Southwestern Bell Wants to Keep Its Profits Secret

The stuff of "telecommunications deregulation" is slightly more difficult to decipher than the monthly phone bill. Just spitting out the words requires traversing 12 syllables -- and then some, if you don't say it right the first time. And if you suspect that it's all a conspiracy hatched by the telephone companies, state and federal regulatory agencies and those guys flying around in the black helicopters, you're probably right.After all, why would Southwestern Bell Telephone want its average customer to equate "non-competitive local exchange telecommunications company" with "profit-mongering monopoly"? And why would it care to disclose that "intrastate switched exchange access" is really a technical way of describing one reason "why the phone bill is so high"? It wouldn't want these things, because if what some suspect is true -- that Southwestern Bell made an awfully nifty profit off the backs of consumers and is now trying to lock into higher rates before competition brings them down -- it would make life difficult for the company's PR personnel. But those adept at deciphering the code, namely people at the Missouri Office of the Public Counsel (OPC), want the state to look into whether Southwestern Bell has indeed been overcharging its customers since 1994 and whether customers shouldn't be compensated somehow, since anyone in the St. Louis region who pays a phone bill has no choice about where to send the check. "These are rates that were set in the last rate case in 1994," says Mike Dandino, an attorney with the OPC. "We maintain, and I think the history of telecommunications is, that costs are going down dramatically while rates are remaining the same." No deciphering required there: Costs are going down, but the rates are not.It's the first major legal skirmish resulting from the federal Telecommunications Act of 1996, which, among other things, cleared the way for competition in local telephone markets. Up until then, companies like Southwestern Bell (the "baby Bells") held a monopoly on local service but were strictly regulated by state agencies like Missouri's Public Service Counsel (PSC), which set rates based on the company's costs and its earnings. This pricing regulation is based on what is called "rate of return" and is designed to make sure that customers' bills reflect the company's cost of providing the service plus a reasonable return on investment for the company's stockholders. But some of Bell's customers include long-distance companies like MCI that pay Bell an "access fee" every time an MCI customer dials a long-distance, in-state number. Earlier this year 30 telecommunications companies led by MCI complained to the PSC that it only cost Bell 0.8 cents per minute to provide the service, and yet Bell was charging the long-distance companies 7.5 cents, therefore making a profit in Missouri of some $58 million annually on long-distance-access fees alone. Once that complaint was filed, the Office of the Public Counsel jumped into the fray by asking the PSC to audit all of Bell's earnings since 1994 to ensure that consumers weren't being overcharged on their monthly telephone bills as well. "Our position was that if Bell is over-earning -- and there is some indication that they have -- that if there is going to be any rate reductions due to over-earnings, include the residential and small-business customers, too," Dandino says.As Pat Harvey, executive director of Missouri Citizen Action, points out: "We think they're over-earning and, therefore, their rate of return is too high and, therefore, their rates are too high, because they're still under rate-of-return regulation. In fact, the law requires that you not look at isolated elements of their earnings. The whole point of rate-of-return is that you put everything into one pot."Southwestern Bell countered by suggesting that the OPC's arguments are based on "false assumptions and misrepresentations" that "appear to benefit MCI." In a prepared statement, Karen Jennings, president of Southwestern Bell in Missouri, states that MCI's filing is based on the assumption that there is no competition yet to Southwestern Bell, and therefore Bell is still under rate-of-return regulation. "That's simply untrue," Jennings states. "(The OPC) knows that 10 other companies have been certified by the PSC to provide local service. Furthermore, 40 more companies are in the process of seeking certification and/or negotiating interconnection agreements with Southwestern Bell." Under the new deregulation laws, passed by the General Assembly last year, local telephone markets are now open to any telecommunications company that wants to take the plunge. The theory behind the law is that as competition emerges in local markets, incumbent companies like Southwestern Bell will gradually enter into the free-market spirit of things by reducing prices to stay competitive. As this urge develops, therefore, the PSC can shift Bell from rate-of-return regulations to price caps to eventual and complete deregulation. "Under the legislation," Jennings states, "earnings investigations are a relic of the past." Keep in mind that "earnings investigations" help the state figure out just how much profit the company is making. "Once a competitor begins providing service, price cap regulation applies," Jennings' statement continues. "Under price caps, basic local service rates will be frozen until at least the year 2000, and can be increased thereafter only by an amount less than the inflation rate." According to John Van Eschen, legal counsel for the PSC, Bell has already requested that it be placed under price caps, which the PSC is considering. But remember that the Office of the Public Counsel has already asked that the PSC reconsider all of Bell's rates before setting price caps to ensure that Bell doesn't continue to over-earn."Here, understand it if you can," is the manner in which the PSC responds to the Public Counsel's request: "The staff (of the PSC) said that the scope of the complaint (MCI's suit) should be expanded (per the request of the Public Counsel)," Van Eschen says. "We thought we should look at all services (local phone rates as well as access charges), in which case there would be a full investigation of Bell's earnings. But we recommended to the commission that they first decide the issue of whether Bell qualifies under Missouri statutes to be under price-cap regulation. Decide that issue first, before they decide to go any further with the complaint."Don't worry if you weren't able to decipher it. That's what people like Dandino and Harvey do for a living. As Harvey translates: "The PSC replied to the Public Counsel's complaint saying, Yes, you're right, we should not just look at these access charges. The law does require us to look at this entire thing, only we're going to recommend to the commission that they not do it, anyway.' The reason being that the commission's staff believes that they will be certified for price-cap regulation before they can conclude the inquiry into their earnings, so the whole thing would be moot."Dandino's translates: "The staff has filed a reply to our motion which says that they agree that if you're going to conduct an investigation, you're going to have to look at everything, at all of the factors, but they thought that there just wasn't sufficient time to do a rate investigation, because of Bell going under price caps."In summary, as best as we can decipher the whole mess, it isn't really any more complicated than reading your phone bill. The issue at heart is whether Southwestern Bell has been overcharging its customers, both residential and business. The OPC, Missouri Citizen Action and long-distance companies like MCI want the PSC to find out if that's true. Not surprisingly, Bell doesn't want any investigation into its earnings. Instead, it wants the PSC to rush to judgment and rule that competition in local markets has arrived and, therefore, no such investigation is needed.The question before the PSC: Does it give Southwestern Bell the benefit of the doubt?

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