmark and ceiling rates.

The newly adopted cost-based rate design allows recovery of embedded costs for monopoly services, while limiting competitive services with price floors set at long-run incremental cost. The rate restructuring also attempts to remove existing cross-subsidies and to prevent the diversion of revenues from high- priced services to underwrite competitive ones. A general exception allows subsidization of rates for basic residential service.

This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.