Most discussions of telephone rate of return regulation center upon the regulatory effects of the Federal Communication Commission. Little attention is given to the regulatory activities of the state utility commissions. Even when attention is directed toward state commissions, little of it is directed toward the decision-makers (the commissioners) of these agencies. Little explanation is given as to why a 2.49 percent rate of return is approved in one case and a 6.75 percent rate of return in another.

Two main theories of regulatory behavior have been offered in the past. The public interest theory offers the hypothesis that regulators are able to discern the public interest and attempt to pursue courses of action that are in the public interest. The theory does not show how the regulators are able to discriminate between the true public interest position and the aberrations sponsored by special interest groups. The "capture" theory hypothesizes that the regulating commission and its commissioners come under the influences of special interest groups. Rather than being concerned with the public interest, the regulators are concerned with distributing the gains from regulation among the special interest groups, including themselves.

The model developed within this study flows out of the "capture" theory. It is hypothesized that regulators award rates of return in intrastate telephone cases based upon the appeal probabilities of the relevant parties, the company and the intervenor. The concern for the appeal probabilities arises from the likelihood that an appeal will direct legislative and voter attention to the activities of the commission. Such attention is likely to trigger legislative review with the possible loss of commission prestige, power, budget, etc., or legislative change in the commission structure or scope of responsibility. It is assumed that any adverse effects of legislative action will flow through and have similar effects upon the commissioners.

Based upon the theoretical model, empirical models are structured to identify the important public choice variables influencing decisions of the commissions and commissioners, to test for differences between the rates of return awarded in formal vis-a-vis informal cases, and to test the implied allocation under the adversary process. To test these hypotheses, ordinary least-squares regressions were run, using case data from 1965-1969 and commission data from 1967.

The regression results raise some interesting questions concerning intrastate telephone regulation. Neither intervenors nor the commission staff appear to have a significant effect upon the awarded rate of return, thus raising serious questions about the adversary proceedings concept. The lower rates of return awarded Bell Telephone Companies raises concern about the alleged benefits from pursuing the Department of Justice plan to disintegrate the Bell Telephone System. It appears that the major limiting force mitigating the power of the firm is the choice of the regulatory procedure used. Finally, jurisdictions using the fair value evaluation method appear more generous in awarding rates of return than those using the original cost method.