As the Utah Public Service Commission prepares to consider an incentive regulation plan for US WEST Communications, the word from a panel of experts is: "Go slow."
The consensus of the panel is that incentive regulation, while holding a lot of promise for the future, has yet to prove itself in actual application. The panel was in Utah as part of the 6th Annual Conference on New Directions for State Telecommunications Regulation sponsored jointly by the Utah Public Service Commission, Utah Division of Public Utilities and the University of Utah.US WEST's plan would freeze rates for four years and allow the company to keep all or part of any excess earnings over the allowed profit margin up to a specified limit. In return, the company would speed up a planned $103 million system-wide upgrading that includes new switching offices and installation of fiber optic cable.
The panel produced a lively debate on the pros and cons of incentive regulation at the conference attended by some 300 regulators, industry managers and consultants at the Doubletree Hotel. And while the consensus appeared to be that the concept is not proven, no one is quite ready to abandon the idea either.
Michael Einhorn, a professor of economics at Rutgers University, said incentive regulation is like professional wrestling, "Things aren't always what they are called."
Incentive regulation has appeared under several guises, all intended to provide lower or stable rates for customers while increasing profits for the company, Einhorn said. And, each plan includes some degree of increased deregulation.
The bottom line to these programs must be fairness, Einhorn said. That includes tariffs or rates that are fair to customers without unfairly subsidizing inefficiencies in a company's operating structure. Under this concept, local regulators set rates that are fair and then companies are given opportunities to offer alternatives for various service offerings. And, the companies are allowed to increase profits by keeping all or part of any excess earnings for efficiencies linked to improved service and technological advancement.
But Einhorn said there is a need to temper the incentive concept with allowances for the effects of inflation to protect the company and for monitoring revenue sharing to ensure customers get a fair share of the excess profits.
Ron Binz, director of the Colorado Office of Consumer Counsel, said he is not convinced that all of the alternatives available under conventional regulatory policies have been exhausted. Like Utah, Colorado is currently considering an incentive plan proposed by US WEST.
Binz said past plans have included "leaky" price caps that have not fully protected consumers and have not included assurances that companies have made a concerted effort to ensure that all possible efficiencies had been incorporated prior to implementing incentive plans. He said keeping plans simple is the best approach to ensure that plans do not create conflicts and that they remain on target. He said there is also questions as to whether service quality is suffering and whether such plans also stifle competition in the telecommunications market.