State panel may set future phone rates

January 22, 1995|By Michael Dresser | Michael Dresser,Sun Staff Writer

With a single sentence, this year's General Assembly could authorize five people unknown to the vast majority of Marylanders to fundamentally change how the state regulates local telephone rates.

The five are the members of the state Public Service Commission, a powerful body that regulates the state's utility companies. Under legislation introduced last week at the behest of Bell Atlantic Corp., the General Assembly would give the agency sweeping discretion to change the basic rules that have governed the telephone business in Maryland since 1910.

If the legislation passes, the decisions made by these five gubernatorial appointees could affect every Marylander's telephone bill.

"I don't know whether it will bring prices down or not . . .," said Frank Heintz, chairman of the PSC. "It is possible for rates to come down in certain areas for certain services, but I would never promise that rates will come down."

Nevertheless, Mr. Heintz is a strong supporter of the legislation, contending that the commission needs flexibility to consider alternative forms of regulation as the state moves into a new era of competition in local telephone services.

The language proposed by MCI Communications Corp. and blessed by Bell Atlantic and the PSC gives the commission only the most general guidance on how to make its decisions.

Stripped of its preliminary gobbledygook, it reads: "The Commission has the authority to regulate a telephone company by means of an alternate form of regulation if it finds, after notice and hearing, that the alternative form of regulation encourages the development of competition, protects consumers, and is in the public interest."

The effect of the bill would be to let the commission scrap rate-of-return regulation, a regimen adopted from anti-monopoly railroad laws of the 19th Century. Under rate-of-return regulation, the PSC sets telephone rates by holding an extensive examination to determine the cost of service and deciding what would be a "just and reasonable" profit.

Bell Atlantic, like most local telephone companies, chafes under this form of regulation. It prefers a form called a "price cap," under which the company and the regulators agree on a maximum rate and the carrier can keep any increased profits it earns by cutting costs. While the legislation allows the PSC to fashion a new form of regulation, a price cap is considered the most likely.

The phone companies and many economists say price cap regulation is more flexible and would help pave the way for a competitive industry in the not-too-distant future. At least 20 states have switched to price cap regulation.

Bell Atlantic has been especially persuasive. Of the six states in its region, Maryland is the only one that has yet to scrap the rate-of-return concept, though it has adopted an incentive plan that lets Bell Atlantic share in financial gains from lowered costs up a a maximum rate of return of 16.5 percent.

Maryland is critical to Bell Atlantic because it has been one of the most aggressive states in opening its telephone market to competition. The PSC already has given MCI and MFS Communications Corp. permission to compete with the local phone company for business customers and has signaled a willingness to open the residential market as well.

"We're ahead on competition but we're behind in the regulatory changes that should go along with it," said Frederick D'Alessio, president of Bell Atlantic-Maryland.

Phone companies and their supporters contend that rate-of-return regulation discourages efficiency in telephone networks because any cost cuts are deducted from future profits. They say that abandonment of rate-of-return regulation is an essential step that states must take to prepare the way for competition and to reap the benefits of the "information superhighway."

Michael Raimondi, executive vice president of the WEFA Group in Burlington, Mass., said a study his company conducted for Bell Atlantic showed that scrapping rate-of-return regulation would spur enough economic growth to create 31,000 jobs in Maryland over a 10-year span.

Mr. D'Alessio said that if the bill goes through, his company will support a price cap. During hearings before the PSC last year, Bell Atlantic had suggested more detailed legislation, but when the PSC expressed its preference for MCI's suggested language, Bell Atlantic hopped aboard.

Price caps have considerable political appeal because they typically guarantee that customers' bills won't increase any more than the rate of inflation, minus a "productivity factor" than can result in a small net decrease. But consumer groups have been wary, contending that price caps typically fail to reduce bills as much they would under a rate-of-return formula.

Mark Cooper, research director for the Consumer Federation of America, said the General Assembly should move cautiously in scrapping the venerable rate-of-return system.

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