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Hold the phone, Mike; SW Bell President Mike Flynn trades exchanges with Winston Bryant over proposed PSC settlement.

WHEN A LARGE utility and its government regulator find something to agree about, someone is bound to be suspicious.

Heads turned on May 4 when Southwestern Bell Telephone Co. announced a settlement with the state Public Service Commission staff to end a year-long dispute, reconcile the company's $45 million in over-earnings and address Bell's desire for flexible regulation.

Rather than face a basic service rate cut, Bell proposed to invest $231 million in the infrastructure of its Arkansas telephone network over the next 3 1/2 years, with the tab being picked up by its stockholders. The PSC staff accepted the deal, leaving only formal approval of the commission's board to settle the issue.

But they forgot about Winston.

State Attorney General Winston Bryant must have known the Golden Gloves championship was in town, for it wasn't long before he was dancing in his corner and pummeling the settlement with rhetorical jabs.

The deal is "fraught with fraud," says Bryant, the state's top consumer advocate. He has promised to fight it before the commission.

"He misses the point," says Mike Flynn, president of the Arkansas division of Southwestern Bell. "We were trying to do what was in the best public interest. He honestly believes that to litigate it is the best way to deal with the situation."

And so, the battle is joined.

Southwestern Bell is framing the settlement as a "win-win" situation for the company and the ratepayers.

Bell, Flynn says, won't seek a basic rate increase for 3 1/2 years, unless it is forced to do so by circumstances out of its control. And, as the icing on that cake, Bell will make a few minor rate cuts, spend $231 million to improve its network and provide new services.

So what's the big deal?

In the first place, Bryant says, Bell customers should not be impressed that the rates won't go up. Bell has survived without a rate increase since 1984, he notes, and has managed to over-earn even while cutting rates. Bryant says industry costs are going down and a basic rate reduction is in order.

Bryant says there actually is room in the settlement for a basic rate increase. For example, if Bell's request to increase local calling scopes is approved, the price could rise.

Hidden Windfall?

"There is no evidence that the over-earnings have stopped since 1991," Bryant adds. "Carrying this to 1996, there is going to be a gift to Bell of over $300 million."

Under the PSC settlement, Bell also would be rewarded with more flexibility in determining rates for special calling services. Bell could file for a rate increase and gain approval within 10 days in the absence of public objections.

Bryant says the burden of proof should remain with the company, not with the consumers.

How about the promised rate cuts? Bryant says they would be diminished by hidden increases.

As part of the settlement, Bell proposes to lower the cost of touch-tone service by 50 cents per customer; it would cost $1 more per month for residential customers who want to pick up the service. Touch-tone would become mandatory for any new customers, including those who move to a new location or have been disconnected.

Then there is the matter of the investment package.

"There is no way they can claim these investments are being paid for by the stockholders," says Bryant, noting that the settlement gives Bell $19.3 million per year in credits straight from the ratepayers as a guaranteed annual return on the $231 million investment.

Usually, Bryant says, Bell would have to make investments at its own cost and the PSC would later adjust the rate base if it determined the changes were in the public interest.

Many of the improvements are not required until the end of 1996, he says, and may result in little or no benefit to the ratepayers. But despite the delay, Bell would begin receiving its return in the first year of the agreement.

More than half of the investment will be made in digital switching technology. Bryant believes the company should have made those changes on its own and asserts that the improvements would primarily protect Bell from competition.

"Southwestern Bell is using this agreement and ratepayer funds to benefit the company and not the ratepayers," Bryant says.

According to Flynn, it boils down to business reality.

"What is the incentive for our company to invest in technology if it might not be part of the rate base?" he asks rhetorically.

Shirley Guntharp, deputy attorney general in the Consumer Utility Rate Advocacy Division, says even the civic-minded portions of the investment package are not quite what they seem.

As part of $32 million in fiber-optic improvements, Bell plans to hook 775 schools and colleges in the state to a distance-learning network. But Guntharp says very few of the schools are able to purchase the equipment necessary to use the distance-learning system, and those that do will have to pay Bell for the service.

A Trend Emerges

Across the country, it has become a familiar battle.

According to a study by the Consumer Federation of America, the "baby Bell" companies overcharged customers by about $30 billion between the breakup of AT&T Co. in 1984 and the end of 1991.
Southwestern Bell in Arkansas
 Total Operating Total Subscribers
Year Expenses Gross Revenues and Circuits
1992 $372,284 $371,074 786
1991 358,281 356,396 757
1990 368,574 357,138 740
1989 353,928 334,889 724
1988 345,906 333,429 702
1987 327,214 334,817 686
1986 327,482 309,706 706
1985 317,803 325,538 651
Numbers in thousands
Source: Arkansas Public Service Commission

"In the name of modernizing telecommunications, the |baby Bells~ can make ratepayers foot the bill for a truly extravagant overbuilding of the network," the study says. One way this is done is by offering to use excess earnings to upgrade the network instead of lowering ratepayer bills, the study claims.

Flynn disputes the entire notion of the PSC and Bryant that the company "over-earned" in 1991.

He says the excess revenues were created by a change of accounting method and the PSC's refusal to factor employee benefits into the rate base. Flynn scoffs at the fact the PSC separates out Arkansas earnings from a company that also serves four other states.

"They have created a fictitious company," he says.

Originally, the PSC staff estimated that Bell had 1991 over-earnings of $61 million in Arkansas. After further review, the staff shaved $5 million from the total, then removed $11 million in toll revenue being considered separately.

In that case, the PSC staff plans to recommend a reduction in the cost of long-distance calls made within the state, so the cost is equal to or less than calls made to other states.

Flynn says he is tired of all the wrangling involved with rate-based, rate-of-return regulation and the limitations it places on his company's growth.

"Here we have a bunch of accountants down at PSC telling us what our earnings ought to be," he says.

But if Flynn is going to get any breathing room in regulation, he's going to have to go through Bryant.

"We are generally going to oppose alternative regulation," Bryant says. "It has generally not worked well in the states where it has been tried."

So where do we go from here?

Bryant has asked for a hearing before the PSC so he can make his case against the settlement. He also has filed a motion asking the PSC to make public its staff's testimony on Bell's over-earnings and to provide information concerning investigations in Missouri and Oklahoma into Bell's over-earnings in those states.

What remains to be seen is whether Bryant has a right hook to match his early jabs.

The $231 Million Deal

If the settlement between the Arkansas Public Service Commission and Southwestern Bell Telephone Co. is approved, here are $231 million in improvements the company would make to compensate for its excess earnings:

* Distance Learning. As part of $32 million in fiber-optic improvements, Southwestern Bell would establish a video and/or digital distance learning network that would be hooked up to 775 schools and colleges within the company's territory.

* Digital Rural Medical Network. A network that would provide a digital link for about 55 rural and regional hospitals and other health care facilities.

* Fiber Parks. In an effort to foster economic development, the company would help establish 14 high-tech information networks with fiber-optic lines, located at industrial parks.

* Network Improvements. All electromechanical switching equipment would be eliminated by the end of 1993 and replaced with computerized equipment. By the end of 1996, all Southwestern Bell exchanges would be upgraded from analog to digital switching, at a cost of $118 million.

Joint planning and development projects with other phone companies will increase fiber-optic networks. The company would also invest $24 million in a new signaling network to facilitate special calling services.

* Price of Touch-Tone Reduced. Basic telephone service would include touch-tone capability. The monthly charge for touch-tone would be lowered from $1.50 to $1, and there would no longer be a charge for connecting the service.

* Party Lines Upgraded, Mileage Charges Axed. All 20,000 party lines in the Southwestern Bell system would be upgraded to single-party service by the end of 1996 at a cost of $32 million, and rural customers would no longer pay additional charges for the amount of miles they live from town.

* New Areas Served. Four communities currently with no telephone service would be brought into the Southwestern Bell network.
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Title Annotation:includes related article; Southwestern Bell Telephone Co.; Arkansas Public Service Commission
Author:Haman, John
Publication:Arkansas Business
Date:May 17, 1993
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