Opinion ID: 1752828
Heading Depth: 2
Heading Rank: 1

Heading: Rate Setting Before Incentive Regulation

Text: Traditionally, the PUC set telephone company rates for basic network services in ratemaking proceedings using rate-of-return principles. [5] The PUC determined what revenue the telephone company needed to recover a reasonable return on its investment, in addition to its reasonable and necessary expenses. [6] This process involved rate design in which the PUC distributed the company's revenue requirements among the various services it offered. [7] The PUC set rates by allocating a company's costs among ratepayer classes. [8] In a 1976 proceeding using these principles, the PUC adopted a system of rate-group classifications for Southwestern Bell. The PUC divided Southwestern Bell's exchanges into ten rate groups. The PUC classified Southwestern Bell's rate groups according to the number of working telephone lines in each exchange. Rates progressively increased from smaller to larger rate groups, so that customers in exchanges with fewer telephone lines paid less than customers in exchanges with more telephone lines. This pricing structure recognized the value-of-service concept: callers in an exchange with a larger number of phone lines could reach more telephones without paying long distance charges than callers in a smaller exchange. Over the years, as a part of its rate-setting process, the PUC periodically adjusted the number and boundaries of Southwestern Bell's rate groups to prevent exchanges with significantly different numbers of telephone lines from being placed in the same rate group. The PUC last made boundary adjustments to Southwestern Bell's rate groups in 1983, assigning Southwestern Bell eight rate groups instead of ten. The PUC also periodically moved Southwestern Bell's exchanges into different rate groups based on access line growth. The PUC last reclassified Southwestern Bell exchanges into different rate groups based on access line growth in 1990.