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PSC urged to cut rates of Bell Atlantic Staff recommends tough controls on prices and services; $97.2 million slash; Phone company wants different scheme for deregulating earnings


Dealing what could be a serious blow to Bell Atlantic Corp., the Maryland Public Service Commission's professional staff has recommended that the PSC cut the company's phone rates by $97.2 million and adopt tough controls on prices and services as its price for deregulating earnings.

In toughly worded testimony filed late Thursday, the staff said Bell Atlantic's plan for switching to a "price cap" form of regulation "virtually guarantees increases each and every year" after a one-year freeze.

While the staff backed Bell Atlantic's basic contention that Maryland should abandon traditional rate-of-return regulation and adopt a price cap plan, it proposed a radically different version of the regulatory scheme.

Staff members based their call for the $97.2 million rate cut on their opinion that the company has been earning far more than it should for monopoly services.

They said the cut should be implemented before a cap is adopted.

The company maintains that the price cap should be based on current rates, which were set in 1993.

The staff recommendation closely follows testimony by the state Office of People's Counsel that urged a more drastic, $232 million cut in Bell Atlantic's rates.

Unlike the People's Counsel's proposal, which would apply part of the suggested cuts to basic rates, the staff would take most of the decreases in the form of lower long-distance access charges.

he staff said it expects those cuts to be passed on to Maryland consumers, but it did not spell out how much money that could mean to the average ratepayer. It said cutting inflated access charges would be the best way to promote competition.

The staff's recommendations are not binding on the PSC, which can and sometimes does overrule them. But because it is seen as a more neutral party than an advocate, the staff's recommendations usually carry more weight with the commissioners.

That makes the staff testimony especially bad news for Bell Atlantic, for in some respects its recommendations come down on the company even harder than those of the People's Counsel.

For instance, the staff proposed that the PSC require Bell Atlantic to meet stiff tests of productivity before it can reap the benefits of declining costs in the telecommunications industry.

The staff recommended setting the "productivity factor" -- a percentage that offsets any cost increases caused by inflation -- at 5.3 percent, higher than the People's Counsel urged. That factor means the company would have to trim costs by 5.3 percent before it would begin to see earnings gains from new efficiencies.

Productivity factors are common in states that adopt price cap plans. But if the commission accepts the staff's figure, Maryland would have one of the highest in the country, said Vivian Witkind Davis, policy analyst at the National Regulatory Research Institute in Columbus, Ohio.

John Dillon, Bell Atlantic's vice president for government affairs, said the number is far too high and noted that Bell Atlantic had suggested a 1.5 percent factor. He said the staff's figure would ++ be, by far, the highest in the region.

But Ms. Davis said the figure isn't necessarily unreasonable. "The productivity in the industry really has improved tremendous

ly," she said.

In supporting a price cap, the PSC staff also addressed one of the most common objections to that regulatory method -- that it encourages telephone companies to stint on service and maintenance, so as to maximize profits.

The staff agreed that degradation of service quality is a real danger, noting that service declined in Wisconsin, Ohio and New York after price caps were adopted.

To keep that from happening here, the staff proposed adopting a "service quality index" with strict reporting requirements and financial penalties for noncompliance.

Mr. Dillon, whose company's plan included no penalties, rejected the notion that Maryland should adopt safeguards based on what happened in states in other regions.

"That's not Bell Atlantic, and we've got jurisdictions within Bell Atlantic today that have price caps and we've had no problems with service quality," he said.

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