Citing heightened competition and lower earnings in the state's local exchange telephone market, the California Public Utilities Commission (CPUC) has frozen price caps for local exchange carriers (LECs) for most noncompetitive local services, and has suspended the 5-percent "x-factor" services for an intermediate level of competition. (The x-factor had allowed LECs to raise prices more rapidly than the general inflation rate to reflect increases in productivity.)
Nevertheless, the CPUC declined to accept proposals by Pacific Bell and GTE California, Inc., to eliminate the price-cap plan entirely with the onset of local exchange competition, but said it would review the matter in three years.
The decision essentially freezes prices for basic exchange services, and limits adjustments to the price ceiling for services subject to an intermediate level of competition. Having examined the intraLATA toll market, opened to competition early in the state's move to regulatory reform, the CPUC concluded that the recent LEC losses in local services stemmed from rising competition, which made price caps less necessary to control market power. It acknowledged uncertainty in the future "breadth and depth" of competition, but confirmed a trend toward "increasing competition."
Suspension of the price-change mechanism "effectively reduces the productivity rate to the rate of inflation," the CPUC said. The 5-percent offset had produced consistent rate reductions over the life of the plan, eroding earnings and jeopardizing the ability of the LECs to finance infrastructure. "Regulators know well that revenue projections are key to financial ratings," the CPUC added. Re Incentive-Based Regulatory Framework for Loc. Exch. Carriers, Decision 95-12-052, I.95-05-047, Dec. 20, 1995 (Cal.P.U.C.).
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