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Phone Refunds May Be Slashed

State regulators propose to cut amounts SBC would pay customers by 35% to 85%.

September 03, 2003|James S. Granelli | Times Staff Writer

Six months after coming close to proposing that SBC Communications Inc. refund $1 billion to its California customers, regulators are sending the state's dominant local phone company a new message: Never mind.

Two administrative law judges at the Public Utilities Commission decided last week to cut that widely anticipated refund by 35%. And if Commissioner Susan P. Kennedy has her way, it would be knocked down by nearly 85% -- to $162.4 million.

Consumer groups reacted angrily to the proposals, released late Friday by the two judges and Kennedy, a former Cabinet secretary for Gov. Gray Davis, who is facing an Oct. 7 recall election. The governor appoints PUC members.

"There's no question that Kennedy's proposed decision makes Davis look awfully pro-utility," said Michael Shames, executive director of consumer advocate group Utility Consumers' Action Network.

Kennedy, who joined the commission in January, strongly objected to such a characterization.

"You don't jury-rig a decision to be business-friendly," she said. "You make a decision on the merits, and that's what this decision does."

Under Kennedy's proposal, SBC customers would see a 3% reduction in phone bills for a year -- about $1.05 on a typical local bill of $35 a month. Under the two judges' proposals, the refund would reduce bills by 12%, or about $4.20 a month. Under the $1-billion refund plan, customers would have seen an average monthly drop of $9.

The commission could vote on the refunds at its Oct. 3 meeting.

SBC, which earned $5.7 billion last year, said it was pleased with Kennedy's alternative proposal but disappointed that she "misinterpreted" rules to find that any refund was due. The company excoriated the judges' decisions, saying their findings were "inconsistent with or even in direct contradiction to" the commission's stated rules.

Under a regulatory framework adopted in 1989, SBC, then called Pacific Bell, was allowed to keep all profit up to 11.5% of its capital base, a figure called return on assets. It was supposed to share half its profit over that amount with its ratepayers. The PUC suspended such profit sharing at the end of 1998.

The state never audited the company under regulatory accounting principles to determine whether SBC earned excess profit until former commission President Loretta M. Lynch agitated for an audit in September 2000. Covering three years, the audit was so complicated that the commission split it between two judges for hearings and decisions.

They were about to render their proposals when the PUC's new president, Michael R. Peevey, transferred the case to Kennedy in March. Kennedy said she met with the judges and persuaded them to change some of their calculations.

In Kennedy's view, SBC overstated expenses by $405.9 million for the three years and should have recorded an additional $575.6 million to its operating income -- not enough to trigger profit sharing. But she agreed with the judges that SBC improperly withdrew $136.2 million in 1999 from one of its trust funds for retiree benefits. She wants that returned with 2.5% interest. The total refund would be $162.4 million.

The judges had found, along with the improper trust fund withdrawal, that SBC overstated expenses by $630.6 million for the period. Proper accounting, they said, would push operating income up by $1.15 billion and trigger profit sharing that would give customers $288.3 million. Together with the trust fund money and 10% interest, the total refund would be $661.1 million.

Kennedy based her interest rate on typical rates for commercial paper, short-term borrowings by companies with good credit. The judges, who wouldn't discuss their decisions, used an average cost-of-money approach, Lynch said, adding that she would have used an 18% rate -- "the same interest SBC charges you when you're late in paying your bills."

Lynch decried Kennedy's decision.

"We shouldn't give companies an incentive to hide profits, earn interest off the money and then not pay consumers what [they] made after pocketing the money," she said.

The single biggest difference between the judges' and Kennedy's proposals is how to treat $400 million earmarked in 1998 for retiree benefits. Kennedy found that to be a legitimate expense to deduct from revenue; the judges didn't. Lynch said SBC didn't transfer any money but saw the need to do so in the future. At the time, she said, the benefits account was fully funded.

Kennedy said the costs were real and treated as such on the company's books. "To force them to do otherwise basically raids the pension fund," she said. Her decision is consistent with previous commission decisions, she said.

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