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New Report Warns About Pitfalls of SW Bell Plan, Cites Excessive Rates, Discouraged Competition, Legal Questions

A new report indicates that Oklahoma consumers may ultimately be the big losers if Southwestern Bell succeeds in obtaining proposed regulatory changes now being deliberated by the State Corporation Commission. The analysis warns that the telephone company, not consumers, is likely to be the biggest beneficiary of the new regulations, preserving its monopoly status while gaining unprecedented authority to set rates for consumers without state oversight.

An expert in telecommunications regulation, former Assistant State Attorney General Rick Chamberlin, compiled the report. Chamberlin, who helped negotiate a 1995 rate settlement with Bell, was hired by State Senate President Pro Tempore Stratton Taylor to advise lawmakers on the proposed regulatory changes, dubbed "The Oklahoma Plan." If approved by the Corporation Commission, the plan will ultimately be submitted to the Legislature for review.

"Because of the Legislature's role in this process and the complex nature of the issue, we felt it was important to have an expert like Mr. Chamberlin review the plan on behalf of consumers," said Senator Taylor.

"The report raises a number of red flags that must be addressed. I don't think anyone, even the biggest proponent of the regulatory changes, could read the analysis without being both surprised and concerned."

According to the legislative leader, two especially troubling findings of the report focus on the rates consumers pay and the advertised benefits of the Oklahoma Plan.

Evidence indicates SW Bell's current rates are too high: Bell hasn't undergone a comprehensive rate review since 1989. Calculations by the Corporation Commission indicate Bell is making at least $90 million in excess earnings each year. The Oklahoma Plan could freeze those overcharges into place for the next three to five years, even though no review has been conducted to determine if the rates are fair to consumers.

Claims that the Oklahoma Plan would encourage competition and a more "consumer-friendly" market are unsupported: Bell has provided no documentation to illustrate how the plan would actually encourage competition in Oklahoma or benefit consumers. In fact, "infrastructure investments" proposed by Bell as part of the regulatory changes would appear to strengthen its current monopoly status, giving it even more power over the market.

"I'm concerned that we may be getting something that is far different than what was advertised. We want more affordable rates for consumers and a more competitive environment, not a stronger monopoly with no state oversight," said Senator Taylor.

Other findings of the report include:

Future rate hikes are guaranteed under the Oklahoma Plan, regardless of market conditions: After the initial three to five year freeze, Bell would be allowed to raise rates every year, at the same level as the inflation rate of the economy. Because the costs of the telecommunications industry have not been rising at the rate of inflation and in many cases have actually declined, this could simply result in additional profits with no incentive for increased productivity.

Investment benefits advertised by Bell are "illusory": As part of the plan, Bell proposes to invest $200 million in its own network, purportedly to benefit consumers. However, a proposed investment in digital switching will make Bell optional services available to more Oklahomans, something that is expected to produce additional revenues for the phone company. Other upgrades are expected to help Bell meet the competitive threat of modem Internet service offered by cable television companies. According to the report, the investments "seem to be more designed to increase SWBT's competitive advantage over new entrants" to the market rather than making the environment more competitive.

Supporting documentation and evidence related to the Oklahoma Plan is weak or non-existent: For a regulatory change described by proponents as monumental, very little documentation has been provide by Bell or the Corporation Commission to justify advertised benefits, rate levels, or projections of increased competition.

Numerous procedural questions cloud the regulatory proceedings: Under the Oklahoma Administrative Procedures Act (APA), the definition of a rule expressly excludes the "approval, disapproval or prescription of rates," yet the Corporation Commission is using the APA rule-making process to draft regulatory changes that establish and approve rates for the foreseeable future. Furthermore, much of the discussion that led to the development of the plan apparently took place in off-the-record, ex parte conversations between Corporation Commissioners and Bell officials, and therefore is not part of the public record.

There is no means for revoking the Oklahoma Plan if it does not live up to its advertised benefits: In its current form, there is no explicit revocation provision in the plan.

The Senate leader urged the Corporation Commission to take a close look at the report and the questions it raised before moving ahead with the regulatory process.

"At the very least, this report tells us that this is a very complex issue that needs further study, much more deliberation than it has received to date. I think the Corporation Commission should slow down, address the concerns raised by Mr. Chamberlin and make whatever revisions it takes to do this thing right. We're not under any time constraints so we have nothing to lose by taking a cautious approach toward this issue," said Senator Taylor.

The Senate President is forwarding copies of the report to the State Attorney General and the Corporation Commission for their review.

The Corporation Commission is in the process of finalizing the terms of the alternative regulation agreement with Bell. That proposal will ultimately go before the Legislature for its review and the consideration of any related legislation.

Contact info
Paul Sund, Senate Communications Director -- 405-521-5605 For technical information about the report, Rick Chamberlin - 405-848-1014