Phone companies can end profit-sharing

By Jennifer Coleman, The Associated Press
Friday May 10, 2002

SACRAMENTO — The state Assembly approved a bill Thursday that would suspend rules requiring California’s two largest telephone companies to share part of their profits with their customers. 

The California Public Utilities Commission opposes the bill, by Assemblyman Rod Wright, D-Los Angeles, saying it would restrict its ability to regulate SBC Pacific Bell and Verizon. 

“The Legislature is getting itself involved in ratemaking” which is the job of the PUC under the state Constitution, said Commissioner Jeff Brown. 

The bill 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. It would turn into law a 1998 PUC decision to suspend the profit-sharing rule for one time. 

But the PUC and other opponents say the bill would suspend a tool regulators can use if they find the companies have made too much money off ratepayers. 

Wright said the PUC won’t be powerless to rein in telephone rates because it can still review the companies’ finances and use that information to set rates. 

“As the Legislature, we should say what the policy is, and it’s the job of the PUC to implement that policy,” Wright said. 

Assemblyman Fred Keeley, D-Boulder Creek, also supported the measure, because he said the bill shifts the risk to shareholders and away from ratepayers if a company doesn’t perform financially. 

The measure was sent to the Senate on a 64-1 vote. 

Brown said Wright’s bill would take authority away from the commission “and places it in the hands of the Legislature, which is not a rate-setting, rate-designing body.” 

But a former PUC commissioner who helped design the new framework in the late 1980s said it was a radical departure from the earlier cost-of-service rate system, and was meant to evolve. 

“It was clear from the outset that sharing was a temporary thing until we got a handle on how things were going to work in practice,” said Mitch Wilk, a PUC commissioner appointed by Gov. George Deukmejian in 1986. 

The new framework was designed to protect ratepayers from any losses by the phone companies, Wilk said. 

“As soon as you reintroduce sharing into something like this, you put ratepayers right back on the hook for the risk,” he said. 

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 the company had understated their 1997-1999 earnings by nearly $2 billion and should refund $350 million to its customers. 

The Office of Ratepayers Advocates, the independent arm of the PUC that represents consumers, has pushed to reinstate the profit-sharing rule because of those audit results. 

Pac Bell disputed the audit’s finding, and said the framework has benefited California customers.