Opinion ID: 2362262
Heading Depth: 2
Heading Rank: 1

Heading: the evolving regulatory standard

Text: As has been suggested, the basis for the commission's denial of NET's filing for its monopoly products and services is rooted in a decade of commission decisions beginning in 1970 and culminating in its most recent pronouncements in 1980 regarding NET's general tariff filing in docket No. 1475. The main thrust of the regulatory standard that evolved over this period is the requirement of a thorough cost-of-service study as a proper starting point for determining an appropriate rate design for specific products and services. According to an expert presented by NET on behalf of its filing, Dr. Frank J. Alessio, American Telephone & Telegraph Company and its wholly owned subsidiaries such as NET historically have relied upon a relative value-of-service pricing technique to determine average category-wide pricing of products and services. Under this approach the utility determines the value of a given service to a customer class and fixes individual prices accordingly. The costs associated with supplying services play only a minor role in developing rate structures. In time, this pricing methodology came under sharp criticism by regulators and scholars because of the difficulty in objectively evaluating a specific valuation affixed by a utility to a particular service. As one commentator posited, How is the company or the regulator to determine the value of a particular service to all customers in a class    when [b]ecause of the monopolistic nature of the industry, it is impossible to determine the free market price. Lander, Public Utility Rate Design: The Cost of Service Method of Pricing, 19 St. Louis U.L.J. 36, 45 (1974); see also Bonbright, Principles of Public Utility Rates, ch. V at 82 (1961). Lander notes that in light of such criticism and the dramatic upsurge in the number of rate-increase requests filed by the industry to meet rapidly rising inflation, the trend among utility regulatory agencies after 1970 began to shift in favor of more cost-justified pricing for telecommunications services. The Rhode Island Public Utilities Commission was among the first state regulatory agencies to urge the development of cost-of-service data in this area. Because its decisions throughout the ten-year period from 1970 to 1980 have significant bearing on the rate proceedings we now review, a somewhat lengthy recitation of relevant portions thereof is appropriate. The commission first expressed its need for cost-of-service calculations over value-of-service judgments in its report and order of January 30, 1970, in docket No. 1024: `The commission finds that the practice of disregarding costs is unreasonable and the commission gives notice that it will not long tolerate it. The company should immediately embark upon a program of accurately determining its actual cost of providing service and within the next twelve months present to the commission a proposed revision in rates which will be based upon the actual cost to the company for providing each type of service rather than fixing rates by the informed judgment as to the value of service as determined on factors dictated by AT&T. The company is going to be required to provide the commission with actual revenue data, cost data, and plant data for its various services such as Centrex service, supplemental equipment, key telephone service, private-line services, mobile telephone service, residence service connection charges, secretarial line services, and various miscellaneous services. `If this commission is to properly discharge its duties, it must be provided by NET&T with actual revenue, cost and plant data pertaining to each of its tariff offerings. It is within the power of NET&T to supply such data and it is fair and reasonable to require that it be supplied within the next twelve months.' See Re New England Telephone & Telegraph Co., 39 P.U.R.4th at 530. More than two years later in docket No. 1092, May 4, 1972, the commission again stressed adherence to the requirement of a cost-of-service study to support NET's tariff filing, noting its consternation at NET's failure to provide such data as of that date: The testimony presented in this case makes it apparent that not only can the company produce no figures as to the actual cost of providing the particular service, but in fact, the company refuses to make an effort to determine what its actual costs are for any given service. The record in this case clearly establishes that the company has presented no evidence whatsoever upon which this commission can make a determination of the actual cost of any tariff offering.       Without such actual cost data, it is impossible for this commission to determine whether the proposed rates are in fact fair and reasonable. Re New England Telephone & Telegraph Co., 94 P.U.R.3d 476, 494-95 (1972). The above ruling was remanded by the court in Rhode Island Consumers' Council v. Smith, 111 R.I. 271, 299-300, 302 A.2d 757, 774 (1973), with directions that the commission clarify the reasons for its conclusion that the value-of-service methodology was unacceptable. In response to the court's directives, the commission held that because there were then no cost studies available, it was constrained to accept NET's rate schedules premised upon the company's traditional pricing methodology. However, NET was firmly admonished to make reasonable efforts to provide such cost information in future rate proceedings: While once more, then, we are virtually forced to accept the value of service approach, we again press the company to exert every reasonable effort to produce more detailed cost information for individual services than it has been able to produce to date. It is important that this commission, in evaluating any utility's rate structure, have before it every type of pertinent and relevant evidence which can possibly be made available so that we can be certain that the structure is as reasonable and equitable as it can be. The company will be expected to continue its efforts to develop such costs and to keep the commission informed of its progress on a periodic basis. If this informal approach does not prove to be satisfactory, the commission may at a later date consider undertaking a formal investigation on the subject. Re New England Telephone & Telegraph Co., 99 P.U.R.3d 228, 236 (1973). With its next general tariff filing in docket No. 1170, Re New England Telephone & Telegraph Co., 10 P.U.R.4th 132, 133-34 (1975), NET provided two cost studies in an attempt to comply with these directives. Of these studies, the commission found the so-called Embedded Direct Cost Study, designed to analyze cost-revenue relationships among several broad service categories, to be an important and useful first step. NET was strongly urged to continue its efforts to produce more detailed cost data. Two years later, however, the commission felt compelled in docket No. 1251 to rebuke NET for its failure to make any significant progress after the submission of these preliminary studies. Although dismissal of the tariff filing was advocated by the division on the basis that the proposed rate structure was not predicated upon cost-of-service considerations, the commission concluded that such a drastic measure would be inappropriate in those proceedings because NET had not received adequate notice of such consequences. However, in its decision of September 4, 1977, the commission issued a stern warning informing NET that future filings not supported by a comprehensive fully allocated cost study would henceforth be rejected. By this report and order, however, New England is put on notice that this commission will not approve rates for the company in any future rate case where there is no rate design based upon a cost of service included in the record. That is, while 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. Re New England Telephone & Telegraph Co., 22 P.U.R.4th 391, 412 (1977). Finally, in docket No. 1475, the commission set forth detailed cost-study standards that NET would have to satisfy as a threshold requirement to obtain a rate increase in any subsequent general tariff filing. Consequently, one year later in the proceedings now under review, the several opposing parties sought dismissal of NET's tariff filing because of noncompliance with the dictates of the docket No. 1475 order. Ultimately, the commission determined that NET had failed to supply the requisite cost study to support its filing in accordance with the criteria outlined in that docket.