CPUC Decision Could Cost Consumers Millions; Competition: Now They See It, Now They Don't.

SAN FRANCISCO--(BUSINESS WIRE)--Oct. 9, 1998--Just three days after the California Public Utilities Commission (CPUC) issued a report concluding that there is no competition in the local phone market, the Commission inconsistently suspended two key consumer protections on the grounds that the market will protect customers from monopoly abuses.

TURN's Telecommunications Director Regina Costa said: "It is inconceivable that they could justify their actions on the basis of competition, when their own investigation shows that customers have no choice. The move came in a proceeding to investigate the status of regulation applied to SBC-Pacific Bell and GTE-California (GTEC). For practical purposes, the Commission's action means that SBC-Pacific and GTEC will keep hundreds of millions of dollars that they should be required to pass through to consumers in the form of lower rates.

"Telephone regulation is now officially a one-way street," said TURN's Telecommunications Director Regina Costa. "Telephone companies are protected and customers lose. These regulations were supposed to ensure that consumers would benefit from reduced costs that result from innovation and would not bear the financial burden of bad business decisions. Instead, consumer protections have been whittled away, service quality problems have increased and customers have been deprived of hundreds of millions of dollars in rate reductions, while the Commission's own staff has found that Pacific Bell has succeeded in preventing competitors from offering local phone service," Costa said.

The consumer protection regulations the Commission voted to suspend are price cap regulation and profit sharing. Price cap regulation requires local telephone providers to lower rates when their costs decline faster than inflation rises. Currently, advances in technology are making equipment cheaper to purchase and operate, driving phone company costs down. The CPUC's decision means that consumers will not benefit from decreased costs, permitting the phone companies to pocket all savings.

Sharing is a regulatory mechanism that requires the phone companies to share profits above a certain percentage with customers. According to Costa, "the Commission has failed in the past to devote sufficient resources to ensure that customers received the full benefits they were entitled to under this regulation. They are abandoning the scheme without ever giving it an opportunity to work."

Regulations were designed to provide incentives to the phone companies to keep costs down, and to ensure that captive customers are not forced to pay unreasonably high rates. The CPUC's Office of Ratepayer Advocates estimates that the removal of price cap regulation in 1995 may have cost consumers hundreds of millions of dollars. Today's decision threatens to cost them hundreds of millions more.

The Commission reasoned that the regulations are unnecessary because the local phone market will self regulate now that it is open to competition. Nevertheless, PacBell and GTE continue to dominate the local phone market. Today's decision is in direct conflict with the CPUC's own report on the state of local competition, issued on Oct. 5. In that report, the Commission staff found that PacBell had failed to meet the requirements of the 1996 Telecommunications Act for opening local phone markets to competition, a prerequisite to PacBell's entry into the long distance market under the Act. Today's action by the CPUC leaves consumers with the worst of both worlds -- unregulated monopolies.

"The decision is based on faulty reasoning and also has serious procedural flaws," said Costa. "The Commission made conclusions about local competition but did not allow us to present evidence on the subject." Costa said TURN, on behalf of the over 28 thousand consumers it represents, intends to seek reconsideration of the flawed decision.