State regulators continue to update methods of pricing telecommunications services, using price caps for local exchange carriers (LECs) while expanding existing pricing flexibility for interexchange carriers (IXCs). The emerging trend toward inviting competitors to serve the local market, including basic local exchange service, also continues. Some of the activity mirrors ongoing developments at the federal level, such as major regulatory reforms under debate in the Congress and court-supervised modifications to existing service restrictions stemming from the AT&T divestiture.
Somes states, like Alabama, have launched a full program of regulatory reform with pure price-cap regulation for all local carriers and a newly announced opening of the local exchange market to full competition. Other states, like Iowa, are straightening out the details of the price-cap trend as LECs test the limits of pricing flexibility and the meaning of price cap promises under existing regulatory reform plans.
The parallel nature of reforms at the state and national levels is evident in a recent decision by the California Public Utilities Commission (CPUC) directing Pacific Bell, an LEC, to seek a federal court waiver of the restrictions on full provision of interexchange services by LECs.
Noting its goal of opening all telephone markets to competition by 1997, the CPUC blamed the restrictions imposed by the federal courts as a part of the AT&T divestiture for preventing local service reforms from reaching the interLATA toll calling market. Regulatory reforms are further restricted by a requirement under state law that local competition must precede or accompany the opening of the inter-LATA market, the CPUC explained. Re Alternative
Regulatory Frameworks for Local Exchange Carriers, I.87-11-033 et al., Decision 95-09-072, Sept. 7, 1995 (Cal.P.U.C.).
The Alabama Public Service Commission (PSC) has implemented a price regulation plan with no earnings sharing for the state LECs, while also opening the local telephone market to competition. According to the PSC, the state legislature resolved any legal impediment by passing Act 95-210 during its 1995 regular session. The pricing plan incorporates a proposal submitted by South Central Bell Telephone Inc., and is optional for other LECs.
The plan divides LEC services among three categories (basic, nonbasic, and interconnection). Rates for basic services are capped for five years, and then adjusted based on the Gross Domestic Price Index and reduced by an efficiency factor and any penalties for missing service-quality parameters. LECs that opt for the plan can decrease prices for nonbasic services at any time, but no increases are allowed for 12 months and thereafter are limited to a maximum of 10 percent in the aggregate. Pricing for intrastate access services provided by LECs will mirror interstate prices approved by the Federal Communications Commission, with all access-charge reductions flowed through to long-distance users.
The PSC's reforms are also designed to encourage competition in the local telephone market. While all new market entrants must apply for a certificate of service, the PSC said that regulatory requirements will be kept to a minimum, at least initially. Nevertheless, it required all new entrants to provide: 1) access and interconnection at reasonable rates, 2) access to emergency and hearing impaired services, 3) operator and directory assistance, and 4) telephone directories at a reasonable price. LECs other than South Central Bell are protected from competition until the earlier of three years or two years after the carrier receives authority to compete outside the existing local exchange area. Re South Central Bell et al., Docket Nos. 24499 et al., Sept. 20, 1995 (Ala.P.S.C.).
The Iowa Utilities Board (IUB) has rejected an attempt by GTE Midwest, Inc., an LEC, to raise some basic local-service rates while lowering others, and to increase access-service rates under its newly elected price regulation plan. The IUB ruled that state law required LECs choosing price regulation to reduce local rates an average of 3 percent and access-service rates by at least 25 percent of the difference between intrastate and interstate charges. According to the IUB, the new state law leaves no room for initial basic-service price increases without notice to customers and requires the LEC to reduce some or all of its rates for basic local service an average of 3 percent of revenues from basic service. Similarly, access-charge increases are not allowed under the statute's provisions for initial rate changes. The IUB said that price-regulated carriers could opt for a full rate proceeding if an LEC believes increased charges are required. Re GTE Midwest, Inc., Docket Nos. TF-95-305; TF-95-306, Sept. 1, 1995 (Iowa U.B.).
The Wisconsin Public Service Commission (PSC) has adopted rules allowing telecommunications utilities to elect a price regulation plan under a 1993 state law designed to encourage transition to a competitive marketplace in the telecommunications industry. The rules address the mechanics of calculating allowable annual price increases for services covered under price regulation, including the productivity factor, annual Gross Domestic Product Price Index, quality-of-service penalty, and infrastructure penalty or incentive. The plan does not include an earnings sharing feature. Telecommunications carriers electing the new form of regulation may not increase prices for any service until one year after implementing a price regulation plan. To qualify, utilities must show that access charges will be reduced according to existing approved schedules, and must file an investment plan for PSC review and approval. Re Rules Governing Telecommunications Utilities Electing Price Regulation, No. 1-AC-156, Aug. 8, 1995 (Wis.P.S.C.).
Finding that benefits associated with increased competition outweigh concerns over a reduction in the abilities of existing carriers to subsidize basic service rates, the Arkansas Public Service Commission (PSC) has approved an application by American Communication Services of Little Rock, Inc. to provide intrastate nonswitched special-access and private-line services in competition with LECs. The PSC dismissed a claim by Southwestern Bell Telephone Co., an LEC, that competition for private-line service would jeopardize the system of residual pricing currently used to subsidize and maintain lower rates for basic telephone service for residential customers. The PSC said that the newly approved competition would affect only a minimal portion of the LEC's statewide revenues, and that the rate effect would be dampened by the recent trend in its own rulings favoring cost-based pricing for telecommunications services. Re American Communication Services of Little Rock, Inc., Docket No. 94-423-U, Order No. 8, Sept. 25, 1995 (Ark.P.S.C.).
The PSC also approved a uniform set of rules for regulating all telecommunications interexchange
carriers (IXCs) in the state, including AT&T Communications of the Southwest, Inc. The PSC found that market conditions had changed so as to justify allowing greater pricing flexibility for all IXCs, including AT&T. (According to AT&T, there are currently 90 certificated IXCs providing service in the state and AT&T's share for gross revenues had declined to 60 percent.) In the past AT&T had been subject to a stricter "rate base" form of regulation than other IXCs as a dominant carrier in the marketplace. The PSC rejected, however, a plan by its staff to completely "detariff and deregulate" interexchange service prices.
In approving the pricing reforms for all IXCs, the PSC found that the "interLATA market in Arkansas can no longer be considered a natural monopoly" and that it was inappropriate to treat AT&T in a different manner from other IXCs in the state. It said that the "robust" competition for long distance customers justified the added pricing flexibility for all carriers. Re Rules for Interexchange Telecommunications Carriers, Docket No. 94-201-R, Order No. 2, Aug. 15, 1995 (Ark.P.S.C.).
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