2 Phone Companies Fined, Told to Return $35 Million

The Federal Communications Commission today imposed a $1.4-million fine against New York Telephone Co. and New England Telephone & Telegraph Co. and ordered them to return $35 million to customers for alleged violations of rules governing transactions with an affiliated company.

The commission’s action-the largest federal penalty against a phone company-targets the two subsidiaries of the NYNEX Corp. and is based on the findings of an audit initiated during 1988 to investigate procurement practices involving NYT, NET and their non-regulated affiliate, Materiel Enterprises Co.

“The bureau audit focused on compliance with the affiliate transaction rules and policies, which are designed to protect ratepayers and competition from harmful cross-subsidies,” the FCC said.

The rules provided that when a regulated telephone company purchases supplies or services from an affiliated company, the telephone company can recover from ratepayers no more than the cost that would have been incurred in an “arm’s length” transaction.

The FCC said the three companies engaged in a series of transactions between 1984 and 1988 designed to increase the overall profits of their parent company, NYNEX Corp., at ratepayer expense.

The FCC said its audit revealed that NYT and NET purchased equipment, supplies and services from MECO at prices that were inflated by $118.5 million. Approximately $35 million of these inflated costs were passed along to interstate ratepayers, the FCC said.

The commission’s order directs NYT and NET to show cause within 30 days why they should not make the ratepayer refunds and pay the fines.