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This is an unofficial announcement of Commission action. Release of the full text of a Commission order constitutes official action. See MCI v. FCC. 515 F 2d 385 (D.C. Circ 1974).
Press Statement of FCC Commissioner Rachelle Chong
Re: Price Caps
May 7, 1997
Along with the Access Charge Reform and Universal Service orders, the Price Caps
decision adopts much-needed reforms which are important to the progressive deregulation of
incumbent LECs as competition increases. Price caps will continue to keep access charges in
check as we make our transition to an access charge regime based on forward looking
economic costs. As competition develops, however, we will gradually deregulate incumbent
LEC interstate access services by removing services from price caps where actual competition
has arisen.
The price cap plan we adopt today contains a challenging unitary X-factor of 6.5
percent annually. While picking an X-factor is not an exercise that brings one to a state of
metaphysical certitude, I feel confident that the X-factor we have chosen is a reasonable one
and well-supported by the record. We have selected this X-factor after very careful analysis of
the growth rate of incumbent LEC total factor productivity (TFP) and the rate of change of
LEC input prices. I believe the new X factor of 6.5 will be a more reliable measure of
incumbent LEC potential productivity gains than our interim price cap plan, which offered
three X-factors, some with sharing obligations. In the unlikely event we have made the X-factor too challenging for some LECs, we retain our low end adjustment mechanism. I think
this is a wise safety net.
To ensure that consumers share in LEC efficiency increases, we have added a 0.5
Consumer Productivity Dividend (CPD) to the X-factor. I recognize that some have argued
that the CPD was initially adopted as a way to flow through the first benefits of the price cap
plan to access charge customers, and that it may be time to bid the CPD a fond adieu. Given
the current state of competition in most price cap LEC markets, we have decided to continue
use of the CPD as a way to ensure that productivity gains realized by the LEC will be shared
between ratepayers and shareholders. In the future, of course, the Commission may decide
that competition has progressed to the stage where a CPD mechanism could be safely
discarded because market forces will provide consumers with the benefit of the LEC's
productivity.
Finally, I am particularly pleased that today's order puts a stake through the heart of
"sharing," the requirement that ILECs earning more than specified rates of return must
"share" half or all of the amount above those rates of returns with their access customers in
the form of lower rates during the next year. I have long believed that a system of pure price
caps without sharing would be preferable, because sharing comes from a rate-of-return era. I
believe that we have correctly found today that sharing tends to blunt the efficiency incentive
we sought to create through the price cap plan.