DAR File No. 27858

Public Service Commission, Administration

R746-352

Price Cap Regulation

NOTICE OF PROPOSED RULE

DAR File No.: 27858
Filed: 05/02/2005, 04:38
Received by: NL

RULE ANALYSIS

Purpose of the rule or reason for the change:

This rule was implemented to apply to Section 54-8b-2.4. Section 54-8b-2.4 has been repealed, hence there is no continuing need for this rule.

Summary of the rule or change:

This rule is repealed in its entirety.

State statutory or constitutional authorization for this rule:

Section 54-8b-2.4

Anticipated cost or savings to:

the state budget:

Savings will result for affected state agencies which will no longer have to process, analyze, or approve price index submissions. It is estimated that the aggregate savings will be less than $25,000.

local governments:

None--Because no local government activities are affected.

other persons:

Affected companies will no longer have to prepare price cap filings and make price changes pursuant to Section 54-8b-2.4. This should result in savings to these companies (the Commission believes only one company in the State of Utah will be affected). The Commission does not have access to information from the company for its past actual compliance costs. It is estimated that the savings could be an aggregate of $50,000. It is affected by the number of the price changes which the company could make, for which the company had discretion, and the price information and billing systems utilized by the company.

Compliance costs for affected persons:

As reporting and filing activities required under the prior rule, which was required by a now repealed statute, are eliminated, there should be savings for the affected company. There should be no compliance costs incurred by any party as a result of the repeal of this rule.

Comments by the department head on the fiscal impact the rule may have on businesses:

The elimination of the rule will enable the affected business to forego calculating and implementing price changes resulting from compliance with Section 54-8b-2.4. This should result in cost reductions for the affected company. As noted above, estimates for these aggregated savings have been made for affected state agencies and the affected company. Ric Campbell, Chairman

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Direct questions regarding this rule to:

Barbara Stroud at the above address, by phone at 801-530-6714, by FAX at 801-530-6796, or by Internet E-mail at bstroud@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

06/14/2005

This rule may become effective on:

06/15/2005

Authorized by:

Barbara Stroud, Paralegal

RULE TEXT

R746. Public Service Commission, Administration.

[R746-352. Price Cap Regulation.

R746-352-1. Purpose.

This rule establishes a framework and procedures for price regulation under Subsection 54-8b-2.4(5)(a).

R746-352-2. Objectives of Price Cap Regulation.

A. Maximum Average Prices -- To alter maximum average prices for tariffed services based upon inflation, industry cost trends, and exogenous factors.

B. Price Protection -- Provide price protection to customers who lack competitive choices.

C. Movement of Prices -- Foster the movement of prices toward cost and the removal of subsidies in the existing price structure of telephone corporations so as to encourage competition for all telecommunications services.

D. Regulatory Burdens -- Minimize regulatory burdens by establishing a relatively simple, administratively efficient, and understandable regulatory system.

R746-352-3. Price Cap Adjustment Formula.

A. For Telephone Corporations Subject to Section 54-8b-2.4 -- For telephone corporations subject to Section 54-8b-2.4, the following price cap adjustment formula shall be used to obtain a Price Cap Index: the Price Cap Index for the current year, or PCI_(t), shall equal the product of the following two values: the Price Cap Index of the previous year, or PCI_(t-1), multiplied by one plus the sum of a measure of inflation, I, minus a productivity factor, X, plus or minus an exogenous factor, Z, minus a service quality adjustment factor, Q. PCI_(t) = PCI_(t-1) multiplied by (1 + (I - X + /- Z - Q)).

1. The Price Cap Index for the current year, PCI_(t), shall be used as the 54-8b-2.4 price cap index, calculated annually, above which the weighted index of the average prices for the telephone corporation's services in a given price cap basket may not rise.

2. The inflation measure, I, equals a measure of economy-wide inflation rates the determination of which is described in R746-352-4(A).

3. The productivity factor, X, equals a productivity factor, or "X-factor," designed to capture the effects of changes in productivity and input prices for the telecommunications industry versus the respective changes in those elements for the economy as a whole, the determination of which is described in R746-352-4(B).

4. The exogenous factor, Z, equals potential adjustments to reflect or offset certain external or exogenous factors (positive and negative), the determination of which is described in R746-352-4(C).

5. The service quality factor, Q, equals potential adjustments to reflect the telephone corporation's service quality performance in accordance with standards set forth in R746-352-4(D), the determination of which is described in R746-352-4(D).

6. In determining the Price Cap Index, the values for I, X, Z, and Q shall be expressed in decimal, rather than direct percentage, form.

R746-352-4. Price Cap Adjustment Formula Components.

A. Inflation Measure, I -- The Inflation Measure, I, to be used for the price cap adjustment in a given year is the annual percentage change in the Chain-weighted GDP-PI as published by the United States Department of Commerce Bureau of Economic Analysis for the 12 month period ending September 30 of the previous calendar year.

B. Productivity Factor, X -- The Productivity Factor, X, shall measure the amount by which the change in local exchange carrier, or LEC, productivity differs from the change in productivity for the United States economy as a whole plus the amount by which the change in input prices for the United States economy as a whole differs from the change in LEC input prices.

1. The following formula shall be used to calculate the productivity factor: The value for X shall equal the sum of two values. The first value shall equal the difference between a minuend representing the percent change in historical total factor productivity of local exchange carriers less a subtrahend representing the percent change in historical total factor productivity of the entire United States economy. The second value shall equal the difference between a minuend representing the percent change in the historical input prices of goods and services used to produce output of the entire United States economy less a subtrahend representing the percent change in the historical input prices of goods and services used to produce output of local exchange carriers.

X = (%Change TFP_LEC - %Change TFP_US) + (%Change IP_US - %Change IP_LEC), where

TFP_LEC equals the historical total factor productivity of local exchange carriers.

TFP_US equals the historical total factor productivity of the entire United States economy.

IP_LEC equals the historical input prices of goods and services used to produce output of local exchange carriers.

IP_US equals the historical input prices of goods and services used to produce output of the entire United States economy.

2. The productivity factor to be used in calculating the maximum prices for tariffed public telecommunication services pursuant to Subsection 54-8b-2.4(5) shall be 6.2 percent for at least the first year in which the index is in effect. At the end of the first year, a change in the factor percentage shall be considered by the Commission upon a request for change in the productivity factor, X.

a. Notwithstanding the provisions of Paragraph B.1., parties may present and the Commission may, at its discretion, rely on other methods of determining X. Any party presenting an alternative method shall have the burden to demonstrate that the alternative method is a substantially equivalent measure of X. The alternative method of determining X shall be submitted to and approved by the Commission by December 31 of the prior year for it to be used in any year's April 15 Price Cap Compliance Filing, submitted by a telephone company pursuant to R746-352-7.

C. Exogenous Factor, Z -- The exogenous factor, Z, shall represent events whose cost or revenue consequences are of a material nature which would not otherwise be captured in the inflation measure, I, or the productivity factor, X. One factor which the Commission may consider in evaluating whether to treat an event as exogenous is how comparable firms whose prices are not subject to regulatory control would or would not change their prices to reflect the event.

1. Exogenous events may include:

a. Any removal of subsidies in the existing price structure of the telephone corporation required by federal or state law or approved by the Commission;

b. The impact of alteration in asset lives to better reflect changes in the economic lives of plant and equipment approved by the Commission consistent with Section 54-7-12.1;

c. Commission approved or adopted changes based upon changes in rules of the Federal Communications Commission, including rules with regard to the separation of interstate and intrastate revenues, expenses, or investments;

d. Changes in tax rates applied to the telephone corporation;

e. Any other change external to the business operations of the telephone corporation resulting from: (a) accounting rules adopted by the Financial Accounting Standards Board and approved by the Commission; or (b) laws or rules enacted or adopted by a governmental entity having jurisdiction; and

f. Any other extraordinary events not reasonably foreseeable as of April 30, 1997.

2. The Z factor shall be calculated as the financial impact of the event(s) on intrastate tariffed services divided by intrastate revenues from tariffed services. The financial impact shall be net of any effects on costs or revenues that are incorporated in the inflation measure, I, or productivity factor, X.

3. In the interest of rate rebalancing so as to move prices towards cost and eliminate subsidies, the Commission may direct that the incremental value(s) of Z for one or more baskets may be positive while the offsetting incremental value(s) of Z for the other baskets may be negative.

D. Service Quality Factor, Q -- The service quality factor, Q shall set a value to reflect the telephone corporation's service quality.

1. A service quality measure shall be established using two installation wire center standards, three repair wire center standards, and one statewide held order standard. Performance against the standards shall be measured monthly.

2. The six standards are as follows:

a. Meet at least 90 percent of installation appointments, excluding customer trouble reports within seven days of initial installation, on a wire center basis.

b. Install at least 90 percent of any new, transfer, and change orders within three business days or on the customer-requested due dates, whichever is later, on a wire center basis. After December 31, 2000, install 95 percent within three business days or on the customer-requested due dates, whichever is later, on a wire center basis.

c. Allow no more than five held orders per 1000 new, transfer, and change orders on a statewide basis. After December 31, 2001, allow no more than four held orders per 1000 new, transfer, and change orders on a statewide basis.

d. Repair at least 80 percent of all out-of-service troubles within one business day on a wire center basis. After December 31, 2000, repair 85 percent of all out of service troubles within one business day on a wire center basis.

e. Repair at least 90 percent of all troubles within two business days on a wire center basis.

f. Meet at least 90 percent of repair commitments on a wire center basis.

3. The service quality factor, Q, for the current year shall be calculated as follows:

a. The service quality measure for a year shall be determined by summing the service failure values occurring during the year. Missing a standard for any four consecutive months constitutes a service failure.

b. Each service failure of a wire center standard shall be given a value of 0.0002 for each wire center in which a service failure occurs.

c. Each service failure of the statewide held order standard shall be given a value of .002.

4. Limitations on service quality factor adjustments.

a. Inadequate service quality results during the first year that a service quality factor adjustment is made may produce a Q-factor value of no more than an initial, threshold value of 0.05. However, upon request of an interested person, the Commission may determine that service quality failures warrant an additional service quality adjustment, up to the full service quality adjustment dictated by the service failures occurring during the year.

b. If the number of service failures during any year causes the initial Q-factor threshold in that year to be achieved, then the Commission shall have the discretion to increase the initial threshold value for the subsequent year by the value of 0.05 or multiple thereof. The Commission may, after improved service quality and subsequent to a petition and order thereon, reduce the Q-factor initial threshold value to be used thereafter by the affected telephone company by a value of 0.05 or multiple thereof.

c. The service quality factor, Q, shall begin being applied in the year 2002 price cap adjustment, based on 2001 service quality data.

5. Exemptions to Service Quality Standards.

a. Exemptions to service quality standards shall be granted for events that the telephone corporation substantiates were beyond its control. It shall be the telephone corporation's responsibility to separately document the cause, the duration and the magnitude of those occurrences.

b. Exemptions are defined as events wherein the telecommunications corporation proves it was unable to meet service standards because of:

(1) A customer's act;

(2) A customer's failure to act;

(3) A government agency's delay in granting a right of way or other required permit;

(4) A disaster or an act of nature that would not normally have been anticipated and prepared for by the telecommunications corporation;

(5) In the case of a work stoppage, the telephone corporation shall have a grace period of six weeks following return to work to comply with service quality standards;

(6) Any disaster or event of sufficient intensity to give rise to an emergency being declared by state government;

(7) A cable cut outside the telephone corporation's control affecting more than 20 pairs; and

(8) A public calling event, busy calling or dial tone loss due to mass calling or dial-up event.

c. A telephone corporation may petition the Commission for longer installation and repair interval standards in wire centers serving remote geographic areas with relatively few customers.

R746-352-5. Service Baskets.

A. Service Baskets -- The telephone corporation's tariffed services having similar characteristics shall be grouped in the following four baskets. These baskets are designed to allow development of different price indices for different groups of services, to limit a telephone corporation's ability to shift cost recovery from one major customer or service class to another, and to afford the company a reasonable amount of flexibility to adjust its prices to respond to changing market conditions. As used in this rule, "service" may include service or individual rate elements. They are:

1. Basket 1: Tariffed Residential Basic Exchange Services, Residential Extended Area Service (EAS), Caller ID Blocking, and per Call Blocking. Residential Basic Exchange Services consist of local access services and local usage services.

2. Basket 2: Tariffed business exchange services, consisting of business exchange access lines, flat and measured local usage, PBX trunks, hunting, Direct Inward Dialing (DID), and EAS associated with the foregoing business services.

3. Basket 3: Tariffed intrastate switched access services.

4. Basket 4: All tariffed services that have not otherwise been placed into Baskets 1, 2, or 3.

R746-352-6. Indexing, Pricing Rules and Permitted Rate Adjustments.

A. Index-Based Price Cap Adjustment -- A Price Cap Index, PCI, and an Actual Price Index, API, shall apply separately to each of the four Baskets, unless otherwise ordered by the Commission.

B. Base Year for Calculating Beginning of Price Regulation -- The base year is the year from which indexing begins, such as the year at which both the Price Cap Index and the Actual Price Index are initialized at a value of 100.

1. The base year for which the Price Cap Index and Actual Price Index will be valued at 100 is 1999.

C. Re-initializing the Price Index to Eliminate the Prior Year's Service Quality Adjustment -- Before calculating the price index for a new year, the previous year's PCI shall be elevated by the amount that it had been depressed, if at all, by that year's service quality adjustment.

D. Adjustment When a Basket Contains Services Priced Below the Price Floor Established in 54-8b-3.3(3) -- If the price cap index for a basket, PCI_(t), as normally calculated, is less than either the prior year's price cap index, PCI_(t-1), or 100, then the PCI_(t) shall be recalculated as the product of the following three values: the price cap index of the previous year, or PCI_(t-1), multiplied by one plus the sum of the measure of inflation, I, minus the productivity factor, X, plus or minus the exogenous factor, Z, minus the service quality adjustment, Q, (1+(I-X+/- Z-Q)), multiplied by an Adjustment Factor, A_(t), where the Adjustment Factor equals a fraction expressed with a numerator of the revenues associated with services in the basket priced above cost pursuant to Section 54-8b-2.4(5)(c) and a denominator of the total revenues associated with all services of the basket. PCI_(t) = PCI_(t-1) times (1+(I-X+/-Z-Q)) times A_(t).

E. Permissible Variances in Service Pricing Controlled by an Actual Price Index --

1. Subject to the limitations contained in this rule, the price for a service in a basket may vary from the price that would be dictated by application of the price cap index where additional, off-setting price change variances are made for another service or services in the basket as measured by an Actual Price Index, API, for that basket.

2. The Actual Price Index, API, is a means to permit comparison of the telephone corporation's price levels to the PCI, by expressing actual prices in terms of indexed values. An API shall be calculated for each Basket on the basis of the revenue-weighted average change in the telephone corporation's prices for all services included in that Basket between the current year, period t, and the previous year, period (t-1). The API is an index of the telephone corporation's actual prices and thus may reflect additional rate decreases or foregone rate increases voluntarily made by the telephone corporation over time. As actual prices change, the API will be changed to reflect upward and downward price movements.

F. Limitations on Service Basket Indices and Individual Service Prices --

1. The Actual Price Index, API, for each service basket cannot exceed the PCI applicable to the service basket.

2. The prices of individual services within a service basket are subject to the following limitations:

a. Unless otherwise approved by the Commission, the price for any service in any basket may not be increased in any one year by more than the net of the PCI for that year plus ten percent.

b. Apart from increases which occur in conjunction with Commission-approved rate rebalancing where there are offsetting rate reductions, or absent a superceding public interest determination, services for which a price reduction would be contrary to 54-8b-2.4(5)(c) may have their prices elevated cumulatively only to the degree that the price cap indices associated with their respective services' baskets exceed 100.

c. The tariff price of each service must remain above its price floor in accordance with 54-8b-3.3(3).

d. Provided that these pricing limitations are met, the telephone corporation may adjust the prices for services in any basket in conjunction with the Annual Price Cap Compliance Filing, or at any other time. Price changes proposed by the telephone corporation shall be filed with the Commission at least 30 days prior to their proposed effective date and shall be accompanied with supporting information showing that the proposed price changes are in compliance with this rule and any statutory limitations.

3. Rate Rebalancing.

a. The Commission may, as consistent with the public interest, direct that the telephone corporation rebalance rates, or the telephone corporation may petition for the authority to rebalance rates. That rebalancing, which would be separate from the impacts of any required price-indexed-based rate adjustments, must be revenue-neutral, assuming no sales quantity changes and may be accomplished both within and across service baskets. Once implemented, the telephone corporation may then rely on the Commission approved rebalanced rates as its effective rates for its Annual Price Cap Compliance filing and any subsequent proposed rate changes.

b. In addition to the preceding rate rebalancings, the Commission may direct the telephone corporation to make revenue-neutral adjustments to rates in Basket 3 services, with offsetting adjustments to the PCI's in other baskets as required, to be consistent with interstate policy as set by the Federal Communications Commission, to the extent that the Commission determines that consistency is in the public interest.

4. All tariff changes will be subject to the approval of the Commission pursuant to 54-3-2 and 54-3-3.

R746-352-7. Price Cap Adjustments, Indices and Other Filings.

A. Index-based Price Cap and Rate Adjustments -- By April 15 of each year, the telephone corporation shall make a Price Cap Compliance Filing with the Commission. The Commission shall approve, suspend, or reject the Price Cap Compliance Filing within 45 days of that filing. Interested persons shall have 30 days from the filing date to file comments based upon a review of the telephone corporation's filing to determine whether the corporation's proposed updated price cap indices, measures, supporting evidence and any proposed rate changes are consistent with this rule. Any rate changes proposed with the Price Cap Compliance Filing shall be reviewed and will become effective on July 1, unless the Commission approves an achievable, different effective date. The Price Cap Compliance Filing will include at a minimum:

1. Data showing the Chain-weighted GDP-PI for the preceding 12 months ended September 30 and the Chain-weighted GDP-PI percentage change for that 12-month period;

2. Calculations of the PCI updated as required for any new X-factor and any inflation I-measure adjustments to reflect the percentage change in the Chain-weighted GDP-PI, any exogenous Z-factor adjustments that have been expressly approved by the Commission by December 31 of the preceding year pursuant to paragraph B below, and any service quality Q-factor adjustments, together with updated API calculations;

a. For each basket, the incumbent telephone corporation must show a complete price-out using the end-of-year quantities or sales levels of services in the basket. The price-out will sum the quantities multiplied by existing prices and proposed prices for each tariffed service, to obtain the total existing revenues and proposed revenues for tariffed services.

3. Tariff pages to reflect any proposed changes in tariff rates;

4. Schedules showing the changes in the tariffed rates;

B. Filings to Support Proposed Exogenous Adjustments -- The telephone corporation and any interested person may file any proposed Z-factor treatment of an exogenous event within 90 days of the date on which the effects of that event are known and measurable. The Commission shall review those filings and issue a written decision accepting or rejecting the proposed Z-factor adjustment and associated value for use in conjunction with this rule within 60 days of the filing. The telephone corporation may request assigning the financial impact of the exogenous adjustment to specific baskets.

1. As a part of its filing, the moving party or parties will submit the following:

a. A description of the matter proposed for treatment as an exogenous event and a demonstration that it satisfies the definition of an exogenous event set forth in R746-352-4(C); and

b. Data that describes and quantifies the estimated financial impact to the intrastate tariffed services of the telephone corporation;

C. Exogenous Factors -- Exogenous factors that have been submitted to the Commission and approved by December 31 of each year will be aggregated and included in the price cap filing on April 15 of the following year. Exogenous factors shall be exclusive of any adjustments already incorporated in the Chain-weighted GDP-PI or the X factor.

D. Compliance Filing Requirements - Below-Cap Rate Changes -- The telephone corporation may adjust its rates at any time during the year, through a "below-cap" compliance filing. In this type of filing, the telephone corporation must demonstrate that its cumulative proposed rate changes will still satisfy the prevailing basket-specific PCIs for that year, in addition to all other requirements or limitations of this rule. In order to satisfy this requirement, the telephone corporation must submit the following to the Commission:

1. Service Baskets. The telephone corporation must provide a calculation of the actual price cap index, API, for each basket. For each price basket, the telephone corporation must show the price-out described in R746-352-7(A)(2)(a).

2. Demonstration of Compliance with R746-352. The telephone corporation must show that the proposed rate changes will comply with the provisions set forth in R746-352-6 and 7.

3. Tariff Pages to Reflect Revised Rates in Each of the Service Baskets. The telephone corporation must provide copies of the affected tariff pages that will reflect the proposed revised rates in each of the service baskets.

4. Description of Proposed Changes to Rates in Each Rate Filing. Additionally, the telephone corporation must provide a brief narrative description that summarizes its proposed rate changes.

KEY: price indexes, public utilities, telecommunications

June 15, 2001

54-8b-2.4

54-8b-3.3

54-3-2

54-3-3

54-7-12]

ADDITIONAL INFORMATION

PLEASE NOTE:

• Text to be deleted is struck through and surrounded by brackets (e.g., [example]). Text to be added is underlined (e.g., example). Some browsers may not depict some or any of these attributes on the screen or when the document is printed.
• Please see the DISCLAIMER regarding information available from state web pages.

For questions regarding the content or application of this rule, please contact Barbara Stroud at the above address, by phone at 801-530-6714, by FAX at 801-530-6796, or by Internet E-mail at bstroud@utah.gov

For questions about the rulemaking process, please contact the Division of Administrative Rules (801-538-3764). Please Note: The Division of Administrative Rules is NOT able to answer questions about the content or application of these administrative rules.