Edward F. Burke, a key state regulatory official, sat at a kitchen table in his Providence, R.I., home a few days ago, listening carefully to a makeshift tape recording of an extraordinary antitrust announcement. What he heard did not make him happy.
Burke, whose job includes trying to keep Rhode Island's telephone rates from getting too high, was replaying the official announcement of the impending breakup of American Telephone & Telegraph Co., the biggest divestiture in U.S. corporate history. He wanted to hear every word spoken by Assistant Attorney General William F. Baxter and AT&T Chairman Charles L. Brown.
But by Burke's calculations, the two men spent less than five minutes on what worried him most--the fate of the nation's 22 local telephone operating companies, the industry's mainstay. "I do not say that in criticism of Baxter and Brown," Burke noted. Yet he pointed out that the local phone firms, which seemed to get short shrift, may account for two-thirds of the Bell System's $136 billion in assets. Speaking with the cautious understatement typical of regulatory debate, Burke added, "We want to make sure that the divestiture is not to the disadvantage of the local operating companies."
Burke, who serves not only as chairman of the Rhode Island Public Utilities Commission but also as president of a nationwide association of state regulators, is not alone. State regulatory officials across the nation, including some in the Washington area, are deeply troubled by the move to split up AT&T. They describe the agreement itself as ambiguous. They fear that state utility commissions could lose some traditional regulatory tools. And they warn that phone bills could go sky-high.
If the local operating companies get shortchanged in the AT&T breakup, says California Public Utilities Commission attorney Martin Attes, "Then it doesn't matter how much regulatory authority we have. All we'll be doing is authorizing rate increases. And it will be a vicious spiral."
District of Columbia People's Counsel Brian Lederer, whose office represents consumers in regulatory proceedings, wants the states to step in to make sure the AT&T divestiture doesn't lead to unfair phone rates. "The state authorities still have the ability to say 'No,' " he says.
"You can bet your bottom dollar I'm going to write and call every congressman and senator from Maryland," says John K. Keane Jr., Lederer's Maryland counterpart. He warns of a risk that AT&T may "dump" its heaviest costs on local phone customers. "The game is not over and all of the cards haven't been played," People's Counsel Keane adds. "It just looks like the game is going to be played a lot faster."
In Virginia, State Corporation Commission communications chief Edward C. Addison worries about phone customers in small towns like Clover. "Who's going to want to serve them with long-distance?" he asks. "We don't want to see those small places left high and dry."
Burke's own group, the National Association of Regulatory Utility Commissioners, has asked to intervene in the AT&T proceedings now before a U.S. District Court judge in Washington. "The potential for impact upon ratepayers would be immense and perhaps unparalleled in regulatory history if the court approves the AT&T splitup ," the association contends in its petition. Attorneys general from 24 states, including Maryland, have also sought to intervene in the court proceedings.
The Jan. 8 antitrust agreement would require AT&T within 18 months to divest itself of its 22 local operating subsidiaries, including the Chesapeake & Potomac Telephone Co. AT&T would retain its profitable long-distance operations, its Western Electric equipment subsidiary, and Bell Telephone Laboratories, its research arm. The 22 local operating companies would form a separate corporation or series of corporations to offer basic local phone service.
Among the issues troubling state regulators are these:
How will Ma Bell's enormous assets be split up? They fear that the local operating companies could get stuck with the costliest and least profitable facilities, equipment and employe sections. If so, they argue, these heavy costs would be heaped on basic local phone rates.
Who will control the fees paid to local phone companies by AT&T and its competitors for hooking long-distance service into the local networks? And how high will these special new fees be set? Such access fees could be a primary means of holding down local phone rates.
Will state regulators lose control of intrastate toll service, long-distance calls within a state's boundaries? State officials object both to a possible reduction in their traditional authority and to prospects of diminished intrastate toll revenues. The result, they say, could be a further rise in basic local phone rates.
Will the local phone companies be reimbursed for their anticipated loss of hundreds of millions of dollars in annual revenues from Yellow Pages advertising? AT&T is expected to take over the Yellow Pages directories.
Will local operating companies need a higher rate of return to offset possible increases in their costs of borrowing and raising money through bond and stock offerings? If so, local rates could go up. Financial analysts have expressed uncertainty about the local phone companies' prospects because they will only be allowed to engage in regulated businesses.
In addition to these financial issues, some state regulators voice concern about the future quality and availablity of some phone services. They worry that AT&T may take away its most skilled executives, leaving local companies with less knowledgeable administrators. They wonder whether the local companies will still be allowed to offer popular areawide basic service, with unlimited toll-free calls across state or phone-exchange boundaries. Public pay phones, some state regulators say, may be removed from their control.
Underlying many of these issues is the regulators' long-standing view of their fundamental task: to assure that phone service is as widely available as possible. High basic rates, they believe, would deny telephones to lower-income households. The issues are clouded partly because many details remain unsettled. Under terms of the agreement, AT&T would have six months to propose a specific divestiture plan. Court proceedings have not concluded. And Congress is considering telecommunications legislation.
"We've got a tremendously complicated situation facing us," says Maryland Public Service Commission Chairman Thomas J. Hatem. "We are very much worried that costs could be imposed on our citizens in a manner that we could not as effectively deal with."
How AT&T's assets are divided up involves highly complex, multibillion-dollar accounting decisions, already stirring widespread controversy. "If assets transferred to AT&T from the operating companies were undervalued, detrimental impact upon local ratepayers would be inescapable," the national regulatory commissioners' association warns in its court petition.
One major accounting question will be how to price the Bell System's terminal equipment, ranging from simple home phones to computerized business switchboards. AT&T is to own this equipment. The issue is how much the local operating companies will be paid as compensation. Terminal equipment has been carried on AT&T's books at $12.7 billion, according to a year-old computation. But its market value, officials say, may be several billion dollars less--a gap likely to cause sharp dispute.
A battle may also be shaping up over the access fees that long-distance companies will pay for their connections into local phone systems. Communications specialists appear divided as to whether regulation over these fees will be in the hands of the Federal Communications Commission or the state utility commissions.
"Absent legislation, it looks like state commissions will probably set access fees," says communications lawyer Thomas J. Casey, expressing one of the conflicting viewpoints. "It may be that it sets up a fight between the FCC and state regulators." The FCC, he adds, "could assert a right to step in. No doubt, a state would object and would go to court."
Whoever regulates them, the access fees seem likely to be a point of contention. "The higher you can keep access charges, the lower you can keep local rates," notes Charles Zielinski, a Washington lawyer and former New York Public Service Commission chairman. But Zielinski argues that the fees may be partly held in check by other factors. If they are raised too high, he says, long-distance companies may be pushed to come up with other options, such as providing long-distance communication through cable television systems. "And that's not totally pie in the sky," he cautions.
Central to the regulation of access fees is a continuing controversy about long-distance and local rates. Despite growing disagreement, many officials contend that long-distance rates are set artificially high and act to subsidize low-priced local service. If such a subsidy exists, the access fees would offer state regulators a means to perpetuate it.
Similar issues are raised in the setting of charges for intrastate long-distance calls. In the Washington region, for example, C&P spokesman Web Chamberlin says both interstate and intrastate long-distance calls are priced above the phone system's costs. The additional revenue, he notes, helps reduce other rates, including those for basic local service.
If the average cost of an interstate long-distance call is $2.55, Chamberlin says, 90 cents amounts to an excess charge used to help pay for other services. For intrastate toll calls, he says, the excess charge is somewhat less, though C&P could not provide a figure. Such computations are disputed, however, by some local officials.
Though the issue is less complex, revenue from Yellow Pages ads is no small item for local phone companies. C&P spokesman Chamberlin says annual net income before taxes and other adjustments from the white- and yellow-paged directories amounts to nearly $50 million in the District, Maryland, Virginia and West Virginia. Most of this revenue, he says, comes from the Yellow Pages. Computations by the national regulatory commissioners' association indicate that loss of Yellow Pages income could lead to increases in monthly phone bills of 71 cents in the District, $1 in Virginia and $1.46 in Maryland.
Faced with climbing phone costs, state regulators are already looking for ways to keep basic service relatively cheap. Pressure is mounting to institute measured local rates, with charges reflecting the time of day, duration and distance of a call. "We're going to look at every possibility and see what we can do," says D.C. Public Service Commission Executive Director Melvin Doxie. Perhaps, he adds, a special low-priced service could be offered, allowing a household a single phone and one call a day.