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Fortnightly Magazine - April 15 1996

GTE to lose the cited levels of traffic in Texas and Florida."

Other evidence (though disputed, see below) showed that PacBell's return on equity was falling during the first half of 1995. The CPUC found that PacBell's revenues grew at a 2.8-percent compound annual rate from 1984 to 1989 (before the price cap), but only 0.2 percent for 1990-94 (when the price cap and the X Factor held sway).

The CPUC even questioned the worth of productivity: "The forced reductions lock the LECs into a constricting internal cost constraint." And although PacBell had cut its workforce, the CPUC voiced second thoughts: "The record shows that Pacific had 13,915 fewer employees at the end of 1994 than at the beginning of incentive regulation (em a reduction of over 20 percent ... [We] wonder whether such reductions in labor force [can] continue without threatening the state's infrastructuring of skilled workers."

The CPUC found support from the Communications Workers of America: "[T]he efficient competitor will just as directly threaten the security of our jobs as does the productivity factor."

It Had to Go

On the day it killed the X Factor, the CPUC set interim rules for facilities-based carriers to compete for local calls. Two months later, it certified 59 resellers to compete against PacBell and GTE in the local market (see, Decision 95-12-056, Dec. 20, 1995; Decision 96-02-072, Feb. 23, 1996). Yet the CPUC's earlier price-cap case acknowledged no proof of effective local competition. That perception of a phantom competition led the CPUC to relax regulation (lifting the X Factor), opening the door for PacBell or GTE to keep local rates high.

One clue to the CPUC's motive may be gleaned from testimony offered by the U.S. Department of Defense (among other federal agencies), which intervened in favor of retaining the X Factor: "The DOD sympathizes with the ... 'double hit' ... from having to reduce prices for competitive services in the face of growing competition, and then also having to reduce overall prices in response to the price cap."

To learn more, I talked with Regina Costa, a telecommunications analyst at TURN (Toward Utility Rate Normalization, a ratepayer advocacy group from San Francisco), and with Jerry Kimata, a spokesman for Pacific Bell.

Kimata emphasized the recent CPUC decisions allowing resale and facilities-based competitors to enter the local market in California. "Competition is here," says Kimata. "It's not appropriate that PacBell should be forced to lower its prices just as competition is entering the market."

Kimata adds that PacBell's local residential rates are already very low, "among the lowest in the country." He points to the CPUC's order of March 13, setting rates for bundled local exchange service sold by PacBell to resellers. Kimata says that commissioners Henry Duque and Josiah Neeper dissented over the 10-percent discount on bundled residential local service sold at wholesale to resellers, arguing that PacBell already priced its retail service below cost.

Back at TURN, Regina Costa faults the evidence for killing the X Factor. Costa claims that the proposed decision issued by Administrative Law Judge Jacqueline Reed not