Federal monitoring of the nation's seven regional telephone companies is inadequate to assure that they do not illegally subsidize their competitive, nontelephone ventures with revenue from their monopolized phone operations, the General Accounting Office said in a study released yesterday.
The GAO urged the Federal Communications Commission, which conducts the monitoring, to increase its staff of auditors and to provide more travel funds for field inspections.
The report said that past FCC audits had turned up no cases of the so-called cross-subsidies. But it asserted that the potential for the practice is growing as the phone companies expand into competitive businesses outside their traditional focus of phone networks.
"Where a firm operates in two markets -- one it monopolizes and another with many competitors -- it has an incentive to subsidize the competitive markets by undercharging for competitive services and/or shifting costs to the captive monopoly market," the report said.
Cross-subsidies would give phone companies unfair advantages against competitors, critics of diversification have long contended, and allow the phone giants to expand their market domination into other fields. Economic efficiency and innovation would also be impaired.
Led by Bell Atlantic Corp., the regional company that covers the Washington area, the seven "Baby Bells" created by the 1984 breakup of American Telephone and Telegraph Co. have advanced into computer maintenance, office equipment leasing, real estate, retailing and software, seeing these new fields as crucial to future growth.
The FCC formerly required such business to be done through separate subsidiaries, to rule out possibilities of subsidies.
In 1986, however, it changed its approach so that the phone companies could operate diverse businesses under one corporate roof. Costs would still have to be segregated, it decided. This has given rise to accounting disputes, the report said, because assigning costs among mingled operations is often open to differing interpretations.
The report said the FCC has only 15 auditors to cover the seven companies, which had operating revenue of $84 billion in 1986.
Much of the FCC's work consists of checking reports prepared by outside auditors hired by the phone companies. The GAO, however, would like to see more independent work by the commission's staff.
Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, which requested the report, used it to attack the FCC. "The report ... that we are releasing today indicates that its plan to prevent cost subsidies is all talk and no action," he said in a statement.
"Congress won't accept replacing the work of government regulators by CPA firms on retainer to the Bell operating companies," Markey said.
Rep. Mark Synar (D-Okla.) also criticized the FCC decision to remove the requirement that new enterprises be conducted through subsidiaries. "At a time when the agency is pushing for less regulation, it has adopted a system that will, in fact, require more regulatory oversight," he said in a statement.
FCC officials said the agency has already made changes to upgrade its auditing and address the GAO's concerns.
"Our travel budget for auditors was limited, so they could not spend a lot of time in the field," said Gerald Brock, chief of its common carrier bureau. "By cutting down on other kinds of travel and putting more existing money into audits, we've already increased our plan for fiscal '88 considerably." Computer operations have also been upgraded, he said. Brock said that the agency would welcome additional funds for auditing, but recognized that a budget squeeze is on.
The report's release came a day after Bell Atlantic Corp. announced that it expects its major diversified companies to have profits of $40 million to $45 million on revenue of about $875 million in 1987.