$1-Billion Rate Saving Seen in Long-Distance Profit Cut

In a ruling that could save phone users $1.2 billion on long-distance telephone bills, the Federal Communications Commission voted Thursday to reduce the profit that AT&T; and local telephone companies, including Pacific Bell, may earn in the next two years.

The commission’s decision will reduce the authorized rate of return on invested capital for AT&T;’s long-distance service to 12.2% from 12.75% for each of the next two years. The investment returns that Pacific Bell and other local telephone companies may earn from providing the connections to long-distance companies will be decreased to 12% from 12.75%.

FCC Chairman Mark S. Fowler said the unusual reductions reflect an economy with healthier vital signs. “Lower inflation and a rosier economic picture produced today’s pro-consumer results,” he said.

“This gives consumers cause to celebrate,” Fowler added, noting that these potential savings would be added to a total of 22% in decreases in long-distance rates that have occurred since spring, 1984. However, because it is yet not known how individual phone companies will deal with the reductions, the specific impact on their customers’ bills is unclear.

In addition to protecting consumers, Fowler said that the ruling provides telephone companies “the proper incentives to innovate, cut costs and offer excellent service.”

AT&T; and the local telephone companies, on the other hand, maintain that a higher rate of return is needed to attract investors, to improve their operations and to offer new services in today’s highly competitive telecommunications environment.

“We’re disappointed that the commission has underestimated the risks that AT&T; faces in the highly competitive long-distance business,” AT&T; spokesman Herb Linnen said.

AT&T; is the only long-distance telephone company involved in the ruling. Its rates are regulated by the commission because the company still dominates the market, even after the divestiture ruling of January, 1984. The new rates will be reconsidered in two years.

Commission officials predicted that cuts in AT&T; rates would most likely lead to rate reductions by AT&T;’s long-distance competitors.

State regulators govern how much money a company may make on purely local business.

As a result of the ruling, FCC officials predicted savings for consumers of $600 million in each of 1987 and 1988. This would reduce revenue for AT&T; by $100 million each year, and revenues for local telephone companies would be expected to fall about $500 million each year, the FCC said.

Linnen said his company plans to review the commission’s ruling before deciding whether to file an appeal. “This is not a major impact on corporate earnings,” a spokesman said.

Higher Rate Requested

AT&T; had asked the commission to approve a 13.7% rate of investment return for 1987 and 1988.

“We are somewhat disappointed in the lowering of the rate,” said Mary T. Hallisy, spokesman here for Pacific Telesis, the parent company of Pacific Bell.

“Pacific’s analysis of its business and financial risks indicates to us that the rate of return should not have been reduced below the existing level,” she said. “However, we also realize that this was a difficult and complicated decision for the commission.”

Commissioner Mimi Weyforth Dawson dissented from the part of the decision that applied a uniform rate of return to all of the local telephone companies, noting in a separate statement that “the local exchange carriers face different and unshared financial risks” that will increase over time.

Dawson said that, although she would have preferred a slightly higher allowance for the local telephone companies, “the carriers have been authorized a fair return on equity.”

At the Consumer Federation of America, a private organization, legislative director Gene Kimmelman hailed the ruling as “a step in the right direction.”