STATES RELY ON PRICE CAPS TO REGULATE LARGER INCUMBENT TELCOS

BellSouth and SBC currently operate under price cap regulation in all their home-region states. Verizon is under caps in all its home states except N.H., where the carrier is under rate-of-return (ROR) regulation despite having the option to petition for alternative regulation. Verizon also is under ROR in Hawaii. Qwest is under ROR in Ariz., Mont. and Wash., although in the latter 2 states it has the option of petitioning for another form of regulation. ROR also prevails for large incumbents in Alaska. Qwest is in the midst of a rate case initiated by the Mont. PSC. A rate case moratorium in Wash., approved as part of that state’s Qwest-U S West merger order, will expire in Dec. Neb. remains unique among states for having deregulated all retail telecom service rates of all providers.

Cap plans for Bell companies are up for review this year in 9 states -- Ala., Colo., Del., Ind., Ky., Md., Minn. Miss. and N.C. In addition, the Maine PUC is conducting a court- ordered review of Verizon price cap regulation in that state. And Cal. this year intends to complete the comprehensive reviews of the price cap plans for SBC and Verizon that it began early last year. The Cal. PUC was to start a comprehensive review of the Citizens Telecom cap plan this month, but postponed that review until the SBC/Verizon reviews were finished.

In Del., Verizon’s current plan will terminate in Sept. and it has proposed a successor cap plan that’s now under review. Md. regulators are in their 2nd triennial review of the cap plan Verizon has operated under since 1996 and Verizon has proposed a major rate consolidation amendment to its plan. The Maine PUC is in the early stages of a docket to satisfy the state Supreme Court’s requirement that it must find Verizon’s price cap program produces lower rates than would prevail under rate-of-return regulation. The court vacated the plan, but the PUC and Verizon agreed to maintain the regulatory status quo until the court’s remand concerns were satisfied.

The Ala. PSC this year plans to open a comprehensive global review of how all local exchange providers were regulated to determine whether changes in industry structure, technology and policy since 1996 required changes in their regulatory systems. Qwest’s Colo. cap plan expires in March 2004 and its Minn. plan ends this Dec. Qwest is expected to file a proposal for a successor plan this summer in Minn. and this fall in Colo. SBC’s cap plan in Ind. is to expire in Nov. and it’s in discussions with state regulatory staff on a successor program. BellSouth cap plans in Ky., N.C. and Miss. are scheduled for their periodic reviews this year.

The S.D. PSC plans to open hearings Aug. 12 on a Qwest petition for deregulation of its basic local rates on the ground that the service has become fully competitive. Currently, Qwest dial tone and local usage are under nonindexed price caps, while retail rates for all other services are deregulated. Qwest said it had lost 30% of the local exchange market to wireless and landline competitors since local competition was introduced in S.D. in 1997, and competitive services are available throughout the state.

Mass. on June 1 implemented a new price cap plan for Verizon. Local rates are frozen while all other retail services can be flexibly priced to any point above wholesale levels. This plan replaced an across-the-board rate freeze since a previous cap plan expired in Aug. 2001.

In N.Y., the PSC on June 18 invoked a provision in Verizon’s revenue cap plan that suspended its retail pricing flexibility if the company failed to meet service quality standards. In a May report, the PSC said Verizon’s service quality had fallen in 2003 from levels in 2002 that had led to $15 million in customer rebates for missing a key service quality goal. Verizon service quality also was called into question by the CWA and by a state Assembly committee study filed in early May. The PSC said its investigation would “aid in evaluating” Verizon’s approach to service quality improvement and its finding would form the basis for ensuring long-term adherence to standards. Verizon will have 20 days from official publication of the PSC order to file its comprehensive service quality improvement plan for meeting all major standards by year-end. Verizon said it would cooperate with the PSC but acknowledged it had had difficulties last winter in meeting what it called some of the toughest service quality standards in the nation.

The states are about evenly split in their regulation of their medium and small incumbents. About half the states still use ROR for those carriers, although many allow them the option of seeking alternative forms of regulation and permit varying degrees of pricing flexibility. Iowa, Neb., N.M. and S.D. have ended rate regulation for all their medium and small incumbents. Earnings-based regulation of incumbents is extinct in Ala., La., Mich., Pa. and Va. All telcos in those states are under some form of price-based regulation. In Del., R.I. and D. C., Verizon is the only incumbent.

CLECs generally operate under minimal state regulation. All states require them to obtain a state certificate or register with the state. CLECs must tariff their rates or file price lists in 45 states, but CLEC rates generally are presumed competitive and normally receive only cursory administrative review. Only Colo., N.J. and Va. impose any explicit retail rate regulation on CLECs, capping their basic exchange rates at the incumbent’s level.

Ind., N.C., Ore. and Wis. have done away with CLEC tariffing and normally don’t review any CLEC rate changes. Nev. doesn’t tariff CLEC rates but does tariff service terms. CLECs in Neb. must comply with the state’s benchmark rates for universal service support if they choose to participate in the state fund. CLECs in Ark. are required to contribute to the state universal service fund even though they're not eligible to receive subsidies. CLECs in 2000 appealed that requirement to the FCC, where the matter still is pending.

Ariz. represents a unique case in CLEC regulation. Its state law requires that CLEC rates bear some relationship to the “fair value” of the CLEC’s assets. The state courts last year ruled that the relationship was entirely within the Corporation Commission’s discretion to determine. In practice, the agency addresses the fair value issue on a case-by-case basis as CLECs file tariffs for new services or price changes.

Legislation passed this year has affected rate regulation in several states. A new Fla. law (SB-654) enacted in late May changed the regulation system for incumbents from price caps to indexed revenue caps and allowed rate increases of up to 20% per year on all services, subject to PSC approval of the tariffs. Incumbents could have their retail rates deregulated if they make deep reductions in their intrastate access charges.

A new N.C. law (SB-814) will deregulate all interexchange service rates as of Sept. 1, along with all telecom carriers’ promotional rates and rates for service bundles. A new Nev. law (SB-400) deregulated broadband services and allows incumbent telcos much broader flexibility to offer retail customers special rates and terms and to make up bundles combining competitive with rate-regulated services.

A new law in Iowa (SF-368) allows regulated local exchange providers to raise residential or business basic local rates up to $2 monthly, provided the revenue from the increase is used to offer broadband service at affordable rates in wire centers where broadband currently isn’t available. The increase would be rolled into the overall local rate. A new law in Alaska (HB-111) extended the statutory life of the Alaska Regulatory Commission until 2007, but requires the agency to complete a comprehensive review of all its telecom rules and regulations by mid-Nov. Okla. Gov. Brad Henry (D) vetoed a bill (HB-1335) that would have deregulated rates of all incumbent telcos except Qwest. He said the bill was contrary to consumer interests.