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Will Residential Customers Pay for Competition?

Fortnightly Magazine - March 15 1996

Service Commission, 907 S.W.2d 140 (Ark.Ct.App.1995), affirming, Re Arkansas Louisiana Gas Co., a division of Arkla, Inc., 150 PUR4th 333 (Ark.P.S.C. 1994).)

The court rejected claims that the bypass risk associated with larger customers justified a higher return from that class, concluding that the record supported the PSC's policy goal of retaining large customers for the benefit of the system as a whole. The court cautioned, however, that its decision should not be read as "advocating an inexorable march" toward absolute equalization of class ROR. Rather, utility shareholders must share responsibility for business risks, leaving ratepayers unharmed where imprudence on the part of the utility is to blame for the lost contributions of industrial users. Arkansas Louisiana Gas Co. v. Arkansas Public Service Commission, No. CA 94-487, Aug, 30, 1993 (Ark.Ct.App.)

Is the Service Competitive?

A 1994 telephone rate design case in Maine provides a unique example of how the cost-of-service argument does not always work for utilities seeking to move costs away from services viewed as competitive. It also demonstrates the limits of the allocation argument in the face of the growing trend toward incentive ratemaking as a replacement for traditional cost-of-service pricing. Re New England Telephone Co., 152 PUR4th 1 (Me.P.U.C. 1994).

New England Telephone Co. had asked the Maine Public Utilities Commission (PUC) to reduce its overall intrastate toll revenues 8.5 percent by increasing rates for residential local exchange service 25 percent. The LEC claimed that current toll rates were substantially above the marginal cost of service, and that long-distance calls were subject to competition. As it turned out, all parties agreed that both toll and local rates were priced above marginal costs.

The PUC found that the LEC's cost studies did not provide a sound basis for a significant change in revenue recovery between rate classes nor sufficient evidence of toll bypass to justify the increase in residential rates. The PUC went on to say that the proposal might be termed a "short-sighted response to growing competition" because it fails to "take into account the significant potential for future competition in the local (and even residential) markets." On the issue of overall cost, the PUC concluded that cost-allocation arguments were inappropriate to support increases to residential rates, given that costs for all services seemed to be declining.

Rather than continue to review "complex cost studies brought forward to support controversial proposals to shift costs among customer groups," the PUC opted to open an incentive regulation proceeding in the near future. One goal of that proceeding would be to develop a regulatory framework designed to help the LEC respond to competition while maintaining stability in the rates of core or captive customers. According to the PUC, the LEC would have "the opportunity" to use cost savings from operational efficiencies and new technologies to lower its rates for competitive services without burdening local exchange ratepayers.

Ultimately, the PUC approved a new "price cap" plan for New England Telephone Co., emphasizing that one objective of recently enacted state law governing telecommunications rate reforms was to keep local rates as low or