SENATE BILL REPORT

SB 6095

BYSenators Benitz, Bauer, Bluechel, Warnke, Newhouse, Madsen, Saling, Stratton, Smitherman, Sellar, Vognild, Conner, Kiskaddon and Zimmerman

Providing an optional method of regulation of certain telecommunications companies.

Senate Committee on Energy & Utilities

Senate Hearing Date(s):January 15, 1988; January 21, 1988; February 2, 1988; February 3, 1988; February 4, 1988; February 5, 1988

Majority Report:  That Substitute Senate Bill No. 6095 be substituted therefor, and the substitute bill do pass.

      Signed by Senators Benitz, Chairman; Bluechel, Vice Chairman; Madsen, Nelson, Newhouse, Stratton.

Senate Staff:Glenn Blackmon (786-7455)

                  February 8, 1988

AS REPORTED BY COMMITTEE ON ENERGY & UTILITIES, FEBRUARY 5, 1988

BACKGROUND:

The telecommunications industry has experienced increased competition for several years.  The state responded to this competition in 1985 by enacting the Regulatory Flexibility Act which allowed the Utilities and Transportation Commission (UTC) to free competitive companies and services from pricing regulation.  The act has been used to grant pricing freedom to all independent long distance companies. 

Unless a service has been declared competitive by the UTC, a telephone company must submit its rates for UTC approval.  The UTC sets rates based on reasonable costs of providing service and a "fair" profit to the company's investors.

SUMMARY:

An optional regulatory system is created that does not rely on the cost of service or a return on invested capital.  If a telecommunications company elects to participate, its rates are determined in the following way:

Competitive Services -- The company must notify customers and the UTC of price changes, but the company does not have to receive permission from state regulators.

Non-competitive Services -- Rates are set by adjusting those in effect on June 1, 1988, each year.  The annual adjustment is determined by a statutory formula that includes the Consumer Price Index and the company's wage costs, taxes, and expenses controlled by regulators.  For basic local exchange service, the maximum yearly rate increase is 3 percent.

If a company chooses this regulatory system, these services are declared competitive and freed from pricing regulation:  long distance service, high-speed private lines, central office-based services, and any other service declared competitive by the UTC.  The competitive services are exempted from some regulatory requirements, such as regulation of securities and the prohibition against price discrimination.

The UTC is directed to adopt service quality standards for the price-regulated services.  If a company fails to meet the service standards, it cannot increase its rates.  The right of small telephone companies to maintain their local exchange service territories without competition is strengthened.

The pricing freedom and rate formula provisions are in effect for five years.  A telephone company can renew for additional five-year periods unless the Legislature acts to end the program after five years.

EFFECT OF PROPOSED SUBSTITUTE:

Labor costs are no longer in the statutory formula for setting rates on non-competitive rates.  High-speed private lines are no longer declared to be a competitive service and exempt from price regulation.  The UTC may re-regulate any service if it finds that effective competition does not exist.

A company electing this type of regulation must submit its rates for all price-regulated services.  The UTC will determine whether the rates provide a reasonable profit, and the price escalation formula is applied to the UTC-approved rates.

The UTC is directed to review the price formula and cap provisions and make any recommendations for change to the Legislature by January 15, 1990.

A company with fewer than 1,000,000 access lines may petition the UTC for a waiver of the 3 percent cap on annual increases in basic local rates.

The UTC is directed to implement by July 1, 1989 a second optional method of regulation that may provide a sharing of cost savings and may reward companies for innovation and efficiency.

The UTC is required to approve pass-throughs of mandated tax and regulatory charges of small telecommunications company within 90 days of filing.

The UTC may approve contracts between a company and its customers that provide guaranteed prices for up to five years.

Appropriation:    none

Revenue:    none

Fiscal Note:      available

Senate Committee - Testified: Bill McDonald, United Telephone; Don Riecks (against); John Riewer, IBEW (for); Dale Vincent, PNB (for); Chuck Ketteman, Arthur Andersen (for); Ed Shaw, PNB (for); Carol Buttry, PNB (for); Mike Harris, CWA (for); Bill Moore, Boeing (against); Sharon Nelson, UTC; Richard Casad, UTC; A.J. Pardini, UC; Charles Adams, Attorney General Public Counsel Section (against); Art Butler, TRACER (against); Frank Figg, GTE Northwest; Lawrence Kenney, State Labor Council (for); David Girard, Washington Council of Senior Citizens and Elder Citizens Coalition of Washington (against); Mike Woodin, AT&T (against); Jay Reed, MCI (against); Patricia Gipson, CWA (for); Gordon Gipson, CWA (for); Mike Poynter, CWA (for); Gail Vincent, CWA (for); Mike Rendish, AARP (against); Gerald Pollet, Heart of America - Northwest (against); Ken Seeley, Metronet Services Corp. (against); Gary Smith, IBA (against); Jan Gee, Washington Retail Association (against); Linda Matson, NFIB (against)