telecom@eecs.nwu.edu (TELECOM Moderator) (01/07/90)
TELECOM Digest Sun, 7 Jan 90 02:17:00 CST Special: Texas OPC/SWBT
Today's Topics: Moderator: Patrick Townson
Preface and Introductory Remarks (William Degnan)
Texas OPC Responds to Southwestern Bell Telephone Co. (William Degnan)
----------------------------------------------------------------------
Date: Fri, 05 Jan 90 19:06:00 CST
From: William Degnan <wdegnan@f39.n382.z1.fidonet.org>
Subject: Preface and Introductory Remarks
>William Degnan has provided a lengthy press release from the Texas
>Office of Public Counsel (the rate-setting organization in that state)
To clarify:
The Ofice of Public Utility Counsel (OPC) was created by the Public
Utility Regulatory Act -- the same legislation which created the
rate-setting organization-- the Public Utility Commission.
The OPC:
"(1) shall assess the impact of utility rate changes and other
regulatory actions on residential consumers in the State of Texas and
shall be an advocate in its own name of positions most advantageous to
a substantial number of such consumers as determined by the
counsellor;
"(2) may appear or intervene as a matter of right as a party or
otherwise on behalf of residential consumers, as a class, in all
proceedings before the commission;
"(3) may appear or intervene as a matter of right as a party or
otherwise on behalf of small commercial consumers, as a class, in all
proceedings where it is deemed by the counsel that small commercial
consumers are in need of representation;
"(4) may initiate or intervene as a matter of right or otherwise
appear in any judicial proceedings involving or arising out of any
action taken by an administrative agency in a proceeding in which the
counsel was authorized to appear;"
(and so on)
The Texas OPC initiated docket 8585 which is a general inquiry into
the reasonableness of SWB's rates and tariffs. This is a departure
from "tradition" where rate cases result from the Telco's request for
a rate increase. SWB was preparing to ask that rates be frozen and
that they be given additional "incentives" to modernize the network.
OPC and PUC staff testimony in 8585 has called for massive rate
decreases and refunds.
Regards, Bill
Disclaimer: Contents do not constitute "advice" unless we are on the clock
William Degnan | wdegnan@mcimail.com !wdegnan@at&tmail.com
Communications Network Solutions | William.Degnan@telenet.com
P.O. Box 9530, Austin, TX 78766 | voice: 512 323-9383
------------------------------
Date: Wed, 03 Jan 90 3:39:00 CST
From: William Degnan <wdegnan@f39.n382.z1.fidonet.org>
Subject: Texas OPC Responds to Southwestern Bell Telephone Co.
The following information was received from The Texas Office of Public
Utility Counsel (OPC), and is distributed for your information/comments.
PRESS RELEASE
Contact: C. Kingsbery Ottmers
(512)475-3700
PUBLIC COUNSEL SAYS SOUTHWESTERN BELL
LOCAL TELEPHONE CHARGES SHOULD BE REDUCED
Newly-released plans provided by Southwestern Bell Telephone
Company (SWB) confirm that the telephone utility's rates should
be reduced substantially, according to testimony filed today by
the Office of Public Utility Counsel (OPC), a state agency which
represents residential ratepayers.
The latest testimony filed by OPC accountant Randy M. Allen
evaluates the effect of SWB's recently)released 5 year Business
Plan on OPC's previously recommended revenue reduction of $595
million. SWB had claimed that its latest plan and its testimony
based on that plan effectively rebutted much of the testimony
filed by various intervenors. After reviewing this newly avail-
able information, OPC accountant Randy M. Allen testifies that
the new information substantiates his conclusion that SWB's
revenues should be reduced at least $595 million. Earlier testi-
mony filed by five other OPC experts suggested that the reduction
should be used to reduce rates for each major service category by
approximately 16.9%.
For example, a 16% reduction to the local service charge would
reduce the average local rate from $9.69 to $8.14. Those previ-
ous filings included the testimony of Washington D.C. economists
Dr. Marvin Kahn and Dr. Charles Johnson, Boston engineer Dr.
Frank Collins, and OPC economic analysts Clarence Johnson and Dr.
Carol Szerszen. The determination that SWB's revenues can be
reduced was the culmination of a major investigation by Mr. Allen
and other OPC experts in conjunction with two major consulting
firms that specialize in telecommunications economics.
The testimony is part of the Public Utility Commission's hearings
established to determine whether SWB is earning excess profits.
SWB responded to the hearing by proposing a plan that would
minimize rate reductions.
Referring to SWB's so)called "Texas First" plan, Ms. C. Kingsbery
Ottmers, the Public Counsel, said "the phone company's insistence
on keeping its monopoly profits should really be called `South-
western Bell First'".
She said that traditional regulatory controls on monopolistic
profits provide the best opportunity to further the economic
development of Texas. "Our proposal will put money back in the
pockets of consumers and businesses throughout the state," she
pointed out.
"Under SWB's plan, excess profits would be funneled to the tele-
phone company's St. Louis-based holding company, Southwestern
Bell Corporation," the public counsel said. "Contrary to SWB's
self-serving description of `Texas First', the corporate game
plan is to diversify into competitive enterprises all over the
world and that means siphoning off excess profits from its Texas
monopoly and investing in businesses from Australia to Europe",
she continued. OPC's recommended revenue level includes suffi-
cient funds for SWB to upgrade the Texas telecommunication system
-- an investment that the utility believes will cost $340 mil-
lion. Ms. Ottmers stated that economically justified improve-
ments to the telephone network should be performed -- and that
high-tech services which are made possible by the modernization
should pay for the upgrades. Ms. Ottmers stated "the quality
telephone service can be enhanced, the telephone equipment
throughout the state, including rural areas, can be improved, the
rates can be cut by almost 17%, and the Company would still make
a totally reasonable profit".
She noted that Southwestern Bell Telephone Company did not offer
to provide service improvements in rural areas, until their
overearnings were questioned by the Public Utility Commission.
"Public utilities are obligated to invest in facilities that are
necessary to provide reasonable and efficient service -- that is
why they earn a profit", she said. "Now SWB wants permission to
spend ratepayers -- not investors' -- money on its investment, in
addition to earning excessive profits".
OPC is particularly critical of SWB's recent claim that proposed
rate reductions would force them to lay off employees and cut
service. Ms. Ottmers said it is important to "distinguish sound
business plans from pure public relations". OPC points out that
its proposed revenue reduction includes sufficient expense levels
to meet currently expected payroll. "Bell is trying to confuse
the public", she said. "The telephone company does not point out
that 5,700 employee reductions occurred since its last rate case
-- without any rate reductions".
Ottmers also branded as "preposterous" Bell's claim that a reve-
nue reduction is illegal. According to the Public Counsel, SWB's
version of "doublespeak" ignores the purpose of regulation. "SWB
makes the incredible claim that regulation is intended to promote
excess profit rather than the fair and reasonable profit required
by law", Ms. Ottmers responded.
She also denies that revenue reductions will reduce SWB's level
of service. She said that traditional regulation operates to
calculate revenue required to cover reasonable expenses plus a
reasonable return on investment.
"If rates are reduced to cover the utility's cost, including a
fair profit margin, and the telephone company responds by cutting
service, that means the telephone company is diverting funds
required for utility service into its excess profits", Ms. Ott-
mers said. "I do not think the Commission should stand for
that".
OPC's testimony defends traditional ratemaking as a sound ap-
proach which equally protects ratepayers and the utility's share-
holders. "It is ironic that SWB argues, on the one hand, that
traditional regulation is outmoded, while at the same time admit-
ting that traditional regulation has allowed SWB and Bell compa-
nies throughout the United States to offer quality telephone
service at affordable rates", Ms. Ottmers added.
"Ratemaking" as practiced in Texas is mandated by Texas law,
which was passed by the Legislature of Texas, according to OPC.
Hearings in the SWB case are expected to start in January of next
year.
-30-
FACT SHEET: TEXAS FIRST
1. Is SWB'S "TEXAS FIRST" PROPOSAL A GOOD THING FOR TEXAS?
Without a revenue reduction, Bell's profits will be far too high
to be called "reasonable". Many of the Texas First service
changes have merit. Incentive rate regulation is not a prerequi-
site for technological advancements. A modern telephone system
is possible under traditional regulation.
2. IF WE DO NOT ACCEPT SWB'S TEXAS FIRST, WITH SWB'S PRICE TAG,
ARE WE CHOOSING STAGNATION - AS SWB CLAIMS - INSTEAD OF GROWTH
AND PROGRESS?
Of course not. SWB's current profits will be far too high. SWB
is understandably trying to hold on to as much of the excess as
possible. Their claims of less growth and progress, and even of
reductions in present levels of service, are nothing more than
scare tactics. SWB is a monopoly, and the fundamental purpose of
utility regulation is to prevent the telephone company from
extracting monopoly profits out of Texas consumers.
3. THE COMMISSION STAFF AND VARIOUS INTERVENORS ARE PROPOSING
REVENUE REDUCTIONS OF $392 TO $702 MILLION. WITH CUTS THAT DEEP,
WON'T BELL HAVE TO CUT SERVICE AND LARGE NUMBERS OF EMPLOYEES IN
ORDER TO COMPETE FOR INVESTORS, AS BELL CLAIMS?
Not at all. In rate cases at the PUC, Bell's rates are set at a
level to pay for all its legitimate business expenses necessary
to provide reliable service to its customers. That includes new
digital equipment, where required, and all necessary employees.
In addition, the rates are set to include a reasonable profit to
the Company (a return on the utility's investment), so that
investors will continue to invest in the utility. The utility's
federal income tax on that profit is also paid by the ratepayers,
to make sure the utility nets enough profit.
The point is this: Bell has no good reason to cut any necessary
service or employee, because the rates are set high enough to
cover all legitimate expenses, plus a reasonable profit.
4. IF THE RATES ARE SET TO GIVE BELL ONLY A REASONABLE PROFIT,
WHY ARE THEY MAKING EXCESS PROFITS NOW?
There are several reasons. Bell's present rates were set about
four years ago. Since that time, the federal income tax rate has
been reduced from 46% to 34%. Ratepayers have continued to pay
Bell for those taxes at the 46% rate, even though the most Bell
would pay is at the 34% level. Some of Bell's operating expenses
have increased and some have decreased since rates were last set
in 1986. For example, Bell has already reduced its employment
level by 5,700 employees.
OPC has recommended an increase in some expenses and a decrease
in other expenses to arrive at a total level of legitimate ex-
penses less than the level requested by SWB. SWB's rate base
(remaining investment) has also changed, and the resulting cost
of capital, including the cost of borrowing money, is less than
the cost at the time of SWB's last rate case.
Because the rates were set high enough to cover taxes and other
expenses no longer being paid by Bell, Bell's revenues are now
too high. No matter whether Bell uses the excess revenue to pay
for something not required to provide good service, or uses it as
excess profits for shareholders, the result cannot be justified
so long as Bell remains a protected monopoly.
5. SWB SEEMS TO THINK THERE IS SOMETHING WRONG WITH TRADITIONAL
RATEMAKING. IS THERE?
Traditional ratemaking provides a reasonable profit for utilities
that provide reliable service. Sound ratemaking principles and
state laws balance the public interest by not allowing SWB to
earn excessive profits at the expense of Texas citizens. Texas
First is SWB's attempt to keep its excessive profits. In fact,
most of Texas First can be accomplished under traditional rate-
making.
6. IS SWB RIGHT WHEN THEY SAY THE OFFICE OF PUBLIC UTILITY
COUNSEL IS DISREGARDING TEXAS LAW BY RECOMMENDING THESE CUTS IN
BELL'S PROFITS?
That claim by SWB must have been made from anger rather than
reason. The claim is preposterous. This office has no reason at
all to disregard the law, and it does not disregard it. It is
Bell which would like to avoid the mandates of Texas regulatory
law - and the utility regulatory laws in Texas are based squarely
on traditional ratemaking. Any contention that utility regula-
tion is intended to promote, rather than restrain, monopoly
profits disregards the historic antecedents of regulation.
7. SWB SAYS THE RATES IN TEXAS ARE 20% BELOW THE NATIONAL AVER-
AGE. DOES NOT THAT SUGGEST WE ARE ACTUALLY GETTING A GOOD DEAL NOW
ON OUR TELEPHONE RATES IN TEXAS?
Bell is also claiming Texas rates are bargains because the typi-
cal monthly bill is less than the cost of a pizza. Those com-
parisons are not very relevant. If SWB's claim were correct,
then it is also true that SWB's costs are more than 20% below the
national average. Of course, too many factors prevent valid
comparisons of that type. The way utility rates are set under
traditional ratemaking, and under Texas law, is to set the rates
based on what it costs that utility to serve its customers.
Anything more is a gift from the telephone customers to SWB.
8. DOES THE CURRENT LAW ALLOW FOR THE COMPETITIVE NATURE OF SWB'S
BUSINESS?
Yes, S.B. 444 has been incorporated into the Public Utility
Regulatory Act and rules promulgated by the Commission. SWB has
not been hesitant to use these rules and other Commission proce-
dures to implement many new services. Public Counsel has not
opposed implementation of these new services so long as they
comply with the law and monopolized services, e.g., basic serv-
ice, are not used to subsidize them. OPC's concern is that the
new services be fair to SWB's customers and competitors.
9. DOES SWB NEED A FINANCIAL INCENTIVE TO PROVIDE RELIABLE
SERVICE?
No. SWB, as a regulated utility, has a moral and ethical respon-
sibility to provide adequate and reliable service at the least
possible cost with regulatory constraints. After all, SWB is in
business to provide service to and support the citizens of Texas,
not the other way around. SWB would earn a reasonable return
under OPC's proposal that is sufficient to attract investment
capital. _Reasonable_ return constitutes adequate incentive to
conduct business properly.
10. HAVE OTHER STATES ADOPTED INCENTIVE RATE PLANS SIMILAR TO
TEXAS FIRST?
While many Bell Telephone Companies have proposed similar plans,
most state regulatory commission have only adopted such plans
after ordering significant rate reductions and changes similar to
those proposed by OPC and other intervenors.
===========================================================================
Disclaimer: Contents do not constitute "advice" unless we are on the clock
William Degnan | wdegnan@mcimail.com !wdegnan@at&tmail.com
Communications Network Solutions | William.Degnan@telenet.com
P.O. Box 9530, Austin, TX 78766 | voice: 512 323-9383
William Degnan -- via The Q Continuum (FidoNet Node 1:382/31)
UUCP: ...!rpp386!tqc!39!wdegnan
ARPA: wdegnan@f39.n382.z1.FIDONET.ORG
[Moderator's Note: My thanks to Mr. Degnan for passing this along and
for his efforts in producing 'digest-ready' copy. Special issues of
the Digest are prepared without number referencing so that they can be
kept in your reference files without an interupption in regular Digest
numbering. PT]
------------------------------
End of TELECOM Digest Special: Texas OPC/SWBT
*****************************