The Federal Communications Commission voted unanimously in Washington Thursday to loosen its grip on American Telephone & Telegraph Co.'s long-distance prices in a move that it said will save customers money and enable AT&T; to respond better to growing competition in the nation’s fast-growing telecommunications market.
The new regulatory system, effective July 1, will set upper and lower limits on current price levels and let AT&T; then price its services anywhere between them. The limits will be adjusted annually.
The so-called rate-cap approach will save residential phone customers $700 million and business customers $200 million over the first four years, the FCC estimated.
For nearly 30 years while AT&T; was a monopoly, the FCC set all interstate phone prices at levels that it calculated would cover AT&T;'s actual cost plus an allowable profit, currently 12.2%.
Scrapping that is “a milestone,” said FCC Chairman Dennis Patrick, who has championed rate-cap regulation for more than two years. “We simply can no longer have a regulatory approach that was crafted in the 1960s” to regulate what was then a monopoly, Patrick said. “It is simply outdated.”
Under the new system, if AT&T; can lower its costs, it can increase its profits.
The commission said also that, in a year, it will probably extend this same flexible pricing approach to the interstate operations of Pacific Bell and other local phone companies that were formerly part of AT&T.; Those companies charge long-distance carriers for originating and completing their customers’ long-distance calls.
“We have gone a long way toward accommodating the concerns and questions raised by consumer groups, competitors and members of Congress,” Patrick said in an interview.
Patrick predicted that residential as well as business customers--and AT&T; shareholders--will be better off under the plan, with a speedier flow of new product offerings by the telecommunications giant as well as lower prices. He termed the approach “incentive regulation” because the better the utility performs, the more it will benefit.
The 3-0 vote had to be unanimous to carry because the five-member commission has two vacancies.
Increase Tied to Inflation
Under the rate-cap approach, AT&T;'s long-distance prices may rise by no more than the annual rate of inflation, minus 3% to allow for higher profits arising from improved technology. For example, if the consumer price index increases 5%, AT&T; may raise prices by no more than 2%; if the index increases 2%, the rates drop 1%.
In explaining the 3% deducted from the inflation rate, the FCC said AT&T;'s average annual gain in productivity is 2.5%, and it called the additional one-half of a percentage point a “dividend” for the consumer. It said the plan would alleviate the effects of inflation on residential rates.
“Consumers will benefit from price caps,” the commission said, “because year after year the price caps are adjusted downward in real terms at a faster rate than could be expected to occur if existing regulation were continued.”
The plan calls also for creating three separate groups or “baskets” of prices and services--one of which applies to those used mainly by residential and small-business customers. This segregation is designed to prevent AT&T; from cross-subsidizing its operations--cutting prices for big businesses, for example, and raising them for residential customers.
However, the company must justify cutting the price charged for a specific service by more than 5% in a given year to assure that it is not indulging in “predatory pricing"--setting prices below actual costs in order to combat a competitor. The limit is 4% for the currently deeply discounted late-night and weekend calling rates.
The presence of such price “floors” in addition to the “ceilings” was praised by AT&T;'s competitors.
“If the floors are solid and real and the commission enforces them, then the plan could function in a way that is not detrimental to competition,” said Jerry McAndrews, executive director of the Competitive Telecommunications Assn.
The biggest competitors, MCI Communications Corp. and US Sprint Communications Co., supported the FCC action, with MCI calling it “realistic” and Sprint “an improvement.” Both companies had had problems with earlier versions of the rate-cap approach.
Because of its former monopoly status and still dominant position in the $50-billion telecommunications market, only AT&T; and the Baby Bell regional phone companies that were spun off from it are subject to FCC price regulation.
Several of the Baby Bells--BellSouth and Nynex--issued statements welcoming the move and predicting lower rates when price caps are extended to their charges for completing interstate calls.
State agencies, such as the California Public Utilities Commission, are responsible for regulating local telephone operations and long-distance services entirely within their boundaries. Many states, including California, are reviewing their regulatory procedures.
McAndrews, speaking for the other long-distance companies, said that, although AT&T; does face competition today, “absolutely no such case” can be made for the local phone companies. “They can do what they want, short of regulatory constraints,” he said, “so we think it is completely inappropriate to give them pricing flexibility. There’s a lot of money involved.”
The plan was approved by the FCC despite concerns voiced by a number of consumer groups and some lawmakers who said the FCC was exceeding its legal authority. Thus, while one commissioner called the change “a noble experiment,” Ken McEldowney, past president of the broadly based Consumers Federation of America, said it is “an experiment funded by the customers.”
“We don’t see the FCC saying that, if the ‘experiment’ doesn’t work, we’ll make you whole,” McEldowney said.
Stock analysts who follow AT&T; and other telecommunications companies have supported the price-cap proposal from the outset and generally responded warmly to the FCC action.
“I think it’s a very large step in allowing utilities to compete more effectively--not having their hands arbitrarily tied by the basic rate-of-return regulation they’ve been under,” said Steven M. MacNamara of Bateman Eichler, Hill Richards in Los Angeles. “They can’t gouge (because of the rate caps) but can become more profitable through efficiencies, and that will help customers, the company and shareholders.”
McNamara added that “it will also keep MCI and the other carriers on their toes.”
The stock market appeared fairly noncommittal, perhaps because the FCC action had been widely expected. AT&T;'s common stock closed the day’s trading on the New York Stock Exchange at $32.75, up 12.5 cents.