American consumers have been paying about $2 billion a year more than they should for local phone service, the Consumer Federation of America charged in a report made public yesterday.
CFA did not allege that consumers are being illegally overcharged. Rather, it said that since 1985, federal and local regulators have allowed the country's seven regional telephone companies excessive rates of return on equity, generally three or four percentage points above the average for American corporations.
By bringing their earnings in line with the corporate average and eliminating accelerated depreciation granted to them in many states or localities, rates paid by consumers could be lowered by about $2 billion a year, CFA said. The group said it based the corporate average on figures for 1,000 U.S. corporations compiled by Business Week magazine.
"If you've got virtual monopolies out-earning risk-taking competitive companies three years in a row, there's something wrong with the regulatory process," said Gene Kimmelman, CFA's legislative director.
Bell Atlantic Corp., the telephone operating company that covers the Washington area, condemned the study, as did other operating companies. "Our earnings are perfectly appropriate when compared to successful, well-managed, high-tech firms like Bell Atlantic," Dave Berry, vice president for federal regulatory affairs, said in a statement.
CFA said local residential charges by phone companies had risen to a current rate of about $16 a month from $10.50 a month in January 1984, when the seven companies were spun off from American Telephone & Telegraph Co. in a court-supervised breakup.
Consumer fees generally are devised by first determining a maximum rate of return for the company and then working backward to set fees at levels that would allow the company to achieve that return.
Some phone companies and regulators around the country are proposing a new philosophy, the "price cap." The idea is to set rates that would be subject to increases based on inflation or reductions due to increased productivity. Companies would be free to make whatever rate of return they could manage within those restraints.
This would give new incentives to the phone companies to be more competitive, advocates of the price cap concept say.
The CFA, however, said that by advocating the price cap and other forms of regulatory change, the companies are hoping to freeze rates at what CFA called current artificially high levels and that the old, rate-of-return system should be retained. However, it contends, regulators should reduce the maximum permissible rates of return.
Regulators generally say that current ceilings on return for phone companies are appropriate, given the cost of capital and a desire that the companies make a good enough profit to continuously modernize the nation's telecommunications network.