Opinion ID: 2362262
Heading Depth: 3
Heading Rank: 5

Heading: Basic-Exchange Service

Text: The final issue in this controversy concerns the denial of NET's request to increase charges for basic-exchange service by approximately $6.9 million. Unlike the approach taken with other service offerings, the commission has continually endorsed NET's use of a residual pricing methodology based upon value-of-service concepts for designing basic-exchange-service rates. For public-policy reasons this service has been priced independently of costs so as to promote the greatest degree of network access feasible. The general principle underlying the rate structure is that exchange-service rates should increase as the number of telephone customers in a particular local exchange-service area can call on a toll-free basis increases. NET's proposal to increase monthly rates for local residential-exchange service by 13 percent was dismissed for failure to provide the requisite cost study indicating the average cost of that service for exchanges of various sizes. Doctor Alessio testified that an incremental cost study was not performed for this service category because of the residual pricing policy that results in these services being priced considerably below cost. He estimated that if such a study were to be conducted, it would show that the price of basic residential-exchange service is significantly below one-half of its incremental cost. In his opinion, therefore, valuable company resources would merely be wasted by carrying out a cost study that he believed would have no effect on the actual pricing decision. We are constrained to agree. The commission responded to Dr. Alessio's assertion by relying on its previous statement in docket No. 1475 that `[W]hile the Commission does not bind itself to either accept or reject a cost-based tariff structure, it will insist on the availability of a fully allocated cost study upon which rate design decisions may be made on a more adequate evidentiary record than has been available in the past.' This comment completely ignores other remarks in docket No. 1475 indicating the commission's acceptance of NET's value-of-service rationale to support its exchange-rate-group structure over a cost-of-service approach. The commission explicitly stated, [W]e require no cost study. To obtain approval of its group reclassification proposal, NET was only required to demonstrate by some objective means the actual value of the service. To this end it was directed to conduct a study to ascertain the average number of calls per subscriber in each rate group. It was anticipated that a comparison of the number of calls with the size of the rate groups would reflect the actual value a subscriber derived from the service. Re New England Telephone & Telegraph Co., 39 P.U.R.4th at 541-42. Further, the commission's reasoning in docket No. 1560 makes even less sense in light of its decision of April 1, 1981 in docket No. 1522 following NET's submission of this rate-group-subscriber study. The commission announced: We are persuaded that basic exchange rates based on actual costs incurred would be likely to introduce disparities due to geographical exchange boundaries and central office equipment. These are factors over which the customer has no control and which might well appear to be more arbitrary and inequitable than the present system.    [T]he data generally shows that as the size of the Local Service Area increases, the average number of calls customers make within the Local Service Area increases.    For this reason, together with the fact that the reclassification tariff is cost-based, we conclude that a comprehensive fully allocated cost of service study is not a prerequisite to the operation of the tariff. Even though the commission also indicated, in the most general terms, that the rate design for this service would continue to be reviewed as circumstances changed, nowhere in the decision did it caution the company that a comprehensive fully allocated cost study would be required in future proceedings before approval of local exchange-service rates would be given. The company's FACS submitted in these proceedings indicates that the overall cost of residential basic-exchange service exceeds revenues by some $32 million. In view of its request to decrease this revenue shortfall by slightly less than $7 million, we believe that the denial in toto of any increase for this service category for lack of such study was arbitrary and unreasonable.