Limit on AT&T; Profits Removed; Cap Put on Long-Distance Charges

From Reuters

The Federal Communications Commission today approved American Telephone & Telegraph Co.'s plan to put a lid on its long-distance telephone charges but remove the ceiling on its profits.

The plan, which takes effect July 1, will modify the regulations set when AT&T; had a monopoly on the nation’s long-distance services and further intensify competition in that $50-billion market.

Under the plan, AT&T;'s long-distance rates can rise no more than the rate of inflation minus 3%. If inflation is 5%, for example, the company can increase prices 2%.

But within that constraint, AT&T;'s long-distance profits will be allowed to rise without limit. The company can choose its own rates within the price ceiling and keep any savings it achieves through cutting costs and bolstering productivity.


Wall Street reacted favorably to the news. AT&T; shares rose 12.5 cents to $32.75 as the New York Stock Exchange’s second most-active issue this morning.

AT&T;'s profits are currently limited to a 12% return on investment--a holdover from its days as a monopoly. AT&T; had complained that rivals U.S. Sprint Communications Co. and MCI Communications Corp. have no such restrictions and that the profit limit took away its incentive to cut costs or improve efficiency.

The FCC estimated that the plan will save long-distance customers $900 million over the next four years, with $700 million going to residential savings and $200 million to business savings.

To assure that AT&T; spreads out savings equally among its customers, the regulation requires it to separate operating costs into three baskets: residential and small businesses, large businesses and special services using toll-free 800 numbers.

Separate baskets will prevent AT&T; from cross-subsidizing its operations and assure that residential and small business users benefit from the new plan, FCC Chairman Dennis Patrick said.

Federal regulators have spent two years studying the plan, which is expected to pressure the long-distance rivals that have dogged AT&T; since the 1984 breakup of the Bell System. AT&T; controls 67% of the U.S. long-distance market.