FCC Proposal Calls for Cap on AT&T; Rates : Aims to Spur Efficiency by Lifting Profit Ceiling

The Federal Communications Commission disclosed Thursday the details of a telephone regulatory proposal that it said could save long-distance customers $1.6 billion over four years.

Under the plan, the FCC would be able to place caps on what American Telephone & Telegraph can charge long-distance customers. In return, the agency would lift the current limits on how much AT&T; can earn from the business.

The FCC said its proposal, which was approved in concept last August and which will come up for final approval in August at the earliest, is “designed to reduce telephone costs and spur innovation.”

It would let AT&T; choose whether to adopt the new regulatory system or stick with traditional, so-called rate-of-return regulation, which it has strongly criticized as unnecessary in an increasingly competitive business. The new plan would begin next April 1 and be reviewed after three years.

Under the proposed approach, future rate changes would be kept to 3 percentage points below the inflation rate, as gauged by the producer price index. Because that rate is half a point more than the estimated gain in productivity AT&T; will make, the commission said it would give consumers a “dividend” of savings.

The FCC predicted that long-distance rates would decline April 1 because of the effects of the proposal and other factors. Sharp inflation could push rates up, but the FCC said that even in that case price caps would keep long-distance charges from rising as quickly or as much as under profit regulation.

New Incentives

But to protect smaller competitors from predatory pricing, the FCC proposal limits any AT&T; rate cuts to no more than 5% a year.

The commission maintains that by capping rates rather than profits, it will provide AT&T; with new incentives to cut costs, invest in more efficient technology and devise innovative marketing techniques to increase profits. Under the present system, once the company achieves its maximum profit margin, there is no incentive to perform better, the commission noted.

AT&T; still dominates the nation’s $50-billion long-distance telecommunications market, followed by MCI Communications, with about a 9% market share, and US Sprint, with about 7% of the market. Hundreds of smaller, regional companies account for 5% of the business.

AT&T;’s rivals generally try to underprice the giant telecommunications company to win customers. Consequently, any rate cut by AT&T; is likely to prompt similar reductions by the competitors.

Competitors Cautious

Spokesmen for AT&T; said several elements of the FCC proposal would pose a greater regulatory burden than the present system but declined to comment further, pending a detailed study of the plan.

MCI and US Sprint also greeted the proposal cautiously, but neither voiced opposition. The Competitive Telecommunications Assn., which represents several hundred of AT&T;’s smaller competitors, particularly welcomed the limit on how deeply AT&T; would be able to slash prices in one year.

FCC Chairman Dennis R. Patrick called the proposal “a rare opportunity to make both consumers and industry better off by eliminating inefficiencies and perverse incentives created by an outmoded form of regulation.” The proposal, he added, includes “a multitude of safeguards to protect consumers.”