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LEC Price-cap Plan Fails Court Tests

Fortnightly Magazine - March 15 1996

The Pennsylvania Commonwealth Court has overturned major parts of a price-cap regulatory plan for Bell Atlantic-Pennsylvania, Inc., a telecommunications local exchange carrier (LEC). The court directed the Pennsylvania Public Utility Commission (PUC) to modify an inflation offset and to reexamine its classification of certain LEC service offerings as competitive. It upheld, however, the PUC's authority to move away from rate-of-return analysis.

The state's Consumer Advocate as well as competing telecommunications companies had alleged that the PUC failed to adequately test the LEC's existing rates for excess earnings before allowing price-cap regulation for its noncompetitive services. Revenues from noncompetitive services could increase annually, based upon the change in the Gross Domestic Price Index less 2.93 percent as a productivity offset. Opponents also claimed that the PUC erred when it deregulated, as competitive services: 1) billing and collection, 2) directory advertising, 3) Centrex, 4) paging, 5) repeat call, and 6) speed calling.

According to the court, the PUC has discretion to choose a method that strikes an appropriate balance between the interests of shareholders and ratepayers. The court also pointed to recent state law permitting the PUC to use "alternative" forms of regulation for telecommunications carriers. In comparing existing rates with national averages and assuming that existing approved rates are reasonable, the PUC satisfied its duties under the state's public utility laws.

The court ruled, however, that the PUC erred in refusing to include an "input price differential" as part of the plan's productivity offset. (The differential is designed to account for the difference between total factor productivity experienced by the LEC and by the general economy.) The court also reversed the decision to deregulate Centrex, paging, repeat call, and speed calling services, finding that the PUC failed to address issues such as ease of market entry and the effect of competition on the LEC's protected services. The court said that the PUC could deregulate directory advertising and billing and collection, as long as it found on remand that the LEC had adequate safeguards to protect ratepayers and competitors against cross-subsidization. Popowsky v. Pennsylvania PUC, Nos. 1442 C.D.1994 et al., Dec. 22, 1995 (Pa.Commw.Ct.).

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