An Embarrassment of Telephone Riches

by D.R. Stewart

The Tulsa World - December 4, 1998

Southwestern Bell Telephone Co., which the 1997 Oklahoma Legislature exempted from formal rate base hearings until February 2001, is garnering $ 91.6 million annually in excess revenue, according to a report by the Oklahoma Corporation Commission staff. 

The report, which was released on Thursday by Commissioner Bob Anthony's office, apparently without the knowledge of either Chairman Ed Apple or Commissioner Denise Bode, was immediately criticized by a Southwestern Bell spokesman. 

"It is difficult to understand the purpose of this report when residential rates are so low," said Southwestern Bell spokeswoman Karen Kay Speer. 

"The average basic local service rate for residential service in Oklahoma is 13 percent below the national average, and the price has not increased in 13 years. How many other services do you have that have not increased in price in 13 years? Quite frankly, we are proud of our ability to work efficiently, effectively market our optional services and bring new services, jobs and technology to Oklahoma." 

Anthony said he was pleased that the staff had been furnished enough financial information to put together a report. 

"I'm also pleased that it is a public report," said Anthony, a long-time critic of Southwestern Bell. "I think the members of the Legislature who prohibited a rate review will be astonished to know the size of their mistake per year. In the three years and one month that they have prohibited a rate review, they are costing customers in excess of a quarter of a billion dollars. Assuming one telephone per customer, it is costing the average Southwestern Bell customer $ 150 each over that three-year period." 

In a Dec. 2 memorandum to Ernest Johnson, director of the commission's public utility division, Jim Armstrong, chief of the commission staff's energy and finance group, and George Mathai, manager of the energy and finance group, said an analysis of Southwestern Bell's financial information found the company collecting base operating excess revenue of $ 63.6 million a year. The memo was made public by Apple. 

In addition, Southwestern Bell garnered $ 28 million annually in excess revenue on Yellow Pages operations, the report found. 

The commission staff compiled the revenue estimates from financial information supplied by Southwestern Bell as part of the 1995 settlement of an Oklahoma Supreme Court case. 

Under the settlement, the company provided cash rebates, rate reductions and community development grants totaling $ 641 million to its Oklahoma customers while agreeing to furnish the commission with the minimum filing requirements for conducting a rate case. The financial information on which the staff projected the excess revenue reflects Southwestern Bell operations during 1996. 

Before Southwestern Bell could provide the commission with the financial information agreed upon in the 1995 settlement, however, the Oklahoma Legislature enacted House Bill 1815, known as the Oklahoma Telecommunications Act of 1997. The law contains a provision prohibiting the commission from initiating or conducting a traditional rate base, rate of return or earnings review for any local exchange telecommunications company that has 15 percent or more of the access lines in the state. 

Anthony and representatives of several consumer groups have alleged that the 1997 law may grant a special privilege from the state to a particular private enterprise, although Southwestern Bell is not named in the legislation. If so, that privilege may be forbidden by Section 51 of Article 5 of the Oklahoma Constitution, which states: "The legislature shall pass no law granting to any association, corporation or individual any exclusive rights, privileges or immunities within this state." 

In July, the commission asked the attorney general for a formal brief on the legality of the 1997 law, which is yet to be done. 

Apple said he could not criticize the findings of the staff report or the company based upon what he has seen. Excessive revenues would be those over a ''fair and reasonable'' rate of return, according to the 1995 agreement. 

"I don't know if $ 91.6 million is excessive. I don't know what has happened to their expenses," Apple said. "When those numbers are known, we can make an intelligent analysis about whether these revenues are excessive. Until we know their fixed, variable and marginal costs, these are preliminary figures." 

The staff report found that the information provided by the company indicates that Southwestern Bell earned a 21.4 percent return on equity during the 1996 review year, exclusive of Yellow Pages operating results. The report says that the commission staff is continuing to assess various cost studies provided by the company to determine which services provided by the company are generating excess revenue. 

In regulated public utilities, a 9 percent to 10 percent return on equity is considered about average, officials said. 

© 1998 The Tulsa World

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