The Federal Communications Commission yesterday adopted new "price cap" regulations for the eight largest local phone companies that the FCC said should save long-distance callers billions of dollars over the next four years.
The rules, which go into effect Jan. 1, 1991, will reduce the rates the local phone companies charge for interstate services, such as charges for connecting long-distance companies with the local phone network. Lower charges to the long-distance companies will mean reduced charges for customers, the FCC said.
The commission last year adopted price caps for the nation's largest long-distance provider, American Telephone & Telegraph Co., thus ending two decades in which AT&T's profits, not prices, were controlled under "rate-of-return" regulation.
The commission argued then, as now, that regulating the prices phone companies charge, rather than their profits, will give the companies an incentive to lower their own costs or increase customer demand and thereby increase their profits beyond what they could earn under rate-of-return rules.
Complicated formulas that allow the companies to raise prices at the rate of inflation, minus a "productivity factor" that compensates for lower costs of producing phone service, are designed to assure that there are real price reductions.
Under the plan adopted yesterday, the local phone companies also will be required to share with customers any profits beyond a specified upper limit. If the company gets too profitable, it will have to return all its profits to customers. The companies may chose either a 3.3 percent or 4.3 percent productivity offset. The higher number would cut their prices more up front, but would allow them to keep more profits before being forced to share them with customers.
The plan, which first was proposed in 1987, has gone through several major modifications, including yesterday's final version, after critics complained that phone companies benefited too much. There has been strong opposition to the plan on Capitol Hill.
The rules will apply only to the seven regional Bell operating companies and to GTE Corp., the country's largest independent phone company. The seven Bells are: American Information Technologies Corp. (Ameritech), Bell Atlantic Corp., BellSouth Corp., Nynex Corp., Pacific Telesis Group, Southwestern Bell Corp. and US West Inc.
Smaller phone companies will be given the option of adopting price caps while the FCC further studies whether to make the price caps mandatory for all companies. In the meantime, the interstate revenues of smaller companies will continue to be regulated under traditional rate-of-return regulation, which allows companies to earn up to a certain percentage of their investments.
The FCC yesterday also voted to lower the allowable rate of return from 12 percent to 11.25 percent.
States, not the FCC, regulate the local earnings of phone companies, and some states already have adopted price cap-type rules for local phone revenues.