Pricing Plan Would Cap Long-Distance Rates : FCC May Propose End to Lid on Phone Profits

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From Reuters

Profits of American Telephone & Telegraph Co. and other phone companies could get a boost under a new regulatory system that the Federal Communications Commission is expected to propose today.

The FCC is scheduled to vote on a proposed new pricing system that will impose ceilings on long-distance phone prices but end limits on profits for AT&T; and other phone firms.

The FCC action could be the most significant regulatory decision this year affecting the phone industry, where long-distance revenue totals $50 billion annually.


AT&T;, which has about 72% of the long-distance market, compared to second-ranked MCI Communications Corp.’s 9%, stands to gain the most from the proposed change. That has raised some concerns among consumers and the telephone giant’s competitors.

The FCC must carefully design the plan to satisfy consumer groups, business users and members of Congress who fear that AT&T; will boost profit and deny savings to customers.

“A lot depends on the compromises the FCC can strike,” said Richard Levine, a analyst at Touche Ross & Co.

If the proposal meets stiff opposition, Congress could force the agency to delay until after the November elections, which could bring changes at the FCC, Levine said.

AT&T; has said the regulatory change is a major objective with the FCC this year.

The price of AT&T; shares has been rising in the belief that the FCC’s price cap plan would benefit the company.

Would Provide Incentives

Currently AT&T; sets prices at a level that will cover costs and earn a fixed profit of 12.2%. Under the new approach, AT&T; and others could set their own prices below a cap and earn higher profits by cutting costs.


The new plan would provide incentives for phone companies to be more efficient, introduce new technology and offer new services, a phone industry official said.

The proposal also would apply to regional telephone companies, which link long-distance firms to local phones and derive about 25% of revenue for providing this access.

Currently the former Baby Bells are limited to a 12% rate of return.

Opponents of the FCC plan have taken their objections to Congress, said Robert Harris, a University of California professor at Berkeley.

“Consumer groups are worried that prices would go too high and AT&T;’s competitors were worried they would go too low. Obviously AT&T; can’t do both,” Harris said.

Members of Congress sharply criticized the federal agency earlier this year for failing to develop its own new regulatory system before seeking input from the public and the telephone industry. FCC officials subsequently decided to develop their own plan that answered Congress’ objections.

Details of the new proposal were being closely guarded. But industry sources and financial analysts said they expected the FCC to begin with prices frozen at current levels or slightly lower than at present.


Future adjustments would be tied to a formula 3 or 4 percentage points below the general inflation rate. A similar system is used for long-distance rates in Britain. Thus, the price ceiling for long-distance service would rise at a rate less than inflation.

Annual Adjustments

The agency also may require AT&T; to pass on to customers some of its excess profits if they exceed a certain limit, analysts said.

They also said the plan could call for annual adjustments to the price caps and monitoring by the FCC of the quality of service and phone company earnings.