Representative Joni Jenkins
Kentucky House of Representatives
Frankfort, Kentucky 40601
Dear Representative Jenkins:
Thank you for forwarding to me the House Committee Substitute and proposed floor amendments on House Bill 337. I regret that after reviewing the documents, I still have grave concerns that the proposed bill lacks the protections needed for the most vulnerable consumers, and could result in a deterioration of the quality of local services over time. I discussed these concerns briefly with Forest Skaggs of the Kentucky Telephone Association on Friday and am copying him on this letter in order to fulfill my commitment to provide more detail on my concerns with the HCS and two proposed amendments. My concerns are both general and specific.
The general concern regarding deregulation of local service is that there is not a sufficiently robust competitive marketplace between the wired local service providers and wireless or internet-based telecommunications to justify elimination of rate of return service and to assure comparably low rates and high quality service for all classes of users. While the proponents of the bill are correct that future growth lies primarily in the wireless and broadband sectors for some consumers, access to dependable, affordable local service and protection against consumer fraud in billing and services remains essential to all consumers. The bill lacks the assurances that there will be adequate oversight over provision of those essential services over time, as the utilities continue to shift their focus and resources into the ?growth areas.
Specific concerns follow, referenced by section or issue:
PSC Jurisdiction Over Basic Service Constrained
Under Section 2, the PSC retains jurisdiction over the utilitys compliance with the basic service obligations, billing accuracy, slamming and cramming. Yet the jurisdiction over the basic service obligations is constrained to three very limited retail service objectives relating to speed of connection, speed of new service and speed of answering requests for repair. What is lost is the current enforceable standard for compliance of safe, sufficient and adequate service.
The decoupling of earnings from ROR regulation does not require, nor does it justify, elimination of regulation of quality, safety, reliability and nondiscrimination in service.
Recommendation: The PSC must retain full authority to set and enforce standards for safe, sufficient and adequate service for basic service obligations both for nonelecting utilities and for the basic local service component of nonbasic services offered by an electing utility. Additionally, the utility should file complete information on rates and service and PSC must retain jurisdiction to enforce all consumer protection measures with respect to both the basic service, and nonbasic service.
Section 4(2) and (3)
The HCS provides for a 3-year rate cap on local rates where a utility elects out of rate of return (ROR) regulation, and provides that the utility may thereafter seek approval to increase its rates for basic service. It is unclear whether the request for rate increase after that time would be based on ROR, and if so, it will be impossible for the Commission to properly determine the proper rate absent access to and public filing of all information concerning both basic and nonbasic services, rates, costs and earnings. Absent that information, the PSC cannot properly protect the basic service customer from imposition of fixed and other costs that should properly be allocated to the competitive growth areas, and likewise cant protect the customer against provider overearning for regulated services and from affiliate transactions.
Recommendation: The tariff filings must include all costs and earnings services for each provider and their affiliates. The standard for PSC hearing of rate cases must be explicitly stated or referenced.
Section 4(5) and Section 5(5)
In both of these subsections, the bill would rubber stamp the utilitys rates, charges, earnings and revenues as just and reasonable without either the public or PSC review of those rates, charges, earnings and revenues. This blanket advance finding is both an impermissible delegation of governmental authority to a private for-profit business entity, and an improper insulation of the utility from future regulatory scrutiny in the event that the utility elects to return to rate of return regulation by withdrawing the election.
The utility electing out of the regulated environment does so at its own risk. In a truly robust competitive environment for nonessential services, the competition will assure reasonableness in rates and charges. However, this is a marketplace dominated by a handful of companies wielding significant market power, and effective competition simply does not exist in many areas of this state, particularly outside of the urban markets. There is no assurance that the rates and charges will in fact be just, among classes, or reasonable within and among classes.
Recommendation: Delete blanket finding that electing utility rates, charges and earnings and revenue are just and reasonable.
Rural Consumers Could Get Raw Deal
In 2004, the General Assembly established an alternative regulation process for small telephone utilities (50,000 lines or less), which capped increases in rates both by limiting the frequency of rate increases and by capping the amount of rate increases to the GDP and by reference to the charges of larger utilities for such services.
This bill allows small utilities to bypass those limits and to impose more frequent rate increases, removing any limitation on the frequency of such increases after a 12-month period and removing any obligation to seek PSC rate increase approval. Thus, for rural consumers, the bill allows more frequent rate increases than for urban areas (which are capped at 36 months and then can increase only with PSC approval, presumably based on ROR).
Essential Consumer Protections Lost
Under the bill, a utility that elects under Section 4 immediately sheds a wide array of constraints on service quality, safety and nondiscrimination. The electing utility, both for local services (except for the limited speed objectives) and for the nonbasic services, is no longer accountable to the Commission or to the public in any meaningful way, since it is exempted from:
- KRS 278.260, which gives the Commission jurisdiction over public complaints that rates are unreasonable or discriminatory or that service is unreasonable, unsafe, insufficient or unjustly discriminatory; and KRS 278.280, which gives the Commission the authority to order remedies for inadequate, unsafe or unjust rates or service. The effect of this is to eliminate the publics ability to complain to the PSC about rates and service other than the three speed objectives), and the PSCs ability to order corrections (including apparently the ability to enforce even the limited speed objectives since in Section 2(3) they may set the objectives but not enforce them).
- KRS 278.020, which requires a certificate of public convenience and necessity for construction and approval for transfers of ownership;
- KRS 278.160, which requires filings of terms, conditions and rates of service;
- KRS 278.170, which prohibits discrimination in rates or service;
- KRS 278.180, which provides for public and commission disclosure of proposed rate changes;
- KRS 278.200, which provides Commission oversight of agreements and contracts between cities and telephone companies;
- KRS 278.218, which requires commission approval of certain transfers of assets of utilities (such as would occur in a merger or acquisition);
- KRS 278.230, which provides Commission authority to review a utilitys books, records and accounts;
- KRS 278.250, which provides the Commission authority to investigate the condition of a utility; and
- KRS 278.255, which empowers the Commission to conduct periodic management and operation audits.
The effect of these changes, in light of the extremely restrictive grants of authority to the PSC and limited public complaint rights under Sections 2 and 3, is to neuter the watchdog and to reduce the Public Service Commissions role to that of approving periodic rate increases for electing utilities for basic service in a vacuum and without access to utility records and accounts; and watching idly as consumers fend for themselves in cases of unsafe, unreliable, or discriminatory rates or service.
The market is not sufficiently robust and transparent to assure that quality of service will be as reliable or better, and that pricing will be at or better than in the regulated environment across classes of consumers.
Recommendation: (a) Delete language exempting electing utilities from these statutory provisions; (b) Include language limiting the ability of the utility to elect until market penetration by unaffiliated wireless and internet providers reaches a sufficient percent in a market to provide for robust competition; and (c) Include language allowing PSC to reassert jurisdiction over electing utilities in the event that a competitive market does not emerge or remain.
Contract Provisions Allow Discrimination, Invite Problems
Section 5 appears to allow both electing and nonelecting telephone utilities to set rates, terms and conditions for nonbasic services without approval by the Commission of those rates as being just and reasonable, and allows those utilities to discriminate in the manner by which those services are provided among similarly-situated customers without disclosure or accountability.
Under subsection 2, telephone utilities may provide services under written or oral contracts and are not required to identify customers nor provide disclosure of arrangements to other customers who subscribe to similar products and services. This section is extremely problematic both because it allows oral contracts that are not disclosed and for which the consumer has no proof and no recourse (since the Section waives applicability of all other laws), and also because the telephone utility may impose a termination liability fee if a current customer decides to cancel nonbasic services and to return to basic service only. As written, the utility could claim an oral contract with the customer exists providing for termination liability fees and could impose that on the customer at the threat of basic service termination.
Recommendations: No oral contract for services should be permitted. No termination liability fees or penalties should be permitted to be imposed by any electing or nonelecting utility on a customer for canceling any or all nonbasic services.
As you can see, the problems with the proposed HCS with the two amendments remain significant and fundamental.
I would encourage you to convert the bill to a study resolution and to allow the legislative committees of jurisdiction, with participation from the public and interested utilities, to study the experience of other states and of the small electing rural utilities under KRS 278.516, and to propose a more metered and balanced bill that allows election under an appropriate regulatory framework and with proper assurances of consumer and public protection.
cc:Representative Eddie Ballard
Members, House Tourism Development & Energy Committee
Forest M. Skaggs III