More than $6 billion a year worth of telephone calls is at stake in a widening regulatory battle expected to help shape the future of local phone service throughout the United States after the planned breakup of American Telephone & Telegraph Co.
This gigantic phone bill--estimated at $6.4 billion to about $10 billion annually--is key to determining how high local rates will rise, according to government officials and communications specialists. "This is the primary issue," says Steven G. Chrust, a telecommunications analyst for the New York investment firm of Sanford C. Bernstein & Co. A Federal Communications Commission official called it the "central, critical" factor.
The multibillion-dollar figure, which represents the yearly costs of an array of equipment used in running the U.S. phone system, is currently included in the price of long-distance calls. If it were paid instead by local phone-service customers, local rates could climb by about 20 to 40 percent on average, some industry figures indicate. AT&T is pressing for a big cut in its long-distance costs, regulatory officials say, and a shift in this direction now appears likely.
"All the parties recognize that there's going to have to be some change," notes JoAnn Hanson, a Minnesota regulatory official who heads the staff of a key federal-state board debating the issue. "There is a lot of concern on the state side," she adds. State officials are among those most worried about major increases in charges for basic local service.
Predictions of rapid increases in local phone rates have stirred widespread controversy since last month's historic announcement of the antitrust settlement between AT&T and the Justice Department, the biggest U.S. corporate divestiture ever. Critics have warned of a possible doubling or tripling of local rates, though AT&T and others dispute such forecasts. The antitrust agreement, still under review by a federal judge in Washington, would require AT&T to give up its 22 local operating subsidiaries, including the Chesapeake & Potomac Telephone Companies. AT&T would retain its long-distance service, along with Bell Laboratories, its research arm, and Western Electric Co., its equipment manufacturing enterprise.
How much of the multibillion-dollar equipment costs should be charged to local instead of long-distance callers was already under debate before the antitrust settlement was announced. Moreover, AT&T officials say any shift in these costs will occur gradually over several years. "Politically, you can't do it in one jump now," says Hal D'Orazio, an AT&T executive who specializes in cost allocations.
Nevertheless, these expenses, along with numerous other regulatory matters, have now become intertwined in the national debate about breaking up AT&T. Many officials believe that future increases in local rates will hinge, to a considerable extent, on the review of the formula for splitting up the costs of plants and equipment, an extraordinarily complex issue that has largely escaped public attention. Any shift would have special impact now because local rates are already being pushed upward by inflation and other factors, including changes in depreciation methods.
The debate about who should pay for these costs also raises two other issues. First, the costs are the focus of a much-disputed assertion by AT&T that low-priced local service is subsidized by excessive long-distance rates. This contention is challenged by the Justice Department, several economic consultants and some of AT&T's competitors, including MCI Communications Corp. and Southern Pacific Communications Co.
Second, how the formula governing these costs is revised may shed light on whether the antitrust settlement brings about rate increases. AT&T and some other officials argue that rate rises stem from other factors, not the antitrust accord. But some officials say the terms of the agreement may directly influence the cost-splitting formula and lead to higher local rates.
Prospects of substantial increases have stirred concern partly because a big jump in local rates would likely cause some customers to give up their phones, especially in lower-income households. Lewis Perl, senior vice president of National Economic Research Associates, says recent studies raise this possibility if local phone rates climb at a faster pace than inflation.
About 91 1/2 percent of America's more than 80 million households now have phones, Perl estimates. If phone rates rise by 50 percent beyond inflation, he says, this proportion would drop to 88.2 percent. If rates double, he calculates, it would fall to 83.7 percent. Among low-income households, Perl estimates, 79.3 percent now have phones. That would decrease to 72 1/2 percent if rates rise by 50 percent, he says, and to 64 1/2 percent if rates double.
The costs under study by the federal-state panel fall into a controversial bookkeeping category. It comprises telephone equipment and plants whose costs remain moderately stable, neither rising nor decreasing with changes in how many phone calls are made. Because the expenses do not vary with telephone use, officials say, no wholly satisfactory method has ever been devised for splitting these costs between long-distance and local service customers.
"There are zillions of ways to allocate those costs and none of them are in any way more objective or in any way more arbitrary than any of the others," says a former FCC economist. The items whose costs fall into this category include home phones and business switchboards, wiring installed in homes and offices, phone poles and cables that go to plants housing electronic switching equipment, and some of the equipment in those plants.
Slightly more than one-fourth of these costs is currently included in long-distance rates, according to government and AT&T officials. Estimates vary, however, partly because of differing economic adjustments. One 1981 estimate supplied to the federal-state panel was $6.4 billion. Another estimate provided to FCC officials was slightly over $7 billion. AT&T's D'Orazio put the figure at $10 billion for the telephone industry, including $7.8 billion for the Bell System alone. Telecommunications analyst Chrust also estimates $10 billion--for next year. Forecasts for the next five years point to substantial increases unless the formula used to compute this sum is altered.
Federal, state and telephone industry officials debating this issue have made some recent headway. The seven-member panel of federal and state officials has proposed a temporary freeze on the proportion of these costs that goes into long-distance rates, and further recommendations are expected by the end of the year. Some officials say the AT&T antitrust settlement will have little effect on these proceedings; others are far less certain.
"The consent decree embodying the antitrust agreement makes things topsy-turvy. It changes the rules of the game," says Allan Bausback, a New York State regulatory official who is on the staff of the joint federal-state panel. "It will definitely influence what the joint board will do."
AT&T, faced with growing competition from other long-distance companies, has sought a major decrease in the proportion of plant and equipment costs included in long-distance rates. Bell System officials argue that long-distance calls account for only about 8 percent of the time these parts of the phone network are used.
Since long-distance rates finance more than 25 percent of these costs, the AT&T argument goes, long-distance customers are paying too much and are, in effect, subsidizing basic service rates. AT&T officials say they want the long-distance share of these costs reduced by about two-thirds over a five-year period--from more than 25 percent of total expenses in this category to about 10 percent under a modified formula.
State utility commission officials oppose a drastic cut in costs allocated to long-distance service, chiefly because they fear possible rises in local rates. Some independent phone companies are also troubled by prospects of reduced payments for long-distance service. "Some of our rural companies could really get killed," says Jan Reimers, an official of the U.S. Independent Telephone Association, an industry group. Rural phone companies depend heavily on long-distance revenues.
The antitrust settlement would establish a new mechanism for splitting costs between long-distance and local service, although whether it will fundamentally alter the current federal-state proceedings is unclear. A preliminary FCC staff analysis warns that disputes about this issue could lead "to confusion if not chaos."
Under the antitrust agreement, local phone companies would charge a fee to allow long-distance corporations, including AT&T and its competitors, to hook up their calls with the local networks. This access fee would become the chief means of passing on a proportion of the costs for plants and equipment to the long-distance firms.
Especially troubling to regulators who want to hold down local phone rates is a provision in the antitrust accord requiring that access charges be "cost justified." They fear this may be construed as a severe limit on how high access fees may be set.
Even before the antitrust settlement, local phone rates were expected to rise because of inflation and other factors. An FCC-instituted change to faster depreciation methods is expected to require $1.4 billion more in additional yearly telephone revenues. Another FCC shift toward shorter-term payment procedures for installing telephone wires in homes and offices is forecast to add another $1.4 billion to phone rates this year and nearly $2 billion next year. Rates may be also be affected--although this issue is embroiled in controversy--by recent moves to deregulate prices of terminal equipment, ranging from home telephones to computerized switchboards.
Some officials contend the antitrust settlement may lead to higher local rates for other reasons. They cite possible loss to local phone companies of hundreds of millions of dollars in yearly advertising profits from Yellow Pages directories, which AT&T is expected to take over. They express concern that an unfair splitup of AT&T's $137 billion in assets and liabilities, including valuable bonds and stock, could damage local companies. They say local companies may have to pay higher interest rates to borrow money and may be run less efficiently without some centralized AT&T services.graphic 1: Graph of Average Monthly Charge For Basic Local Phone Service (Source: AT&T company, August 1981) graphic 2: Telephone equipment is one of the costs under study by the federal-state panel.