PSC limits Bell prices, not profits People's Counsel says regulators fail to meet obligations

'An anti-consumer order'

Telephone company also ordered to cut rates $32 million

November 09, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Turning away from a decades-old system of regulation of Bell Atlantic-Maryland's profits, the state Public Service Commission made a pair of landmark rulings yesterday that overhaul the way the telephone industry is regulated.

That sparked howls of protest from the Maryland People's Counsel and MCI Communications Corp.

The PSC eliminated rules that regulate profits in favor of a system that limits Bell Atlantic's prices. With maximum prices, .. the company will be able to keep most of the money it saves from building modern networks, instead of being required to pass along the savings to consumers.

Regulators will count on competition to keep phone rates low.

But the commission refused to order Bell Atlantic to make the major rate cuts that the People's Counsel, long-distance companies and the PSC's own staff had said should be the price for this new freedom.

Instead, the commission ordered Bell Atlantic to cut rates $32 million annually, instead of the $117 million sought by the PSC staff or the $218 million sought by the People's Counsel, which represents consumer interests before the PSC.

The $32 million cut represents about 2.5 percent of Bell Atlantic's 1995 revenue in Maryland, said Steve Molnar, the PSC staff's telecommunications policy director. Bell Atlantic estimated that the order could cut the average phone bill by almost $2 monthly.

"This is really an anti-consumer order," said People's Counsel Michael Travieso. "They [the commission] have not fulfilled their obligation."

Travieso contended that the commission should have insisted that Bell Atlantic's profits conform to the level permitted by the old rules one last time, before profits were deregulated. Travieso said Bell Atlantic has been earning more than the law allows because it is still passing along to consumers expenses it has already paid.

The commission rejected advice from its staff and the People's Counsel to impose a "productivity factor" that would have forced rates lower each year, essentially forcing Bell Atlantic to find ways to make its network cheaper and share the savings with customers for as long as the company still holds monopoly power.

Instead, the commission froze basic residential and business rates for three years. During that time, Bell Atlantic will not have to share with consumers the money it saves through productivity improvements.

After that, the PSC will limit Bell Atlantic's prices under a formula that allows Bell Atlantic to raise prices if general inflation spikes upward, even if the actual cost of providing phone service doesn't rise.

"It's a declining-cost industry," Travieso said, contending that the biggest expense in moving phone calls from one place to another is for computers, which fall rapidly in price. "That $130 million [in excess annual profits] is in their rates and it's going to stay there."

Chip Casteel, MCI's regional public policy executive, said the PSC plan nearly guarantees that Bell Atlantic will raise rates when the three-year "hard cap" expires. He called parts of the order "just plain irresponsible."

"It's frankly astonishing to us," Casteel said. "They [commissioners] took a major step backward and adopted one of the worst price cap plans in the nation." But PSC Chairman Russell Frisby said the commission decided "it was time to cut the cord" of regulating profits. "Competition is how we fix it" if Bell Atlantic's prices are too high, he said.

The commission's 103-page order, which drew a one-page dissent from Commissioner Susanne Brogan, said basic phone rates in Maryland have not risen since 1985 and have been cut several times during the 11-year span.

The order also cites Bell Atlantic's claim that the rising percentage of Marylanders who have phones -- now 97 percent -- proves that existing prices are affordable.

Bell Atlantic didn't like even the $32 million rate cut.

"That's like saying my garage burned down, but not my house," Bell Atlantic-Maryland President Daniel J. Whelan said, contending that some costs will rise because of competition. "The People's Counsel assumed we would continue to advertise at the same level as when we had no competition. They assumed we would not replace our plant and equipment any faster. They ignored the things any reasonable business person has to consider when they confront a competitor."

But Whelan said the order sets the stage for Bell Atlantic to offer long-distance service in Maryland by mid-1997.

The company's local service prices are still regulated under the order, despite the push toward telephone-industry deregulation, because the company is expected to enjoy an effective monopoly over the local phone market in Maryland for several years after new players are allowed into the business.

The PSC plans is to phase out controls as more competitors build their own networks, allowing the market eventually to control Bell Atlantic's prices without state help.

The other PSC order yesterday settled arbitration cases between Bell Atlantic and competitors AT&T Corp., MCI, Teleport Communications Group and MFS Communications Co. Inc. Those companies asked the PSC to set prices for specific elements of Bell Atlantic's local call-handling network that the new competitors will lease until they build out their own systems.

The new federal law allows new local carriers to choose between building their own systems, buying phone service wholesale from the traditional monopoly in their area and reselling it, and buying some elements and building others.

Pub Date: 11/09/96

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