After Brief Respite, Consumers Face More Telephone Upheaval
A classic Regulator brand clock, its pendulum stilled and its hands perpetually marking 4 o’clock, hangs on the wall of the spacious corner office that Dennis R. Patrick inherited from Mark S. Fowler this year upon becoming chairman of the Federal Communications Commission. “It said Regulator ,” Patrick told a visitor, “so I stopped it.”
The clock seemingly also has stopped--but only momentarily--in the fast-changing telecommunications industry.
The Patrick-led FCC is awaiting comment on a proposal it made earlier this month to loosen its regulatory grip over American Telephone & Telegraph’s profits. Also, U.S. District Judge Harold H. Greene is holding off until this fall on deciding whether to let AT&T;’s offspring, including San Francisco-based Pacific Telesis Group, enter such fields as equipment manufacturing, electronic information services and long-distance calling--activities prohibited by the antitrust settlement that broke up the Bell System in 1984.
Before long, though, 36-year-old Patrick and 64-year-old Greene are likely to trigger further upheaval in an already tumultuous industry. In the meantime, they are weighing the economic efficiency and scientific advances that might be unleashed by increased deregulation versus the potential threat to competitors and to ordinary telephone customers.
The issues before Patrick and Greene will set the ground rules under which once-monopolistic AT&T;, whose Bell System for a century provided reliable phone service but little else, and others can adjust to a more volatile, computerized world offering telecommunications services that would have boggled Alexander Graham Bell’s mind.
Regrets Bell Breakup
“This is not a static environment,” said Patrick, a native Southern Californian, in an understated style that contrasts with the more bombastic approach of Fowler, his predecessor. “We’re dealing with a moving target. And the market is changing very, very rapidly.”
Since the Bell breakup, which Patrick regrets, consumers have had to put up with a succession of sometimes-bewildering changes and aggravating, seemingly inexplicable new charges on their local phone bills. Consumers have had to decide whether to buy phones they previously could only lease; they’ve found themselves, rather than their phone companies, suddenly responsible for repairing the phone wires in their homes, and they have been paying a mysterious and rising “subscriber line charge” imposed by the FCC--now $2.60 a month--in exchange for cuts that have totaled 33.5% in long-distance rates.
The FCC has been responsible for most of these unsettling changes, including the highly unpopular subscriber line charge, about which Patrick says: “My mother always complains when I visit.” Now the commission is poised to stir matters up further.
Patrick and his three commission colleagues (there is one vacant seat) on Aug. 4 proposed eliminating ceilings on how much AT&T; can earn on its shareholders’ investment, or its rate of return, in favor of setting maximum prices for long-distance services. The FCC’s aim, Patrick said, is to create incentives for AT&T; to cut costs and improve its technology by letting the company keep part of any savings it achieves within the price limits. Consumers would benefit from a periodic cut in the price limits, he said.
The proposal quickly won rave editorials from Business Week and the Wall Street Journal but drew equally prompt cries of alarm from consumer groups.
In requesting comment, the commission noted that, even before the breakup of the Bell System, the convergence of communications and computers had prompted the FCC to modify its regulatory approach. The commission has sought to encourage new electronic services and foster competition in emerging fields while keeping ordinary telephone service affordable.
But the breakup of the Bell System prompted further regulatory adjustments, triggering a chain of events that led to the FCC’s proposal this month. For one thing, divestiture brought an end to the free flow of revenue among the various parts of the Bell system. To replace the complex web of contracts and tariffs that fed the monolith, the FCC reduced the connection charges paid by AT&T; and its long-distance competitors to local telephone companies and imposed subscriber-line charges on businesses and homes.
The residential line charge was originally intended to be $6 a month, but the FCC retreated after Congress reacted to a storm of consumer outrage. Consequently, a joint board of state and federal regulators devised the current schedule under which the levy rose from $2 to $2.60 on July 1 and is to increase to $3.20 on Dec. 1, 1988, ultimately reaching $3.50 four months later.
Now even that compromise schedule is under fire from consumers and state regulators who question whether the residential charges are really necessary. The FCC imposed the charge to lower long-distance rates so that really big phone customers would not build private systems that could do the job cheaper. But a new study by Bethesda Research of Rockville, Md., found that big customers rarely quit phone companies because of the cost, and concluded that the subscriber line charge is “demonstrably unwarranted.”
In any case, the FCC sought to take some of the sting out of the new charges by forcing AT&T; to lower its long-distance rates. The stated intent was to hold overall phone charges steady while promoting a fairer sharing of the cost of service.
But that brought protests from AT&T;’s principal long-distance competitors--second-place MCI Telecommunications and third-place US Sprint, which felt compelled to match the FCC-imposed cuts. That, in turn, pushed both even more deeply into the red last year, although MCI returned to profitability this year.
“We compete with the FCC, not AT&T;,” complained MCI spokesman Gary Tobin.
Consequently, when the FCC issued its price-cap proposal this month, MCI quickly supported the plan. It reasoned that, given more freedom, AT&T; would be less likely to reduce prices further instead of fattening shareholders’ dividends.
‘Mythical’ AT&T; Competitors
Some consumer advocates aren’t as sanguine.
“The whole thing is scary,” said Sylvia Siegel, director of San Francisco-based TURN, or Toward Utility Rate Normalization. “The price caps will become the price floors,” she predicted, warning: “The only benefit will be to keep MCI and Sprint in business as mythical competitors of AT&T.;”
Moreover, the Competitive Telecommunications Assn., whose 150 members include US Sprint and regional and specialized long-distance carriers, regards the price-cap proposal warily. Comptel intends to urge the FCC to, at the very least, go slow if it changes the way it regulates AT&T.;
“We’re really sailing into uncharted water here,” said Comptel President Jerry McAndrews. “It’s going to be a risky business for everyone, except maybe AT&T.; Competition is still fragile.”
McAndrews suggested setting minimum, as well as maximum, prices to prevent predatory pricing by AT&T;, which still controls 80% of the long-distance market. This so-called banded-rate approach is similar to one that AT&T; proposed on Monday to the California Public Utilities Commission, which regulates long-distance calling within the state.
The FCC is not expected to vote on its long-distance proposal until next year. But this fall Judge Greene is due to decide whether the so-called Baby Bells issue should be allowed to enter the currently forbidden fields of electronic information services and equipment manufacturing as well as long-distance calling.
As hearings unfolded in U.S. District Court in Washington earlier this year, Greene expressed astonishment when the Justice Department, supported by the FCC, reversed its pre-divestiture position and called for unleashing the Baby Bells.
Justice insisted that conditions have changed substantially since divestiture. “The world is very different with eight competing firms (the seven regional companies and the divested AT&T;) than it was with one,” said Barry Grossman, chief of the communications and finance section in the department’s antitrust division.
The restrictions against the Baby Bells, he said, were imposed to ensure that they would not drive fledgling competitors out of business or let telephone service deteriorate. Department officials now believe that there are enough healthy competitors so that the safeguards no longer are needed to keep competition alive.
But AT&T;, its long-distance competitors, electronic information firms and consumer groups have urged Greene to leave the restrictions in place, at least for another three years. MCI, for example, argued that the Baby Bells’ local networks remain “bottlenecks” through which virtually every telephone call must pass; letting the companies that control those “bottlenecks” compete in businesses dependent on those networks would create “irresistible incentives to impede competition. . . . Bell System bottleneck abuses delayed and almost destroyed the advent and early growth of long-distance competition in this country.”
In the first year of the equal-access program under which customers could choose a “dial 1” long-distance service from among several competing companies, MCI pointed out, the Baby Bells favored AT&T; by leaving all customers who failed to make a choice with AT&T.; The FCC eventually required the Baby Bells to allocate those customers among all the competitors.
“We have been on the receiving end of anti-competitive abuses,” McAndrews of Comptel added in an interview. “Wherever (the Baby Bells) have an opportunity to abuse their local bottleneck, they do it.”
Meanwhile, members of Congress, who have largely watched from the sidelines as national telecommunications policy has been reshaped in court and at the FCC, find themselves wondering whether they might enter the fray.
“Everybody’s waiting to see what Judge Green does,” explained John Windhausen Jr., counsel to the Senate subcommittee on communications. But, he added, “There is sentiment that some degree of liberalization is called for” in loosening restraints on the Baby Bells’ activities.
That view is shared, apparently, in the House. In addition, the two most active members on telecommunications issues in the House--John Dingell (D-Mich.), chairman of the Energy and Commerce Committee, and Edward J. Markey (D-Mass.), chairman of its subcommittee on telecommunications and finance--view the FCC price-cap initiative with what Dingell called “deep suspicion.”
“The benefits for the company are clear,” Dingell said, “but it’s hard to see the benefit for the customers or for the public at large.”
For now, however, Congress and telecommunications executives alike are waiting for the FCC and Greene to act before deciding on their next move.
