Sprint deal avoids suit

David Strow

Tuesday, June 8, 1999 | 11:03 a.m.

When Sprint first began exploring a Nevada rate increase in 1998, phone company officials initially figured they needed a $50 million per year increase.

What they received in Monday's deal with the Attorney General's office and the staff of the Public Utilities Commission amounts to an average of $18.6 million per year over the next three years -- and requires Sprint to put up $14.5 million, or $30.60 per customer, in credits up front before it can start collecting on increased rates.

Much of that increased revenue will come from new residents and residents with more than one phone line -- the customers Sprint says were creating the need for more cash to fund its growth.

"We hammered out the best agreement we can hammer out," said Sprint spokesman Rob McCoy. "While it's considerably less than our initial request, it does give us immediate rate relief to meet the growth, which is our major challenge."

The rate hike is less than what Sprint originally asked for. So why is a company that is supposedly cash-poor willing to drop its increase that drastically, then pony up $15 million before ever seeing a benefit?

"The reason is, you're vulnerable to a lawsuit that says you're not entitled to increase rates at all in the next 18 months," said Consumer Advocate Fred Schmidt, referring to his office's threat to sue Sprint in an attempt to block its rate increase.

McCoy wouldn't comment directly on the lawsuit threat, but said Sprint didn't want to see its request get bogged down in legal battles.

"It's our view that the short-term loss in revenue this year is something we're willing to do because of the long-term opportunity," McCoy said. "What it means is that we'll begin 2000 with the refunds behind us, and our financial outlook is much brighter. This takes the sting out of our growth demands."

The deal still requires the approval of the PUC before it can go into effect. Hearings have gone into recess until June 23, and the commission has requested that all parties file legal briefs outlining their views.

Sprint says it is suffering from a revenue deficiency of about $50 million per year. The deficiency refers to the shortfall between Sprint's local earnings and its authorized rate of return. Sprint contends it is earning a 5.8 percent return on its Nevada assets, far below the 12 percent authorized by state regulators.

The Attorney General's office has challenged the validity of that number, since it can be changed drastically if Sprint changed its rate of depreciation. Far from losing money, Sprint reported net income of about $28 million in 1998 in Southern Nevada, according to the company's annual report filed with the PUC. Revenues totaled $400 million.

"How you choose to depreciate can make your earnings look a lot better or worse," Schmidt said. "They can control their profitability. The company's profits have gotten small compared to overall revenue and assets ... (but) we don't believe there's a revenue shortfall."

Sprint officials, however, say that cash flow is insufficient to fund continuing expansion, which it estimates is costing more than $170 million per year. At the end of 1998, the company had about $875 million in assets in southern Nevada.

After subtracting Sprint's $14.5 million credit this July, Sprint would receive an additional $5 million this year. In 2000 and 2001, that will increase to at least $23.4 million in additional funds per year. The largest chunk of that will come from the $23.40 annual rate hike that will be assessed to every Sprint line operated in Southern Nevada.

In estimating that additional revenue, the parties used year-end 1998 numbers of 561,000 residential lines, and 144,000 business lines. This would give Sprint an additional $16.5 million per year.

The $30.60 credit is supposed to mitigate the impact of the increase, but how much impact it will have varies widely. For a residential or business customer with only one line, the credit will cover about 16 months of additional charges. But since the credit is applied per account, rather than per line, it will do nothing to lessen the impact of higher rates on additional lines. This was intended to place more of the burden on customers who are demanding more lines, a big cause of Sprint's higher infrastructure costs.

Those customers adding lines after Sprint's hike takes effect in July will receive no credit at all, and will be immediately affected by the higher rates.

The next big piece of new revenues will come from increased connection charges. Monday's deal allows Sprint to raise residential connection charges to $29.25, up 57 percent, and the same rate that businesses pay now. Business connection fees will remain unaffected. Based on 1998 connections, the connection charge hike will raise an additional $4 million per year. Raising its service call charge to $20 per visit means another $357,000.

The third major piece is directory assistance. Sprint would receive permission to raise the rate for directory assistance calls from 38 cents to 50 cents. Based on the 1.7 million directory assistance calls placed in 1998, that would mean $2.47 million more per year.

The estimate of $23.4 million in additional profits beginning in 2000 is entirely based on 1998 figures. But continuing growth will inevitably push that number higher.

In 1998, Sprint's residential lines grew by 6.2 percent, while business lines grew by 3 percent, according to its PUC annual report. If it maintains that growth rate in 1999, Sprint would make $24.3 million more off its increased rates, $900,000 above projections. By 2002, the last year rates would be frozen, Sprint could be making $2.9 million more per year than original projections, assuming growth continues at its current pace.