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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

DEREGULATION WITHOUT ACCOUNTABILITY: What The Consumer Would Lose If HB 337 Becomes Law  Posted: April 2, 2006
March 30, 2006

All Members
Agriculture & Natural Resources Committee
Kentucky State Senate
Frankfort, Kentucky 40601

Re: House Bill 337

In response to Senate Jensen’s question on the effect of the language in Section 4(3) of the telecommunications deregulation bill that reads:

Notwithstanding the terms of any adopted regulation plan or any provision of law to the contrary, telephone utilities may provide nonbasic services pursuant to terms and conditions provided to the customer. . . .”

I am writing to provide more detail on the effect of that provision.

The short answer is that the clause overrides legal protections found in four sources of current law: the statutes, PSC regulations, PSC decisions, and published schedules (called “tariffs”) which become legally-binding documents between the carriers and their customers under the “filed rate doctrine” recognized in Kentucky. The effect of this language and Section 4(4) is to override all other state statutes, and to override the regulation plan under which BellSouth currently operates.

Lost would be:

* Any ability of consumers to challenge prices as being unreasonable since by law they automatically become “just and reasonable” when set by the company.

* Protections against the major companies doing anticipatory, location-specific price cuts to keep competitors from entering a geographic market.

* All consumer protection laws that conflict with the terms and conditions set by the company. Under HB 337 at least 60% of current BellSouth customers could be transitioned to deregulated status and become subject only to the “terms and conditions” simply because of their use of one of the services that would make them “nonbasic” customers. A consumer could suddenly find themselves subject to any number of provisions that might be dictated by the company, including mandated arbitration of disputes, penalties for termination, unilateral changes to rates, and other terms and conditions not be subject to PSC approval or PSC complaint jurisdiction. Customers for nonbasic service would lose the protection of Commission regulations which currently prohibit disconnection of service during a billing dispute as long as the customer is paying amounts not in dispute.

Here is additional background concerning the current regulatory status of BellSouth, and how the “notwithstanding” language in the bill will change that to the detriment of the average consumer.

The reference in Section 4(3) to an "adopted regulation plan" would include overriding the BellSouth Transition Regulation Plan ("TRP"), currently in effect and subject to PSC review in 2009. The TRP basically is an agreement between BellSouth and the PSC describing how BellSouth will be regulated in Kentucky.

The TRP has evolved from the original "incentive regulation" plan the PSC adopted for BellSouth in 1988. As I understand it, BellSouth has not had a full-blown rate case since May, 1985. During that period the cost of service has declined. When interest rates came down in from the highs of the early 1980's BellSouth's authorized rate of return put it into an overearning situation. BellSouth proposed a price regulation plan and negotiated some rate reductions with the PSC. This incentive regulation evolved into the current TRP. Prior to 1992 there was some question about the legality of this type of "flexible regulation." The General Assembly fixed that by enacting KRS 278.512, which is a standards-based, model deregulation statute. I believe that the PSC's decisions adopting the TRP are grounded in KRS 278.512. BellSouth invoked the statute when it asked the PSC to make the plan permanent.

The TRP is essentially a contract with the PSC. The PSC required BellSouth to file the TRP as a tariff, and the plan is in Section A36 of BellSouth's Kentucky Tariff. As a tariff the plan is fully disclosed and published on the web: http://cpr.bellsouth.com/pdf/ky/a036.pdf

What would be lost under HB 337 from that “adopted regulation plan?” First, the TRP does not permit rate increases without notice to the PSC and review of the terms and conditions. The "notwithstanding" language would permit BellSouth to sidestep the requirements of the TRP and would remove terms and conditions for service from PSC oversight. Although this section of the bill does not specifically mention "rates" it seems clear that the proponents intend that their rates for nonbasic services will be unregulated.

Second, the TRP gives BellSouth lots of pricing flexibility for competitive services, but generally requires service to be priced above long run incremental cost. The only exception is for areas where there is actual competition. There, BellSouth can go below cost to compete with "an equally low price of a competitor." Under the TRP BellSouth cannot do anticipatory, location-specific price cuts to keep a competitor from entering a geographic market. Rather, BellSouth must first "file evidence that competitors are charging rates below the Company's long run incremental cost for the service." HB 337 eliminates this safeguard by inserting three words: "adopted regulation plan."

The second area where the “notwithstanding” language trumps existing sources of law is in the overriding of many provisions of Kentucky’s utility laws, KRS Chapter 278. Under HB 337 at least 60% of current BellSouth customers could be transitioned to a purely "contractual" relationship because of their use of one of the services that would make them “nonbasic” customers. Possibilities here include forced arbitration of disputes and penalties for early termination. Unilateral changes to rates, terms and conditions would not be subject to PSC approval or complaint jurisdiction. In addition, since HB 337 presumptively declares that an electing utility's rates "shall be deemed to be just and reasonable" it is not clear that a customer could ever challenge a rate as being unreasonable.

Here are the statutory sections affected; all are noted, but the key protections are marked (*):

* KRS 278.160 -- this is the core publication requirement for rates -- under current law all telecom utilities publish their rates, terms and conditions and they are available for the world to see. Only filed rates are enforceable. KRS 278.160(2) embodies the common law filed rate doctrine. Under the current tariff structure it is generally true that a customer may add or remove features readily, change long distance providers without penalty, switch carriers (in areas where there are two local providers, like Louisville) without penalty. If nonbasic service is detariffed, carriers could use promotional rates to lock customers into term plans with penalties. Cf. wireless service and satellite television. Carriers could impose discriminatory non-recurring charges to initiate service.

* KRS 278.170 -- this is the non-discrimination statute which prohibits unreasonable rate differences among customers using the same service -- this is a fundamental principle today -- BellSouth and other telcos, including the CLECs, must offer similarly situated customers the same rates, unless the PSC grants flexibility under 278.512 (which it has for BellSouth, subject to a filing requirement under 278.160). Without this requirement, utilities could discriminate for any reason, offer discounts to favored customers. A utility could charge a different rate based on the credit score of the customer, or billing history. Today, when BellSouth makes a special arrangement for rates, etc. it must still file the arrangement with the PSC in order for the contract to become the legal rate.

KRS 278.180 -- this is the notice period for rate changes, which already grants some discretion to PSC.

KRS 278.190 -- this is the procedure for investigating proposed rates.

KRS 278.192 -- this is the test period statute for rate cases.

KRS 278.200 -- PSC authority over rates and standards fixed by agreement with a city.

KRS 278.230(3)* -- the basis for utility reporting requirements.

KRS 278.250 -- general power to investigate utilities subject to due process.

KRS 278.255 -- management audit statute giving PSC ability to investigate management effectiveness of large utilities (with KY revenue greater than $100 million).

KRS 278.260* -- This is a core protection -- PSC jurisdiction over customer complaints for rates or service.

KRS 278.270* -- complementary to 278.260; allows PSC to order a new rate when old rate is found unreasonable after complaint.

KRS 278.280* -- this is a broad grant of authority to the PSC to order changes to any services or practices found to be unjust, unreasonable, unsafe, improper, inadequate or insufficient. This statute is what permits a ratepayer to demand service.

KRS 278.290 -- valuation of utility property for the purpose of a rate case.

KRS 278.300 -- PSC jurisdiction over issuance of securities or indebtedness -- not likely to come into play for BellSouth or any other publicly traded utility subject to SEC jurisdiction.

A third source of law that would be eliminated is the PSC’s administrative regulations. To name a few, current "general" regulations govern utility policies for initiation of service and for termination. Deposits are limited to two months estimated charges and termination of service by the utility requires notice. Under current regulations telephone companies cannot disconnect service to force the payment of a bill under dispute. This regulation would no longer apply to local nonbasic service. http://www.lrc.state.ky.us/kar/807/005/006.htm.

HB 337 overrides the PSC regulations for this insofar as nonbasic service is involved. Thus, an electing utility could vary its deposit requirements among similarly situated customers.

The PSC's telephone regulations, which are found at http://www.lrc.state.ky.us/kar/807/005/061.htm, incorporate technical standards which HB 337 would override as related to nonbasic service. While there is no reason to think the large carriers will consciously refuse to provide good service, divesting the PSC of jurisdiction over complaints for nonbasic service while eliminating application of technical standards will make it tough for consumers to use the PSC informal complaint process to get service issues resolved.

As the PSC explained in its Exhibit provided on February 2, 2006 to the House Committee on Tourism, Development & Energy, there are several concerns about how HB 337 would affect standards for nonbasic service, i.e. Is there a standard for unsafe services? Is there a standard for insufficient services? Can companies refuse or terminate service? Is there a standard for adequacy of service?

The PSC has never publicly stated that the GA version of HB 337 addresses the concerns it raised before the House committee.

The final source of authority and accountability that would be lost arises from PSC Orders. The Kentucky PSC frequently engages in "rulemaking" via generic order. For example, the PSC has promulgated industry rules for telephone billing format via order, and filing requirements for Contract Service Arrangements via a combination of orders and rules. There are other examples of generic orders. The point is that the "notwithstanding" language of Section 4(3) and 4(4) would override PSC generic orders which currently apply to various telecom carriers.

I hope that this provides additional information that helps illuminate the full impact of the “notwithstanding” clauses in Section 4(3) and (4) of the bill.

Cordially,

Tom FitzGerald
Director


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