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Testimony before the Pennsylvania Senate Agricultural and Rural Affairs Committee

Bell Atlantic -- Rate Rebalancing

October 3, 1996

Senator Madigan and Members of the Senate Agriculture and Rural Affairs Committee, my name is Irwin Popowsky and I am the Consumer Advocate of Pennsylvania. My job is to represent the interests of Pennsylvania utility consumers in matters before the Pennsylvania Public Utility Commission and other state and federal agencies and courts that regulate the activities of Pennsylvania's investor-owned utilities.

This is the first time that I have had the honor of testifiying before this Committee, but I think that it is entirely approrpiate that this Committee is examining a specific utility issue that is of particular importance to rural Pennsylvanians. That is, the proposed basic residential rate increase that Bell Atlantic - Pennsylvania is now seeking from its customers and the potential that this is just the first in a series of rate increases that Bell and other Pennsylvania telephone companies may seek that would result in drastic rate hikes for rural Pensylvanians.

Under Bell's current proposal before the PUC, a residential customer in Williamsport who subscribes to the most basic limited service packages, without touch tone, would see a monthly increase in rates of $2.90, or nearly $35 per year. A Williamsport customer who takes unlimited flat rate service would see an increase of $1.60 per month, while a flat rate customer who also takes touch tone service would see a monthly increase of 67 cents.

In nearby Lock Haven, both flat rate and limited usage customers alike would see a basic rate increase of $2.95 per month. If a Lock Haven customer subscribes to touch tone service, the increase would be $2.02 per month. Thus, the "typical" Bell customer in Lock Haven will see an increase in basic local service rates of at least two dollars and in many cases, nearly three dollars per month. The same is true for residential customers in other nearby communities, such as Avis, Millheim, Millville, Renovo, and Woolrich.

While some Bell customers in more urban areas will see local service rate reductions of as much as $1.13 per month, the overall impact of Bell's proposal is to increase basic residential local service rates statewide by $41.6 million. Moreover, even in Philadelphia and Pittsburgh, it is only flat rate customers who see rate reductions. Urban customers who subscribe to limited basic usage packages, including Lifeline service, would see rate increases comparable to those of rural customers.

While the $41.6 million basic residential service increase would be offset by reductions in other Bell services, only a small fraction of that offset comes from other residential services. Most of the offsetting reduction goes to business services and access services charged to long distance companies. In other words, under Bell's "revenue neutral rate rebalancing" methodology it would be perfectly appropriate for Bell to lower the rates of a single large business customer in Center City Philadelphia by $1,000 per month, and then raise the rates of 1000 rural residential customers by one dollar per month to make up any losses. While I have no objection to Bell lowering its rates in order to meet competition, it should not be able to make up for such reductions on a dollar for dollar basis by raising rates for those services and in those areas which still do not have competitive alternatives. This is particularly true when Bell Atlantic is reporting record profits as its revenues soar and its expenses of providing service consistently decline.

In a press release dated January 23, 1996, Bell Atlantic announced "record earnings growth in 1995." Bell Atlantic reported net income of $1.86 billion in 1995 as well as a 2.9% increase in network revenues, a 3.4% increase in the number of access lines, a 4.9% reduction in work force, a 9.9% increase in access lines per employee, and a 2.4% reduction in cash operating expenses per access line.

But these 1995 results are just the beginning. In a speech given on March 19, 1996, before a Merrill Lynch Telecommunications Conference in New York, Bell Atlantic Chairman Ray Smith provided a look at his Company's earnings prospects in the near future. Chairman Smith predicted five percent revenue growth in 1996 and beyond and, he noted, "this is before contributions from our new long distance and video businesses, which will kick in in the 1997-98 time frame." While profits from new and existing services are already "exciting", Mr. Smith told the Wall Street analysts, "the profit potential per household really opens up when we add the new opportunities -- long distance, data connectivity and video -- to the package."

If all of these Bell Atlantic claims are true -- and I think they may be -- then my question is, why does Bell Atlantic have to raise the most basic rates for rural Pennsylvanians by two to three dollars per month; and what assurance do we have under the current form of regulation in Pennsylvania that Bell Atlantic won't soon come back for more?

My Office is opposing every penny of Bell's proposed basic residential increases before the PUC. We have argued that these increases are unjustified, unnecessary, and in direct violation of the PUC's 1994 Order which assured all Bell ratepayers that their basic rates could not be increased prior to the end of 1999.

Why do we believe that this rate hike is illegal? It is necessary to look at the background of this case.

In 1993, the General Assembly added Chapter 30 to the Public Utility Code, which authorized the PUC to approve "alternative" forms of ratemaking. One such form of ratemaking, called "price cap" regulation, allows a telephone company such as Bell to be free of profit regulation as long as it keeps its rates "capped" at a certain level or in accordance with an approved formula. In addition, Chapter 30 allowed for the total rate deregulation of services that were found to be "competitive." Significantly, Chapter 30 also created a category of services called "protected" services, which included basic residential services.

Bell Atlantic-Pennsylvania filed the first Chapter 30 proceeding in October 1993, and the Commission issued its decision in June 1994. In that June 1994 Order the Commission, by a vote of 4-1, approved Bell's proposal to deregulate the rates for six services which were found to be competitive, and to establish rates for all non-competitive services on the basis of an inflation index, without regard to profits or costs. The Commission modified Bell's index from "inflation minus 2.25%" to "inflation minus 2.93%." Finally, the Commission included a paragraph in its Order which stated: "That Bell's rates for protected services are, hereby, frozen until December 31, 1999."

In supporting that Order in a Statement issued at that time, Commissioner John Hanger wrote: "The majority's opinion substantially modifies Bell's Petition. It freezes basic phone rates until the end of the century or December 31, 1999." Then-Chairman David Rolka, who also voted for the Order, issued a Statement, noting that "No rate increases for protected services are absolutely assured given the Commission's rate freeze on such services through the end of 1999."

Leaving aside what the Commission and the Commissioners said when they issued their order in June 1994, let's look at what Bell Atlantic told the public when it agreed to accept the Commission Order a few weeks later. Attached to my testimony is the Press Release that Bell Atlantic issued on July 15, 1994, when it accepted the alternative regulation plan authorized by the Commission. On page 2 of that Press Release, Bell Atlantic stated:

In addition to accelerating Bell Atlantic's deployment of its broadband telecommunications network, the plan caps basic telephone service rates for all residence and business customers through 1999.

I would urge the members of this Committee to read that sentence again, and ask yourselves what Bell Atlantic possibly could have meant when it said that the plan "caps basic telephone service rates for all residence and business customers through 1999." Under what version of the English language can this promise not be deemed to be broken by the proposal to raise basic telephone rates for customers in Lock Haven and many other rural communities by two to three dollars per month in 1996?

The question therefore arises as to why the Public Utility Commission is even considering Bell's request to raise residential basic service rates by $41.6 million? What is the point of a price cap if it doesn't cap prices? What is the point of a rate freeze if it doesn't freeze rates? Why did the General Assembly create a category of "protected" services if those services were not going to be protected? Would the rural legislators who supported the enactment of Chapter 30 in 1993 have voted for the bill if they had been told that Bell could lower rates to meet competition for certain services in some areas of Pennsylvania and then simply make up for such reductions on a dollar for dollar basis by raising non-competitive basic rates in the most rural areas of Pennsylvania?

I have to note though that, while the rate increase proposed by Bell in this case is clearly inconsistent with a basic service rate freeze, my greater concern is where the Company plans to go from here. If the freeze is lifted, will this case represent just the first in a series of cases in which rates for basic residential service will be increased in some areas of Pennsylvania in order to let Bell reduce rates for more competitive services and customers? I have said before, and I will say here again, that Bell should come forward and tell this General Assembly and tell the Public Utility Commission and tell the people of Pennsylvania, how high it intends to raise basic telephone rates. It is particularly important for Bell to say how high rates could go for rural Pennsylvanians.

Bell has said that it is necessary to bring its rates in rural areas closer to the costs of providing service. Bell refuses to tell the public, however, what those costs are. Bell insists that its specific cost information is proprietary and therefore it cannot be revealed at this hearing. Our Office has tried to get this information opened to the public, but the PUC has denied our request. I would note, however, that in the universal service case now pending at the Commission, other telephone companies have presented non-proprietary data which they say suggests that the cost of serving customers in some of Pennsylvania's most remote rural telephone exchanges is more than $100 per month. Currently Bell charges on average about $8.60 per month for basic service with a minimal level of usage. Bell has proposed in the current rate rebalancing case to raise that level on average to $10.75. Bell and a number of other telephone companies suggested in the current universal service investigation that a $25 per month charge would be a reasonable level that would not cause customers to drop off the system. It should be noted though that this $25 per month would only cover the charge for a dial tone and touch tone, with a minimal usage package of about three outgoing calls per month. I want to be clear that Bell has not proposed that it will raise its rates to $25 per month, let alone the higher number which reflects what Bell claims to be its true cost of providing basic service in its highest cost areas. But Bell has declined to say how high it does intend to raise basic rates and what limit, if any, it would accept on basic service rate increases in the future.

I would also note that I reject the proposition that residential service is being subsidized in all or even much of Pennsylvania. A lot depends on how costs are allocated and what services are looked at. The OCA's evidence in the current Bell case demonstrated that even in Bell's most rural density cell, Cell 4, the overall revenues from residential local services adequately covered the properly calculated costs of providing those services. Even our Office would acknowledge, however, that there are some areas within Cell 4 where the costs of service exceed the revenues, and in those areas we would support the use of a competitively neutral universal service fund to bridge the gap between costs and revenues.

I would also note that Bell is not alone in its efforts to suggest that rate rebalancing should be used to increase basic residential rates. In their current Chapter 30 proceedings before the Commission, both Commonwealth Telephone Company and the Frontier Communications Companies (Breezewood, Oswayo River, Canton, Lakewood, and the former Enterprise Company, now Frontier of Pa.) have included a provision in their plans that would permit them to make future rate rebalancing filings. When our Office suggested in those cases that unlimited rate rebalancing could result in unreasonable increases in basic residential services, those companies proposed that they would be willing to limit their annual basic rate increases to $3.50 per month or 40%, whichever is greater, subject to a cap at the cost of providing service or the universal service rate approved by the Commission. While those proposals are still pending before the Commission, I would venture to say that many rural legislators would be shocked to see their constituents face potential basic rate increases of $3.50 per month, or 40%, every year for a period of several years.

While it is my hope that my Office can convince the PUC not to allow disproportionate rate increases for basic service customers of any Pennsylvania telephone companies, I also would respectfully urge the General Assembly to take another look at certain provisions of Chapter 30 as soon as possible. Specifically, I would submit that if Chapter 30 allows telephone companies to raise basic protected service rates by such significant amounts, then there is a major gap in Chapter 30. As I stated earlier, Chapter 30 established a special category of services, including basic residential service, called "protected services." In order to be approved under Section 3004(d) of Chapter 30, an alternative rate plan must ensure "the continued affordability of protected telephone service." Yet, here we see that the most basic protected residential services for many Bell, Frontier, and Commonwealth customers could be subject to rate increases that are many times greater than the average increase that would be permitted for all non-competitive services under their respective price cap formulas. It does not seem that protected services under such a plan would be protected in any meaningful way.

I would respectfully urge you to support an amendment to Chapter 30, which already has been introduced in the House of Representatives, at HB 2544, which would limit the increase under an alternative or streamlined form of ratemaking for protected services to no more than the average increase allowed under the overall price formula. In other words, if the price formula established by the Commission allows a telephone company to raise rates by 2% in one year, then the rates for each protected service could be raised by no more than 2% in that year. Quite simply, I think the General Assembly should take this step to protect protected services. Otherwise, what was the point of creating this category of services, if we are simply going to allow the subscribers to those services -- often those with the fewest competitive alternatives -- to bear the full brunt of the telephone company's "rate rebalancing" efforts? I have attached a copy of HB 2544 to my testimony and I would implore the members of this Committee and all members of the General Assembly to give this provision your most urgent attention.

I hope that technological and competitive market developments will soon lead to lower prices and even better telecommunications service for all Pennsylvanians. In the meantime, I think that regulation must continue to protect basic service customers, particularly in areas where the benefits of technological and competitive advances are least likely to occur in the immediate future. To that end, I will continue to urge the Public Utility Commission to enforce its 1994 Bell rate freeze order and to take appropriate actions to protect the ratepayers of other telephone companies as well. I would also urge the General Assembly to take the steps outlined in my testimony in order to fulfill the original intent of Chapter 30 to ensure the availability of universal telephone service to all Pennsylvanians at just, reasonable, and affordable rates. 




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