STATES SWING TO PRICE CAPS FOR BIGGEST INCUMBENTS

Survey found Verizon was under rate-of-return in Mass., Hawaii and N.H., but Mass. situation represented only temporary reversion until new price regulation plan was adopted. Qwest is under rate-of-return in Ariz., Mont. and Wash. Alaska also keeps its largest incumbents under rate- of-return. N.J. represents unique case of price-capping system that also includes profit-sharing requirement, but profit sharing never has been invoked and may be done away with under pending Verizon proposal for new price regulation plan. In Ariz. and Hawaii, statutory constraints limit regulators’ discretion to adopt alternative regulation.

Regulation plans for largest carriers are up for renewal in 7 states plus D.C., with most decisions to be made by fall. Cap renewals are pending for Verizon in Mass., N.J., and D.C. Verizon’s current cap plan in R.I. expires in Dec., and PUC has directed carrier to file proposal for successor plan by May. Price cap renewals for SBC/Ameritech are pending in Ill., Ohio and Wis., and BellSouth caps in N.C. are awaiting renewal.

Verizon saw decision by N.Y. PSC earlier this month to adopt new regulatory plan based on revenue cap rather than price caps for each service. Two-year program, running to March 2004, gives Verizon pricing flexibility for all its services except Lifeline so long as net increase in revenue is below 3% per year. Lifeline rate is frozen. Plan continues tough service quality standards and extends duration of credits to customers for late repairs and installations.

Midsized incumbents are under alternative price-based forms of regulation in 23 states and under rate-of-return in 23. Md., Del., Hawaii and R.I. have no midsized incumbents. Ohio in Dec. adopted generic price-based regulation system that any incumbent may elect, but that system won’t take effect pending decisions on pleas for reconsideration of system’s local rate and access charge treatment and any possible court appeals that may follow. Alternative regulation ranging from price caps to full rate deregulation is rule for midsized incumbent carriers in Ala., Cal., Fla., Ga., Ind., Ia., Ky., La., Mich., Minn., Neb., N.M., N.Y., Nev., N.C., Pa., S.C., S.D., Tex., Va., W.Va., Wis., Wyo.

For smallest incumbents, 20 states use alternative forms of regulation while in 27 those carriers are under rate-of- return. Del., Hawaii and R.I. have no small incumbents. States using alternative regulation such as price caps for those carriers include Ala., Ark., Fla., Ga., Ind., Ia., La., Mich., Minn., Neb., N.M., N.C., N.D., Ore., Pa., S.D., Tex.., Va., Wis., Wyo.

For CLECs, 28 states review CLEC rate changes, although in all of them CLEC rates are presumed competitive and usually take effect as filed; cost support isn’t required. States that review CLEC rates include Ala., Alaska, Ariz., Ark., Cal., Colo., Del., Fla., Ga., Hawaii, Ill., Iowa., Ky., La., Md., Mich., Minn., Miss., N.M., N.J., N.Y., Ohio, Okla., Utah, Vt., Va., Wash., W.Va. Other 22 states don’t review CLEC rates, even though most require that tariffs or price lists be filed. Ind., Ore, N.C. and Wis. don’t require CLEC tariffs or price lists. Nev. doesn’t require CLECs to tariff their rates but does require tariffing of service terms.

Seven states have specific constraints on certain CLEC rates. N.J. and Va. cap CLECs’ basic exchange rates at incumbent’s level. In Colo., CLEC residential basic exchange can’t exceed $14.74 monthly cap specified by state law for all local providers unless basic service is bundled with advanced services. Del. prohibits CLECs from charging any rate that’s below incremental cost. In Neb. and Ill., CLECs wanting to receive support from state universal service funds must cap their basic exchange rates at benchmark levels specified by fund rules. In Vt., CLEC operator service rates can’t exceed Verizon’s rates. Other state constraints on CLECs include Ark. requirement that CLECs contribute to state universal service fund even though they're not eligible to receive subsidies. CLECs in 2000 appealed that requirement to FCC, where matter is pending. CLECs in Iowa must have their local calling area coincide with incumbent’s calling area.

Two states are taking comprehensive looks at their alternative regulation systems. Cal. PUC by spring 2003 hopes to conclude comprehensive 3-phased review, opened last Sept., of regulatory framework that’s been controlling rates of Pacific Bell and Verizon for last decade. First phase is examining issues specific to Verizon, including whether it owes ratepayers $112 million in shared profits. Record in that phase was completed earlier this month and order is expected in May. Second phase, which began this month, will examine issues specific to Pac Bell, including whether it owes ratepayers $350 million in shared profits. That phase also will consider service quality standards and enforcement mechanisms for both big telcos. Briefing cycles are scheduled in April and late May, followed by hearings July 8- 26, final briefing cycle in Aug., draft decision in Oct. Cal. system included profit-sharing requirement for these carriers that PUC suspended in 1999.

Third phase, opening in fall, will consider all aspects of regulatory framework not addressed in first 2 phases including whether to resume price cap indexing that PUC suspended in 1995 or to also resume profit sharing, how to treat exogenous factors, how to time cap adjustments and whether to change regulatory monitoring processes. Initial comments are due Sept. 20, replies Oct. 4. Hearings, if necessary, would be Dec. 16-24 with final briefing cycle in Jan. If no hearings are needed, final briefs would be due Nov. 18 and final replies Dec. 9. In either case, final decision is expected in spring 2003.

Ala. PSC this spring plans to open comprehensive review of how all local exchange providers, both incumbent and competitive, are being regulated. PSC also will look at interexchange carrier regulation, including how BellSouth’s expected long distance entry will affect regulatory standards and processes. PSC wants to see whether current price- capping system for incumbent telcos and light regulation of CLECs and long distance carriers remains consistent with promoting competition while safeguarding universal service. PSC expects to issue notice of proposed rulemaking, outlining issues to be addressed, around end of this month.

Three states saw unsuccessful legislation this year that would have had major impact on how dominant incumbents were regulated. Wis. Senate Health & Utilities Committee March 20 defeated 2 bills that would have affected SBC/Ameritech’s regulation plan. Failed SB-451 would have prohibited SBC/Ameritech from increasing local rates except in exchanges where PSC found effective local competition existed, while failed SB-408 would have required structural separation of Ameritech if it were convicted 3 times of anticompetitive conduct within 2 year-period, or if its local market share remained above 50% in 4th year after bill’s effective date. Both defeated bills would have imposed additional wholesale and retail service quality requirements on Ameritech. Failed deregulation bill in Ida. (SB-1447) would have required complete deregulation of basic service rates in exchanges that met specific criteria outlined in legislation; bill never made it out of committee. Hawaii legislature earlier this month defeated 3 bills (H-2255, SB-2864 and SB-2874) that collectively would have established alternative price cap system that Verizon Hawaii could elect without any prerequisites or tradeoffs.