States Apply Lightest Retail Rate Rules to Biggest Carriers
State regulators are applying a lighter regulatory hand to rates of their largest incumbent telcos, which face heavy competition, than to the rates of the smallest carriers that face little or no competition. Rate-of-return regulation is all but extinct for the largest incumbents, but still sees wide used for midsized and small companies. CLECs come under minimal regulation in 44 states; 6 states impose some CLEC rate constraints. These are results from a 50-state survey of states retail rate regulation by our affiliate State Telecom Regulation Report. The white paper accompanying this issue gives detail by state of retail rate-regulation policies (State Retail Rate Regulation of Local Providers: A Communications Daily White Paper).
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For the largest incumbent carriers, only 6 states still use rate-of-return regulation. Large incumbents’ retail rates have been deregulated in 14 states; 31 states impose price caps. Regulators in Cal., Ida., Ia., Kan., Ky., Mich., Neb., Miss., Okla., R.I., S.D., Tex., Utah and Wyo. have deregulated their largest incumbents by policy or law. Rate-of-return hangs on in Alaska, Ariz., Hawaii, Mont., N.H. and Wash. The systems vary in pricing flexibility allowed for competitive services, but competitive-service revenues still count in rate-of-return calculations. The other 31 states use price caps for the biggest local carriers. The big carriers say competition has become strong enough to constrain their prices without regulation, and states have tended to agree.
But Bells in 2 states this fall saw bids for lighter regulation derailed. Verizon in N.H. had proposed replacing rate-of-return with a program of price caps for basic local services and rate deregulation for everything else. But the carrier withdrew the petition in Sept. after opponents made an issue of whether the plan obeyed the state’s alternative regulation statute. BellSouth in N.C. proposed moving past price caps to full retail rate deregulation, but the Utilities Commission in Sept. put that proposal on hold until BellSouth was taken over by AT&T. The commission said the combined company might want a different tack on rate regulation.
Ownership transfers of dominant incumbent local exchange carriers in Hawaii and Nevada didn’t change their retail rate regulation. Hawaiian Telcom -- as a condition for PUC approval of the 2005 transfer of ownership from Verizon to the Carlyle Group -- may not file a general rate case until 2009. Hawaiian Telcom is the state’s only incumbent. In Nev., Sprint’s spinoff of its local exchange operation, the state’s largest, to Embarq as a condition for its merger with Nextel didn’t change the operation’s price cap regulation program, now in its final year.
For midsized incumbents, the rate-regulation picture is more restrictive, with 22 states keeping rate-of-return rules. The states allow varying degrees of pricing flexibility, but revenues still count in calculating earnings. And most states let midsized carriers seek less- restrictive regulation. Only Ia., Kan., Mich., Neb. S.D., Tex. and Wyo. have deregulated midsized incumbents’ rates. Meanwhile, 17 states regulate midsized carriers’ rates with price caps: Ala., Fla., Ga., Ind., La., Minn., Mo., Nev., N.J., N.M., N.C., Ohio, Pa., Va., S.C., W.Va., and Wis. But Del., D.C., Hawaii, Md. and R.I. have no midsized incumbents.
For the smallest incumbents, 27 states still use rate of return regulation. Their systems generally offer little pricing flexibility. But in most states companies can seek more price flexibility or less restrictive regulatory methods like price caps. Small companies’ retail rates are deregulated in Ind., Ia., Mich., Minn., Neb., N.M., N.D., Ore., S.D. Tex., Va., and Wyo. Price caps regulate small- incumbent retail rates in Ala., Ark., Fla., Ga., La., N.C., Pa. and S.C. There are no small incumbents in Del., D.C., Hawaii or R.I. State regulators say actual or prospective competition smaller incumbents face is the single biggest factor driving carriers to seek more price flexibility.
CLECs generally operate with minimal regulation. Only 6 states put any curbs on CLEC retail rates. CLECs in Ariz. are subject to a form of rate-of-return regulation but regulators have broad latitude on how they tie rate changes to earnings. Colo. CLECs can’t exceed a $14.74 cap on monthly residential basic exchange service imposed on all carriers by law. Del. CLECs can’t price services below incremental cost. Neb. CLECs who accept state universal service subsidies can’t price above statewide benchmark rates applied to all subsidy recipients. In. N.J., CLECs can’t increase basic local rates without cost justification. And in Va., CLEC rates are capped at the incumbent’s levels.
Other state constraints on CLECs include an Ark. policy requiring CLECs to contribute to the state universal service fund regardless of whether they receive any subsidies. Ia. requires that CLEC local calling areas coincide with those of the incumbent. Mo. bars CLECs from setting carrier access charges higher than the incumbent. All states impose entry regulation on CLECs. Forty-four states require CLECs to get state certificates by demonstrating technical, managerial and financial competence. CLECs merely register with the state commission and supply basic information about themselves in Ky. Mass., Mont., N.H., Wash. and Wis.