Price caps draw fire from consumer advocates

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

Price cap regulation, the form of telephone rate oversight Bell Atlantic wants to bring to Maryland, might not sound like a subject to provoke great passion, but that wasn't the case when it was introduced in Pennsylvania.

After the state Public Utility Commission decided last year to adopt a price cap over his objections, the PUC's vice chairman, Joseph Rhodes Jr., angrily told the press that his colleagues had committed a "brutal assault on the Bell rate payers."

Mr. Rhodes later apologized for his outburst, but his reaction is characteristic of the sentiments of consumer advocates and some regulators about the system, which would replace the traditional rate-of-return regulation most states have used through most of this century.

Price caps typically set a maximum rate that a telephone monopoly can set on basic services, usually with provisions for inflation and increasing telephone industry productivity.

Company's costs assessed

Rate-of-return regulation assesses the phone company's costs and sets rates that allow a "just and reasonable" profit.

Pennsylvania's PUC made its move only last June -- too soon to determine how well it has served rate payers and the state's economy, but other states have had caps long enough to create a track record.

Even where caps have been in place for years, they remain a source of controversy.

California is a case in point.

The state has had a price cap arrangement in place since 1990, resulting in rate decreases each year it has been in effect, but consumer advocates still maintain that it has been a disaster for rate payers.

Jack Leutza, chief of the telecommunications branch of the California Public Utilities Commission, said Pacific Bell has had to give back to rate payers about $500 million over the past five years under the state's price-cap plan, including $130 million last year alone.

Mr. Leutza also said price-cap regulation had succeeded in achieving another goal of the commission: simplifying the regulatory process.

But Thomas Long, senior telecommunications attorney for a California consumers group, said consumers are paying a heavy cost for shorter hearings.

"I have no doubt that California consumers are paying much more than if we'd continued rate-of-return regulation," said Mr. Long, who represents a group called Toward Utility Rate Normalization.

He said rate decreases had been bigger for several years before the price cap system took effect.

Mr. Long charged that price caps are attractive to regulators because they avoid the grueling work involved in a traditional telephone rate case.

He added that phone companies dislike the scrutiny involved in a traditional rate case because it reveals things about their operations that they'd rather the public not know.

"Price caps are a way for utilities to escape close examination of their costs to make sure that rates aren't in excess of their costs," he said.

Not all caps same

But not all price caps are the same.

The large refunds in California are a result of the state's 5 percent productivity factor, a provision of the price cap plan that assumes a telephone company should be able to decrease costs by at least that amount each year as a result of technological advances.

That factor has more than offset the inflation adjustment in recent years, prompting Pacific Bell to appeal to regulators for a reduction.

Mark Cooper, research director for the Consumer Federation of America, said that in many states, public utility commissions and state legislatures have failed to set a stringent enough cap or to ++ link regulatory change to actual competition.

"In Virginia, you've got a terrible price cap and nothing on competition. Pennsylvania's almost as bad as Virginia," he said, citing two states in Bell Atlantic territory.

In Virginia, Bell Atlantic's rates are frozen through 2001. There is no productivity factor but no inflation adjustment either.

It's a good deal for Bell Atlantic -- if inflation remains in check.

In Pennsylvania, the productivity factor was set at 2.93 percent -- far lower than California but higher than Bell Atlantic wanted.

The difference is that the Pennsylvania legislature enacted legislation that tied regulatory change to a commitment to deploy a broadband network capable of transmitting high-speed video to even the most remote rural area by 2015.

In Maryland, a much more urbanized state, that approach has not surfaced.

Persuasive claim

One of the most persuasive claims made by proponents of price cap regulation is that the elimination of rate-of-return regulation encourages telephone companies to invest in their networks.

In some states, telephone companies have issued not-so-subtle hints that they will minimize investment in states that spurn price caps.

But a study prepared for the National Regulatory Research Institute last year questioned whether that would happen.

It found that states with incentive-based forms of regulation, including price caps, showed little difference in investment from traditionally regulated states.

The study found that investment in the network is related much more to corporate strategy that a state's regulatory approach.

"Support for either rate-of return or incentive regulation as predictors of the level of infrastructure is far from overwhelming," said the report, which was funded by a national organization of state utility commissioners.

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