Pac Bell, Verizon might escape profit-sharing duty

By Jennifer Coleman, The Associated Press
Wednesday May 01, 2002

SACRAMENTO — Consumer groups and state regulators are opposing a bill that would shelve rules requiring SBC Pacific Bell and Verizon to share part of their profits with ratepayers. 

The bill, by Assemblyman Rod Wright, D-Los Angeles, would freeze until 2007 a regulatory framework that’s currently in place for Verizon and Pac Bell, the companies that provide phone service for most Californians. Pac Bell officials called the bill a “status quo measure.” 

Wright’s bill would turn into law a 1998 Public Utilities Commission decision to suspend the profit-sharing rule for one time. He said Tuesday that decision has stabilized telephone rates and encouraged companies to invest in California. 

“Business people want stability in their rates,” Wright said. “You want to know what your bill is going to be next year.” 

But the PUC and other opponents say the bill would suspend a key consumer safeguard — a rule that required the companies to share excess profits with ratepayers. 

The PUC and its Office of Ratepayers Advocates warn that it could let the telecommunication giants pocket hundreds of millions more in excess profits. 

“The bottom line is, we didn’t feel it protected consumers,” said Regina Birdsell, director of ORA, the independent arm of the PUC that represents consumers. “It lifted oversight from the PUC and that’s the only protection that we think consumers have at this point.” 

The PUC would still be able to audit companies and set rates, Wright said. 

“We’re not tying their hands,” he said. “If the PUC thinks the profits are too high, lower their rates.” 

The ORA has pushed to reinstate the profit-sharing rule, which hasn’t been used in three years, because its audits found Pac Bell and Verizon failed to report billions in profits between 1997 and 1999. 

When it suspended profit-sharing for Verizon and Pac Bell in 1998, the PUC said the rule “distorts incentives” for companies to be efficient and invest in new technology in the state, said Mark Weideman, a Pac Bell attorney. 

“They were right on,” he said, adding that sharing limits “how much a company can earn.” 

When the PUC suspended the rule in 1998, deputy counsel Helen Mickiewicz said, it anticipated more competitive in telephone service, which would reduce rates. That hasn’t happened. 

So regulators need the option of using the profit-sharing rule and the audits to keep the companies from exploiting their “captive audience,” Mickiewicz said. 

The rule is part of streamlined regulatory framework developed in the 1980s to allow Pac Bell and Verizon to react to a changing telecommunication market. 

Californians have benefited, Weideman said, because the system allowed Pac Bell to invest billions to upgrade its infrastructure and offer DSL and other technology to its customers. 

Every three years, the PUC audits the companies and makes changes to the framework. In its latest triennial audit of Pac Bell, the PUC found that the company had understated their 1997-1999 earnings by nearly $2 billion and should refund $350 million to its customers. Had the sharing rule been implemented, another $457 million would have been due to customers, the audit found. 

Pac Bell disputed the audit’s findings. Wright also questioned the accuracy of the audit. 

Then, in a budget subcommittee hearing last week, Wright asked to have the ORA’s telecommunication branch cut from the budget in two years. 

“Right now, we have a $22 billion hole in the budget,” he said. “The people at ORA came in front of my committee twice recently and were just wrong.” 

If the ORA can justify their existence to the Legislature in the next two years, lawmakers can restore their budget, Wright said. 

For a legislator to attempt to “wipe out a whole office of regulators” sends the wrong message to SBC’s headquarters in San Antonio, said Regina Costa, telecommunications director for The Utility Reform Network. 

“These guys are supposed to be working for Californians and not Texas corporations,” Costa said. “You’d think that they’d learned their lesson with Enron.” 

The bill is to be heard today in the Assembly Appropriations Committee.