HOUSE BILL REPORT

HB 1268

BYRepresentatives Sutherland, Gallagher, Jesernig, Betrozoff, Appelwick, Brooks, Meyers, May, Grant, Barnes, Leonard, J. Williams, Moyer, Ferguson, Belcher, Bumgarner,P. King, and D. Sommers 

Providing an optional method of regulation of certain telecommunications companies.

House Committe on Energy & Utilities

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass. (8)

      Signed by Representatives Brooks, Gallagher, Jesernig, May, Meyers, Miller, Sutherland and S. Wilson.

Minority Report:  Do not pass. (4)

      Signed by Representatives Nelson, Chair; Todd, Vice Chair; Jacobsen and Unsoeld.

House Staff:Deborah Senn (786-7384)

AS REPORTED BY COMMITTEE ON ENERGY & UTILITIES FEBRUARY 4, 1988

BACKGROUND:

In 1984, AT&T was divested as a result of an antitrust suit against AT&T filed by the Justice Department, and the introduction of new technologies such as microwave and satellite, which enabled other companies to get into the telephone business. The breakup of AT&T was designed to enhance the new competitive market. As a result of the break-up, the original AT&T maintained the long distance business (primarily the interstate market). Its competition came from other carriers such as MCI and Sprint.

Basic local service and short haul long distance (i.e. a call from Olympia to Seattle) were to continue to be provided by the subsidiaries of the seven regional holding companies that were created.  The subsidiaries became known as the Baby Bells. The regional holding company for the State of Washington is U.S. West, and the Bell company which serves a portion of the state is Pacific Northwest Bell. Because local basic service is still a monopoly service (there has been no major technology advances which would allow competitors to efficiently and economically enter the local exchange market), regulation by the state Utilities and Transportation Commission continued.

In 1985, in response to the break-up of AT&T and the new competitive telecommunications environment, the Washington legislature passed the Regulatory Flexibility Act. This allowed a telecommunications company the flexibility to set prices for services that the Utilities and Transportation Commission deemed competitive.

SUMMARY:

SUBSTITUTE BILL:  The Regulatory Improvement Act (SHB 1268) consists of two approaches.  First, for local exchange companies that opt into the program, certain telecommunications services are declared competitive.  Those services include intrastate toll (short haul long distance, i.e. a call between Seattle and Olympia), and Central Office Based Services.  Central Office Based Services are defined in the bill as Centrex, or a private branch exchange service which is provided through the telephone company's central switch.  Because these services are declared competitive they are essentially deregulated.

Second, for those services that are still considered monopoly services, such as local basic exchange service, custom calling services such as call waiting and call forwarding, small business services, high speed data transmission, operator services, and carrier access charges, there is still a form of modified regulation.  The prices of the above-mentioned services will be determined by a formula as follows:  The cost of tax and accounting changes are calculated, and then 75% of the increase or decrease in the Consumer Price Index is added or subtracted. Increases in local basic service are capped at 3%.  Prior to the implementation of the program, a traditional rate case is conducted so the Utilities and Transportation Commission can determine benchmark rates upon which the formula is calculated.

If, after three years, the Utilities and Transportation Commission finds that the rates for local basic service are not fair, just and reasonable and the participation in the program is contrary to the public interest, local basic rates may be brought back under traditional regulation.  The reregulation provision only applies to local basic service.

Other portions of the bill provide that a telecommunications company can opt not to take an increase, but any decrease in rates must be implemented, and net revenues from local basic exchange service cannot be used to subsidize other services.  The franchise boundaries for smaller telecommunications companies are protected and there are provisions on service quality.  For small telephone companies,that do not elect the program, the Utilities and Transportation Commission is ordered to implement an incentive regulation program and pass through cost changes for subscriber line charges, taxes, and accounting methods.

SUBSTITUTE BILL COMPARED TO ORIGINAL:  High speed data transmission is moved from the "deregulated" portion of the bill to the price regulated formula.  A rate case is conducted to determine "benchmark" rates upon which the formula is to be calculated.  The case is to take seven months and after new rates are determined, a telecommunications company can decline to participate in the program.  A short lag is built in between the finding of benchmark rates and the first application of the formula.  Labor costs were in the formula in the original version of the bill. Labor is removed from the formula.  Under the original bill, a telecommunications company can bypass an increase and accrue it over several years.  In the substitute, if a telecommunications company does not take an increase it cannot be carried forward.  In addition, a telecommunications company cannot opt out of a decrease.

The Commission is directed to investigate and review to make sure the formula is calculated correctly, monitor service quality, require financial records to be filed, determine a fair and reasonable amount for carrier access charges, and reregulate local basic service if, after three years, it finds that the rates for local basic service are not fair, just and reasonable.

Fiscal Note:      Requested for Substitute February 5, 1988.

House Committee ‑ Testified For:    Ed Shaw, Mike Moran and Dick Hemstad, Pacific Northwest Bell; John Weaver, John Jaeger, Jack Malooney, Bill McGee, Gordon Gipson, Patricia Gipson, Mike Harris and Jackie Jamerson, Communications Workers of America, AFL/CIO and PNB employees; Jack Doyle, Washington Independent Telephone Association (Neither for nor against); Bob Bowman, SeaFirst Bank (Neither for nor against); Glenn Blackmon, Staff, Senate Energy and Utilities Committee (not for or against - appeared at committee request to provide information).

House Committee - Testified Against:      Jim Culp, Director, Department of Information Services; Laddie Taylor and Mike Woodin, AT&T; Jay Reed, MCI; Matt Flora, U.S. Sprint; Jan Gee, Washington Retail Trade Association; Art Butler, TRACER; Linda Matson, National Federation of Independent Businesses; Chuck Adams, Public Counsel Section, Attorney General's Office; Sharon Nelson, Chair, Dick Casad and Bud Pardini, Commissioners, (Commissioner Pardini was neutral), Steve McLellan and Ernie Heller, Utilities and Transportation Commission; Frank Morris, Washington State Council of Senior Citizens; David Gerard, Elder Citizens' Coalition of Washington and Washington State Council of Senior Citizens; Bill Erxleben, self; Bob Joy, Washington State Grange; Pat Fiske, AMNET; Rob Walton, Washington Fair Share Group; Ken Seeley, METRONET Service Company; Tom Ferree, self; Jerry Sovereign, Northwest Telephone Answering Services of Washington; Charles Harris, Spencer Aircraft Industries; Gary Smith, Independent Business Association; Mike Moore, The Boeing Company; Michael Gilbert and Gerald Pollet, Heart of America Northwest; Elizabeth Springer, Coalition for Advancement and Protection of Long Term Care Residents.

House Committee - Testimony For:    It is necessary to preserve the viability of companies like Pacific Northwest Bell in an increasingly competitive telecommunications environment.  The existing law (the Regulatory Flexibility Act) has not worked quickly and efficiently enough to meet its needs in the market.  The Regulatory Improvement Act would deregulate services so that PNB could meet market demand. Services such as intrastate toll (short haul long distance) are competitive because consumers can access any long distance carrier using a five digit code.  In return for deregulation of services, telecommunications companies are undertaking a risk by guaranteeing that local basic rates will not go up more than 3% per year and other rates no higher or lower than 75% of the Consumer Price Index.  Communication Workers of America (CWA) argue that the legislation is necessary to preserve telephone industry jobs.

House Committee - Testimony Against:      Services that would be deregulated are monopoly services and would give a company like Pacific Northwest Bell a competitive advantage.  If short haul long distance (intrastate toll) is deregulated, Pacific Northwest Bell will have total freedom to price along with tremendous competitive advantages.  Pacific Northwest Bell already has a competitive advantage because it has the "dial 1" advantage toll calls.  The formula that would determine the price of local basic services, and other services like call waiting call forwarding and business calls, will only cause rates to increase.  Local telephone rates (for Pacific Northwest Bell) have decreased twice in the past two years and that trend could continue particularly if costs continue to decline in the telecommunications industry.  Basing rates on the Consumer Price Index, which has historically increased, will only cause rates to increase.  The 3% cap only applies to a small portion of the telephone bill.  Other provisions of the bill, such as service quality, monitoring, etc., weaken the Commission's authority.