In a decision that may dwarf even the massive government rollback of cable TV rates in 1993, federal regulators on Thursday will decide whether consumers and businesses will get a multibillion-dollar break on their phone bills.
The Federal Communications Commission is expected to modify rules that determine how much long-distance carriers pay local telephone companies to route toll calls to their destination. Long-distance companies now pay about $23 billion a year for the service under current regulations, so a rate change--which could go into effect as early as July--could have a huge impact on an industry that is in the midst of spending billions to modernize the nation's existing telephone network.
"A lot is at stake here," said James L. Lewis, a vice president at MCI Communications Corp. "We're talking about a huge amount of money."
The issue pits the regional Bells and other local phone companies against consumers, businesses and long-distance carriers who argue that local phone companies don't deserve nearly half of all long-distance revenue just for carrying a toll call the last leg of its journey.
Bradley Stillman, legislative director for the Consumer Federation of America, estimates that phone subscribers would save $6.5 million a day if the FCC eliminated loopholes in the current access fees that allow phone companies to earn annual profits of as much as 14%.
"Right now, consumers pay way too much for phone service," Stillman said.
The regional Bells counter that revenue from the access fees is sorely needed to underwrite unprofitable phone service in rural areas as well as pay for network upgrades and service for all customers.
"These revenues are largely used to subsidize phone service in rural areas and that ability will clearly be threatened if the FCC doesn't continue some form of rational rate making," said Roy Neel, who heads the U.S. Telephone Assn., a Washington, D.C., industry group.
"We've been struggling with the recession the past few years in California and we've got big investment commitments to meet in terms of improving our service to customers," added Alan Ciamporcero, director of FCC relations for Pacific Bell. "This decision will have a very significant impact on our future both financially and in terms of giving us more flexibility from regulation."
The dispute centers on a little-known and complex economic formula adopted by the FCC in 1990 that caps the amount local telephone companies can charge long-distance firms for access. The formula was designed to yield an 11.25% annual profit margin and to encourage phone companies to operate more efficiently instead of "gold plating" their networks with state-of-the-art equipment to justify rate increases.
Critics say that despite the cap, local phone companies' earnings on the access charges have soared to as high as 14% in recent years. The increase occurred, experts say, because the formula did not anticipate dramatically declining interest rates or productivity gains that have allowed the telephone industry to serve millions more customers even as it laid off tens of thousands of workers over the last five years.
And, unlike the old days of phone rate regulation, the money hasn't been plowed back into fancy capital improvements, said Bruce Kushnick, director of the New York consulting firm New Networks Institute.
Instead, Kushnick said, the access fees have fattened the phone company's bottom line and helped the industry bankroll unrelated local phone ventures ranging from overseas cable TV operations to underwriting corporate golf tournaments.
"Since there is no competition today, the Regional Bells have simply made more money from monopoly subscribers," Kushnick wrote in an exhaustive 272-page report examining their finances. "In fact," Kushnick continued, "almost all other (telephone financial ventures), from the $19 billion spent on foreign investment to the $7 billion in losses from real estate and financial services, have done little for cash flow or profits."
The crucial telephone rate ruling comes as Congress is debating legislation that would end telecommunications monopolies and allow cable TV firms, local phone companies and long-distance carriers to compete in each other's markets.
While nearly all telecommunications officials say they support such competition, some officials say the present access-fee arrangement could give local phone companies a wide competitive advantage over telecommunications newcomers who aren't allowed to earn monopoly-style profits.
"Telecommunications is a declining cost business, like computers . . . and the telephone companies are simply engaging in price-gouging," said Brian Moir, a Washington, D.C., communications lawyer who heads a coalition of business and consumer groups seeking to have access charges reduced.