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Public Advocate Office - Representing and Promiting Utility Ratepayer Interests in Maine

This is the first edition of a monthly column on utility regulation. Readers are encouraged to submit questions in the areas of electricity, natural gas, water, and telecommunications. Please send your questions to Ron Norton, 112 State House Station, Augusta, Maine 04333-0112 or via email ron.n.norton@maine.gov. The column will be co-authored by Ron Norton, Economic Analyst, and other staff members of Maine Office of the Public Advocate. Ron is also a Professor of Economics at the University of Maine at Augusta.

Are you aware that an agency exists whose mission is to represent and promote utility ratepayer interests in the State of Maine? The agency is the Maine Office of the Public Advocate, which was created by the Legislature in 1982. The Office provides consumers their own voice in natural gas, electric, water, and telecommunications utility-related proceedings at the Public Utilities Commission, the Legislature, various federal agencies, and in State courts. The Office is served by Stephen Ward, Maine's Public Advocate, three laswyers, an economist and three skilled support personnel. Over the past twenty years, the Office has pursued lower utility bills for consumers and improved quality of service from utilities. Ratepayers savings, attributable to Public Advocate intervention during that period, amount to more than $230 million dollars.

In addition to representing ratepayers in formal proceedings, the Office strives to keep the public informed regarding ongoing utility issues and developments. Toward that end the staff is available for public speaking engagements, and publishes biannual reports on the electric industry and telecommunications. These reports are available to the public at no charge. The staff is also available to answer your utility related questions.

The telecommunications industry has undergone substantial restructuring over the past two decades. The reasons for restructuring and the impact on regulation will be discussed in future columns. Not too long ago, a single company provided your entire land-based phone service including the phone, local calls, long distance calls and other sundry items. And all charges for those services were regulated. Today, only the local service component is subject to rate regulation. Long distance rates are now market determined through competition among the many providers of in-state and out-of-state long distance service. Add on features, such as caller-ID, call waiting, conference calling, wire maintenance protection, etc., are set by your local phone carrier without regulatory oversight.

Although consumers have benefitted greatly from significantly decreases in long distance rates, restructuring and the resulting myraid of choices now available to consumers, has generated considerable confusion. Exercising your choices and making changes can lead to a substantially lower phone bill, but all too often the confusion results in consumers doing nothing. Many phone companies thrive on this confusion.

You can select your long distance carrier and in the process save money on your phone bill. However, many consumers do not, and thus continue to pay excessively for long distance and certain option local services. Check your phone bill, as you may be just such a consumer. If you are paying more than 5 cents per minutes for long distance, you can probably do better. Our office has helped scores of people save anywhere from $1.00 per month to $100 per month on their phone bills and get improved service quality at the same time. Those savings arise from switching to plans with lower long distance rates, no monthly fees or minimum charges, 6 second billing rather than the traditional 1 minute billing, careful choice of economy vs. premium local service, and elimination of costly and unnecessary wire maintenance fees. If you want options such as caller ID, call waiting, call forwarding etc., there are combinded local and long distance plans that may save you a considerable amount of money.

Those consumers who have never requested a lower rate from their carrier or never switched long distance carriers are most likely paying an unnecessary premium. The Public Advocate Office rountinely advises consumers on the potential savings associated with carrier selection and is always available to assist you in that process. The amount of potential savings varies depending upon a consumers' profile and sorting through all the information can be challenging. Next month's column will be devoted to a discussion of the anatomy of a phone bill and how you can save money on your phone bill. Specific cases, involving hypothetical customer profiles, will be presented in demostrating the potential savings from excercising the choices now available to consumers. In fact, twice a year, our office publishes the Ratewatcher Telecom Guide to assist you in making these choices. The Guide provides up to date information on rates and fees charged by a variety of competitors' phone service, wireless service, and internet service. This guide is provided free to the public. Call our office at 287-2445 and ask to be plaed on the mailing list and the lastest, as well as future, editions will be mailed to you.

Over the oast ten years, electric regulation has also changed considerably. The electric industry in Maine has undergone substantial restructruing. Maine is one of the state where electric utilities no longer own generating fascilities. The price that you pay for the generation component of electricity is now market determined and is reflected in your electric bill as a flow-through in the from of an energy, or supply charge. The other components of your bill reflect a transmission charge, a distribution charge, and a straded cost assessment. The transmission charge is set at the federal level by the Federal Energy Regulatory Commission (FERC) and is also a flow-through. The distribution and standard cost components are determined by the Maine Public Utilties Commission through an adjudicated process involving consideration of both utility and ratepayer interests. Ratepayer interests are presented to the Commission trhough intervention by parties such as the Maine Public Advocate. The details of this process and the impact of restructuring on the form of electric regulation in Maine will be discussed in future columns.

TIP OF THE DAY:

Do you pay for wire maintenance? If so, do you know that this is a charge for maintaining the phone wires inside your residence? (You local phone company is responsible for maintaining the wires to your house and the cost for that is covered in your basic phone bill.) Most residential users will never have a problem with their inside wires and when they do have the problem is often one that requires only an inexpensive repair. If Verizon is your local carrier and you have this service (Verizon calls it Telesure), you are paying $3.95 a month for this unnecessary insurance.

 

Ron Norton

Economic Analyst, Office of the Public Advocate

& Professor of Economics at the University of Maine at Augusta.

 

The Anatomy Of A Phone Bill and How to Save Money

By Ron Norton and Wayne Jortner

Editors note:

This is the second edition of a monthly column on utility regulation. Readers are encouraged to submit questions in the areas of electricity, natural gas, water, and telecommunications. Please send your questions to Ron Norton, 112 State House Station, Augusta Maine 04333-0112 or via email to ron.n.norton@maine.gov. Ron Norton is Economic Analyst with the Maine Public Advocate. Ron is also a professor of economics at the University of Maine at Augusta. Wayne Jortner is Senior Counsel with the Maine Office of the Public Advocate.

Have you ever wonderdered what all those charges are for an your phone bill? If you are like most people, your interest is probably motivated by a desire to avoid or reduce as many of those charges as possible. Well, I have good news AND bad news for you. The good news is that you can eliminate some of those charges and reduce others. The bad news is that many charges are allowed by Federal and State law and, as such, are unavoidable. Let's consider the government-mandated charges first. Grab a copy of your phone bull and we'll take a ride down the regulation highway. Get your wallet ready, because it is definitely a toll road.

The first regulated charge is for your local phone service. For most of your, this will appear as either "Unlimited Economy" or "Unlimited Premium Service." Both services provide unlimited calling within a designated local calling area. Premium service has a wider calling area than does economy service, but costs more. In Verizon territory premium is price $1.50 per month than ecconomy. In Maine, the price of these services is set by the Maine Public Utilities Commission (MPUC). We will revisit the choice between ecomony and premium calling in just a moment.

Some of you may have a local package that includes your local service and also a variety of optional feautures, such as Call Waiting, Call Forwarding, Caller ID, etc. Optional features are not considered necessities by the MPUC, and therefore their prices are not regulated (it is interesting to note that Verizon charges $7.50 per month for Caller ID while the cost of providing that service may cost less than a penny.) Hence, the price that you pay for local package is set at the discretion of your local phone company.

There are at least nice charges in the Tax and Fees section of your nill. The first is a Federal Subscriber Line Charge (or FCC charge). The Federal Communications Commission (FCC) allows up to $6.50 for this charge. This money goes to your local phone company to compensate for the costs of providing access to the long distance network. Next is the Federal Universal Service Fee (or Federal Universal Service Charge). This fee is set by the FCC every three months and is currently 8.9% of the combined interstate and international portion of your bill. This fee recovers your local phone company's required contribution to the Federal Universal Service Fund, which subsidizes high-cost rural phone companies, Internet and telecom connectivity for schools and libraries, phone services for low income customers, and certain telecom and Internet costs of health care providers that use telemedicine.

Next is the Federal Universal Service High Cost Fund Credit. Yes, that is not a misprint, it is a credit that actually lowers your total bill. This credit flows back to customers an increase in high-cost support that Verizon began to recieve a few years ago. The Public Advocate was responsible for negotiating a plan to pass back a fair share of this credit to every Verizon customer.

The Local Number Portability Charge is set up by the FCC and goes to you local phone company to recover the costs of upgrading facilities necessary to allow you to keep your telephone number when you choose a competitive local phone company or when you move within your calling area. The 911 State/Country Charge, established by the Maine Legislature, pays for the new E-911 system that will allow emergency dispatch centers to identify the address of a caller. The School and Library Fund, also established by the Legislature, represents 0.5% of the instate portion of your bill and subsidizes Internet and telecommunication services for Maine's schools and libraries. The Maine Universal Service Fund charge, authorized by the Legislature, is currently set by the MPUC at 1.46% of the instate portion of your bill and the monies collected are allocated to Maine independent phone companies to keep their rates from rising above Verizon's local rates.

The Service Provider Tax is the new name of the state sales tax on telephone services. This sales tax, originally authorized by the Legislature in the 1920s, serves as a sourceof revenue for the State's general fund. The Federal Excise Tax, authorized and set by the Federal Government, serves as a source of revenue to the U.S. Treasury's coffers. This tax was originally established to fund the Spanish American War in 1898. (We believe that this way is over but old taxes die hard.)

Other than your choices between "Ecconomy" local services and "Premium" local service, you have virtually no contril over any of the charges discussed above. The only way to avoid them is to have no phone services. (To be sure, a small percentage of customers have chosen wireless and Voice over Internet services as a replacement for traditional phone service and thereby avoid the bulk of these surcharges.) However, as promised, there IS some good news. By selecting wisely with respect to the remaining chrages on your phone bill, you can save money. How much money is dependent upon how "unwise" you have been in the past, your dialing profine, the options that you select, and in some cases where you live.

First consider your choice of local service, is it Economy or Premium? With Premium you pay $1.50 more per month for expanded local calling area. For example, if you live in Augusta the premium calling area includes all the areas covered by the Economy service plus the East Vassalboro, South China, and Waterville exchanges. Premium is a smart choice if you talk more than 30 minutes per month to people people in that expanded area. However, if you talk to people in the expanded area infrequently then you are probably better off with the Economy service. For example, suppose you only talk on average 10 minutes a month to people in the expanded area, then you pay the Economy fee ($1.50 less than Premium) and five cents per minute (set by the MPUC) for your calls to the expanded area. Under this scenior, choosing the Economy service saves you $1.00 per month. Actually, many people never call anyone in thier expanded area. If you do not know what additional excharges are included in your Premium service (which is the case for more consumers that we talk to) you can either visit www.state.me.us/mpuc/homepage.htm or give us a call at 287-2445.

Do you have optional services such as Call Waiting, Call Forwarding, Caller ID, etc.? If so, do you really need them? They are quite pricey. But if you need them, you might want to explore alternatives to your local phone company. If you live in Verizon territory, you may be able to select a competitor's plan for bundled local, long distance, and optional services that is cheaper than the total cost od your current services. For example, USA telephone provides a combined local-long distance package for $20-$25 per month (depending on location) plus taxes and fees. That package includes three optional services like Caller ID and Call Waiting, plus taxes and fees. The package includes three optional services like Caller ID and Call Waiting, plus long distance for 2.9 cents per minute. Your actual savings will depend upon your calling profile, but for many, the savings can be substatial.

Do you pay for inside wire maitenance? If so, do you know that this is a charge for maintaining the phone wires inside your residence? ( Your local phone company is responsible for maintaining all equipment OUTSIDE of you house and the cost for that is covered in your basic phone bill.) Most residential useres will never have a problme with their inside wires and when they do the problem is often one that requires only an inexpensive repair. If Verizon is your local carier and you have this service, you are payinbg $3.95 per month for this unnecessary insurance.

If your long distance plan has a monthly fee or monthly minimum, you are probably paying too much for your long distance service. Our expierence indicates that most people, who have such plans, can save money by switching to a different long distance carrier that charges no monthly fee or minimum. Similarly, if you have a longs distance plan that has a per miniute long distance rate that exceeds 4 cents per minute, you may be able to save money by selecting a different carrier.

When examining your bill, have you noticed that all your long distance calls are charged in one-minute intervals? If so, you have a long distance plan that rounds up to the next minute For example. a 90 second phone call is billed at 2 minutes, a 2-minute-3 second call is billed at 3 minutes, etc. This can add up, especially if you make a lot of long distance phone calls of short durations, i.e. fewer than 10 minutes. THis can happend if you connect with an answering machine and simply hang up or you are told the person you wish to speak with is not home, or if you dial the wrong number, etc. Here is some good news: some long distance carriers bill at six second intervals rather than the traditional one-minute interval. Switching to such a carrier can save you money. In fact industry estimates indicate that on average you can save approximately 10% of your long distance bill from this one change.

For many, the greatest potential source of savings involves the per-minute rate for long distance. Do you know what you pay for this rate? If not you are probably paying too much. It is easy to determine your long distance rate. Simply divide the total dollar amount billed for long distance by the number of calls listed. If this fraction equates to greater than 5 cents, you are definitely paying too much. Our expierence indicates that those consumers who have never requested a lower rate from their carrier or never switched long distance carriers are most likely paying an unnecessary premium. Many of these customers are paying rates that are more than three times greater than current market alternatives. There are numerous long distance carriers out theire with rates less than 5 cents a minute, and at least one as low as 2.9 cent.

Choosing the right long distance carrier is easy if you have the right tools. As your understanding of both your calling profile and available market alternatives increases, the likelihood of you making the right choice improves dramatically. We can help. Call our office at 287-2445 and we will sned you a copy of our semi-annual Ratewatcher Telecom Guide, which provides information that should assist you in your decision. Or simply call us and we will personally help you in making your decision. Or simply call us and we will personally help you sort through all this. Also, our office periodically offers phone clinics throughout the state. In fact on Friday, December 3rd we will be holding a clinic from 9 am -5 pm in the second floor loung of the new Student Technology Center at the University of Maine at Augusta. Please bring a copy of your phone bill and join us. You definitely can save some money on your phone bill, if you put your mind to it.

 

The Public Advocate Prevails In January 26th Supreme Court Decision

By Ron Norton and Wayne Jortner

Last week the Maine Supreme Court issued a decision overturning the Maine Public Utilities Commission's (PUC) five-year price plan for Verizon. This plan involves an alternative to the traditional for of regulation. The Court's decision vacates the rates for local phone service approved by the PUC on September 25, 2003 and returns the matter to the PUC for further proceedings. The Court found that the Commission failed to follow state law, which requires the Commission to ensure that its alternative rate regulation does not result in rates that are higher than rates that would be set based on Verizon's cost of service which is a fundamental aspect of the traditional form of regulation.

Traditional regulation involved setting rates that allow the utility to receive revenue sufficient to cover its costs of service (COS), and provice the utility to recieve a reasonable opppurtunity to earn a fair return on investment (ROI). The COS as established by considering capital investment, operating expenses, depreciation, and taxes. The ROI involved calculating an appropriate level of profit which is based on the costs of attracting captial from investors. Corporations finance their capital with debt (bonds) and equality (stocks). Therefore, the cost of capital is a weighted average of bond interest rates and a fair return to equaity investors (ROE).

For years, the traditional from of regulation was the subject of considerable criticism. Establishing an appropriate COS was often cumbersome and at times quite controversial. Identifying an appropriate COS relied heavily upon data provided by the regulated utility and there was no guarantee that such data reflected the most efficient use of resources. After all, if a regulated utility is routinely compenstated in rates for expeses incurred where is the incentive for the utility to aggressively pursue efficiencies and cost-cutting? As a result, rate cases were mired in lengthy analysis of the individual components of the COS calculation. Indentifying an appropriate ROE was equally problematic, being subject to considerable theoretical and empirical debate. The entire process often consumed months of expensive regulatory processdings, the cost of which ultimately flow to ratepayers. Furthermore, such a process can be repeated over and over as regulated utilities can theoretically file for rate increases on an annual basis.

In 1993, the Maine Legislature approved legislation allowing the PUC to adopt an Alternative Form of Regulation (AFOR) for Verizon and any other telephone utility in the state. However, the Legislature established that any AFOR must be consistent with certain safeguards. The safeguard of paramount concern in this case involves the requirement that, during the five-year temr of the AFOR, ratepayers, must not have to pay more for local service under the AFOR than they would have paid under traditional regulation. Obviously, such a safeguard requires a comparison of rates under the AFOR to rates tha the PUC would likely have approved in the absence of an AFOR.

In 1995, the PUC approved the first five-year AFOR for Verizon. The AFOR set local rates in the first year at a level based upon a traditional COS and weighted average cost of capital. Throughout the remaining term of the AFOR, local rates capped at the prior year level plus an inflation adjustment less an annual productivity offset of 4.5%. Theoretically, this would reduce rates due to lower regulatory expenses resulting from avoided rate cases and also through ratepayer sharing of expected continued efficiency gains in the telecommunications industry through the productivity offset. The AFOR also did provide Verizon with an incentive to continue pursuing cost-cutting effeciency measures, as annual productivity gains in excess of the 4.5% would be retained by the company.

The first AFOR expired in 2000 at which time the development of a replacement AFOR commenced. The Public Advocate argued that, prior to implementing a second AFOR for Verizon, Maine's AFOR statute required a traditional COS investigation to fairly establish the beginning point for local rates. This investigation was the only way to ensure that going forward ratepayers would pay no more for local service under the second AFOR relative to what they would pay under traditional regulation. The Public Advocate also sought to hold the Commission to its promise that the benefits of efficiency savings from the merger with Bell Atlantic would be shared with Verizon's customers. The PUC disagreed, arguing that such an investigation was not in the bst interest of ratepayers because it would not be sufficently precise to satisfy the comparison of rats under two different systems.

On June 25, 2001 the PUC issued an Order, extending the initial AFOR through May 31, 2006. Throughout the five-year extension, local rates were to be set at the level in existence at the end of the first AFOR plus$1.78 per line per month. The Public Advocate appealed this decision to the Maine Supreme Court, based on the arguement that the statutory requirement of a comparative rate calculation had not been met. In February of 2003, the Court issued a decision supporting the Public Advocate's contention that the rates were set contrary to statutorily-mandated guidelines and returned the case to the PUC for further proceedings. The Court was quite clear that those proceedings must include a comparative rate calculation.

In September 2003, the PUC determined that a comparative rate calculation was not in the best interest of ratepayers because it was "impossible" to accomplish. Hence, the PUC ordered a reinstatement of the AFOR extension that it had approved in June of 2001. Once again, the Public Advocate appealed the PUC decision to the Supreme Court. In the decision issued last week, the COurt concluded that the extension of the AFOR does require an analysis and that there is a continuation of the linkage between rates and cost whenever a new AFOR is adopted. It further determined that a comparative rate calculation is indeed required unless extrodinary circumstances demonstrate that such a comparision is not in the best interest of ratepayers. The Court further determined that such circumstances had not been demonstrated in this case.

So what happens now and how will this decision affect ratepayers? The PUC will reopen proceedings in this cse, which will likely involve a rate investigation of some sort. It is uncertain what these proceedings will do for local rates during the remainder of the AFOR, which expires in June of 2006. They may be lower that those previously approved by the PUC or they may not. Even if they are lower, the benefit to the ratepayers may be short-lived as this second AFOR expires in a little more than a year. However, the Public Advocate believes that there is an important long-term benefit to ratepayers. Hereafterm it should be clear to all parties, including the PUC, that the development of future multi-year plans for phone companies must include an objective analysis to ensure that rates are lower under alternative regulations and each AFOR must begin with the establishment of a fair starting point for rates.

 

TIP OF THE WEEK:

The OPA's most recent Ratewatcher Guide is now available at no cost to Maine residents. The guide is published by our office twice a year and provides detailed information on local, long distance, wireless, and Internet services, including prices available to Maine residents. The guide provides information that may enable you to save on your costs for any of these services. Call our office at 287-2445 and will send you a copy and put you on our mailing list, after which you will automatically recieve future editions of the publications.