Path: utzoo!utgpu!news-server.csri.toronto.edu!rpi!zaphod.mps.ohio-state.edu!sol.ctr.columbia.edu!lll-winken!telecom-request From: ms6b+@andrew.cmu.edu (Marvin Sirbu) Newsgroups: comp.dcom.telecom Subject: Re: Hollings and the RBOCs Message-ID: Date: 6 May 91 14:27:25 GMT Sender: Telecom@eecs.nwu.edu Organization: TELECOM Digest Lines: 36 Approved: Telecom@eecs.nwu.edu X-Submissions-To: telecom@eecs.nwu.edu X-Administrivia-To: telecom-request@eecs.nwu.edu X-Telecom-Digest: Volume 11, Issue 338, Message 5 of 9 In several recent messages John Higdon has asserted that Pacific Bell is "guaranteed" a cushy rate of return. While historically that was true, it is no longer true as of 1991. Both at the State of California level and at the Federal level, Rate of Return (ROR) regulation has been replaced by a system of price caps. The price caps have been set initially at a level which would guarantee a rate of return of 11 - 13%. However, the cap is AUTOMATICALLY cut each year in real terms by 4.5% (Federal) or 6.5%(State). Thus, unless Pacific Bell is continually lowering its costs by at least that much, it will find itself making less than the initial 11-13%. In 1988 Nynex agreed to a price cap plan where it promised to cut rates in real terms at the same rate as inflation -- about 4.5% per year (What it actually agreed to was to freeze prices in nominal dollars which amounts to the same thing.) By the end of three years its rate of return had dropped to about 8%, or less than you could get by buying a truly no-risk Treasury Bond. Nynex was unable to meet the productivity target it had agreed to with the NY PSC and saw its profits drop substantially. Now before you laugh and say "Any fool should be able to cut prices by 4.5% per year given the rapid improvements in technology," remember that as technology costs drop, the remaining labor costs (e.g. outside plant repairs, operator services, etc.) become a higher and higher percentage of the total. Thus, further improvements in technology have less and less impact on total costs. I'm sure that there is plenty of slack at Pacific Bell so that it can achieve 6.5% reduction in real terms for a few years. It will be interesting to see for how long they can keep it up. Marvin Sirbu