Phone companies like proposed rules for long-distance rates. Hikes would be based on inflation, without limits on profits

Recent signs that inflation may be warming up worry a lot of people, but they should make Telephone companies more eager to accept FCC proposals for changes in the way long-distance phone rates are regulated. However, they may make consumer groups more worried about higher rates. Under the proposed Federal Communications Commission regulation, the American Telephone & Telegraph Company and the seven regional Bells would be able to increase their long-distance charges each year with the rate of inflation, minus 3 percent. That 3 percent is supposed to guarantee that consumers will benefit from any increase in the phone companies' profits. So when inflation is running at 4 percent, for example, the companies would be allowed to raise their rates 1 percent. If inflation was 3 percent or less, they could not raise rates.

Allowing phone companies to raise their rates based on inflation is a complete switch from current regulation, which limits the profits they can make on their long-distance business: 12.2 percent for AT&T and 12 percent for the local Bell companies. Under this system, rates have been steadily declining. The FCC says the switch to price caps encourages companies to boost their profits by improving their efficiency. Higher profits, this thinking goes, would then be passed on to consumers in the form of lower rates.

While neither AT&T nor the local Bell companies have seen the Federal Communications Commission's soon-to-be-released 250-page document on the proposal, they are generally encouraged by the regulators' shift away from historical rate-of-return regulation.

NYNEX, a regional Bell company that serves New York and New England, praises the FCC's apparent intention ``to give [phone companies] incentives to create a feature-rich telephone network.''

``If we're going to have an information age, we have to provide the telephone companies with a large amount of money for reinvestment,'' says Richard Vietor, a professor at the Harvard Business School. He says the current system of regulation limits both the amount of money available to these companies for new investment and the incentives to invest.

In dropping these restrictions, and instead setting a limit on what companies charge for long-distance calls, the FCC says, users can save $1.6 billion in the first four years of the change. The new regulation would affect both long-distance rates and access fees that long-distance carriers, like MCI and Sprint, pay for connection to local phone companies. But individual holding companies would have the right to adopt this new system or retain the current rate-of-return regulation.

``While we believe price caps are better than current regulation,'' an FCC spokeswoman says, ``it's never been tried out before on the scale we propose to employ it, so in an important first step, we believe it's necessary to make it voluntary.''

The commission is hoping to put the plan into effect April 1 next year, if legislation introduced in February - which would delay any applying of price caps until the ramifications are known - does not get through Congress.

Rep. John Dingell (D) of Michigan, chairman of the House Energy and Commerce Committee, is fighting the proposal, which he said regulates ``without regard to underlying costs and profits.'' Since the FCC is allowing companies to choose whether they want to be regulated by price caps, or continue the rate-of-return system, he calls the proposal ``a case of heads, they win; tails, we lose.''

``When we finished going through the numbers, it's clear that rate payers are disadvantaged,'' says Brian Moir, a lawyer at the International Communications Association, a trade group of large phone customers. ``If the commission's proposals were in effect for the past three years,'' he says, ``rate payers would have been paying higher rates.''

By the 1990s, Mr. Moir says, most of the phone companies' capital investment costs will be off their books.

So instead of having those high costs, expenses will fall, he says. ``These companies want their artificially high costs to be frozen high before they go down.''

Consumer groups, while not opposing price caps per se, do believe the caps would reverse the recent downward trend in long-distance rates.

``Under rate-of-return regulation, rates have not been rising with inflation,'' says Pamela Gilbert, a staff lawyer at the US Public Interest Research Group. Now, she says, ``local phone companies are pushing for rate caps on the state level ... they are already making [tremendous] profits.''

But the plan requires that phone companies reduce their rates by 3 percent a year to reflect a comparable increase in productivity, an increase that analysts say the industry currently experiences.

``These phone companies can improve their productivity better than that 3 percent,'' says Patrick Jurczak, a telecommunications analyst at Drexel Burnham Lambert Inc. ``The outmoded rate of return does not provide the same incentives to do that.''

While some of the regional Bell companies are pleased with the progress demonstrated by this updated version of the FCC's first plan, they are concerned with the consumer productivity requirements.

NYNEX says this ``may establish potentially unrealistic productivity goals'' for it and its sister Bells to achieve.

The company also says that because ``much of the structure of rate-of-return regulation seems to remain in effect ... the full benefits of price cap regulation will be delayed.''

John Connarn, vice-president for federal relations at Chicago-based Ameritech, said of the price-cap approach: ``Ameritech is pleased that the plan ... would apply price-cap regulation to both AT&T and local exchange companies.'' But he expressed concern that while the FCC's plan guarantees customers ``a substantial productivity dividend,'' it does not do the same for the companies.