Local Telephone Rates Called Too High : Users Out $6 Billion as Firms Rack Up Big Profits, Group Says

Excessive local telephone rates have cost consumers nearly $6 billion and helped regional Bell phone companies earn big profits since the breakup of the Bell system, a consumer group said Tuesday.

In a report titled “Take the Money and Run,” the Consumer Federation of America also cautioned that reducing regulation of the Bell companies will produce more bad news for customers.

The study said average local monthly residential charges have increased to about $16 from about $10.50 in January, 1984, when the Bell system was broken up.

It said rates increased three times faster than inflation for the same period. Nearly half the increase is from the subscriber line charge, which rose to $2.60 per month last July from $2.

Since the Federal Communications Commission implemented the charge in 1985, more of the costs of maintaining the local network have been shifted to local subscribers and away from long-distance callers. Before 1984, local network costs were subsidized by long-distance rates.

The consumer federation said Bell firms are charging too much for local service and are trying to persuade government regulators to lift limits on their profits in exchange for caps on rates.

“Starting from a set of rates that are much too high, they are seeking to completely deregulate many services and to end rate-of-return regulation on the rest, thereby locking in excess profits,” the report said.

Bell companies responding to the report disagreed with its conclusions and disputed the group’s view that replacing the traditional regulatory regime with rate caps would drive up phone costs.

Ameritech said the consumer group “is whistling a tired old tune that’s still off-key.” In Ameritech’s region--Illinois, Indiana, Ohio, Michigan and Wisconsin--the local phone companies haven’t had a general rate increase since 1985, and basic phone service is available for $10 a month or less, the company said.

BellSouth faulted the consumer group’s track record in predicting industry trends and said its report on overcharging “will be found equally erroneous.” The company said the group predicted that the addition of the subscriber line charge would drive 6 million poor subscribers off the network. Instead, telephone penetration has increased.

Gerald Brock, the FCC’s top telephone official, defended the agency’s regulation of the Bell companies and said the 12% rate of return set for them was “a fair balance and an appropriate level.

“The (Bell) companies believe 12% is too low, and some groups believe it’s too high,” he noted. The FCC prescribed the rate “based on the state of the market and returns of other companies. It was the commission’s best judgment,” he said.

The seven regional Bell holding companies were spun off from American Telephone & Telegraph when AT&T; was broken up by an antitrust decree Jan. 1, 1984.

Since then, the Baby Bells have grown rapidly, registering sales at twice the national average in 1985 and 1986 and consistently paying dividends higher than many of the top 1,000 U.S. corporations, the consumer group said.

“This reflects the fact that economic growth was strong and that the (regional Bell companies) face little if any threat to their monopoly business,” the report said.

Gene Kimmelman, legislative director for the consumer group, said that while the Baby Bells’ rates of return are within the percentages allowed regulators, the rates are higher than those for most large unregulated companies.

He said that while the FCC allows the Bells to earn 12% on its federally regulated business, many states have authorized rates of 13% and 14%.

The average rate of return for the top 1,000 corporations was 10.9% in 1987, compared to 13.6% for the Baby Bells, the report said, citing Business Week figures.

The Bells’ rate of return over that of the 1,000 corporations amounts to nearly $5 billion, the consumer group said. In addition, the group said, depreciation rates produced nearly $1 billion in excess charges in 1985.

The inflated charges mean local rates are about 5% to 7% too high, the group said.