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How consumers will pay and pay.

How Consumers Will Pay and Pay

The traditionally staid telephone industry is in a turmoil. The huge Bell system split into eight parts on January 1; competition has come to long-distance service and to equipment sales; the Federal Communications Commission has made decisions that could profoundly reshape rate structures; and Congress is likely to pass telephone legislation for the first time in fifty years, after it reconvenes on January 23. At stake are billions of dollars in potential profits for A.T.&T. in new lines of business, and continuing monopoly profits for the eight spun-off operating companies. Finally, millions of poor, elderly and/or handicapped Americans may lose vital telephone service, and many other people of modest means may undergo much hardship because of rising phone bills.

One of the most common myths about the Bell system breakup is that a reluctant A.T.&.T. was forced into a disadvantageous settlement of the government's antitrust suit against it. "It wasn't our idea,' complained A.T.&T. chairman Charles L. Brown. No matter whose idea it was, the deal between Brown and Assistant Attorney General William Baxter, chief of the Justice Department's antitrust division, plucked victory from defeat for Bell. It was a very good deal for A.T.&T. About to lose the suit and perhaps Bell Labs and Western Electric, its manufacturing arm, A.T.&T. emerged with a settlement that, as described by Dean Paul McAvoy, one of the corporation's economic advisers, enabled it to unload its "low-profit [local service] exchange operations, leaving it free to focus on competing in the long-distance and equipment markets,' which will be profitable indeed. A.T.&T. also escaped from the states' regulatory arena, where consumer resistance to increasing rates is potent; so it is restrained only by the more permissive F.C.C. and by the competitive market, where its size and market share give it a tremendous advantage. In addition, the settlement released A.T.&T. from the restraints of a 1956 antitrust decree that had kept it out of the highly profitable markets in computers and enhanced services such as data storage and retrieval.

The divestiture is so sensible that the Japanese telephone system, structured like A.T.&T., is choosing to do the same thing. According to the president of the Nippon Telegraph and Telephone Company, it is simply "common sense' to get rid of local phone operations that are regulated and profit-limited and to concentrate on long distance and on telecommunications growth areas.

The immediate problem for consumers is, of course, the avalanche of rate increases levied by the local phone companies --more than $10 billion requested in 1983, and that's just the beginning. A.T.&T. and the F.C.C. reassure us that state regulators have been granting "only' 40 percent of the applications. That comes to "only' $4 billion, far more than what was requested just a few years ago, and in some states the proportion granted has been much higher (in Maryland, the figure is 70 percent).

The local companies are trying to blame the increases on the breakup of the Bell system; in fact, they are the culprits-- "a little more greedy than they should be,' Baxter acknowledged --along with the F.C.C. Within the last few years, the commission has acceded to A.T.&T.'s desire for maximum pricing flexibility in competitive markets like telephone equipment and long-distance service, and has issued three rulings that will cause the cost of local service to sky-rocket: accelerated depreciation of phone equipment, immediate write-off of the wiring inside the consumer's business or residence and a flat monthly fee charged to all local users for access to the long-distance system, no matter how little they use that network.

Advanced telecommunications technologies--data transmission, cable, cellular radio, fiber optics, satellites--offer tremendous possibilities for a varied mix of new and old services. The spun-off companies want to get into the new areas, but that will require capital investment. Where else to get it but from the rate payer, through increased depreciation charges, which have been low until now. That is not unreasonable. If the rate payer is going to use technically advanced services, he or she should pay for them.

But which rate payer? Most of those services, such as high-speed data transmission, custom calling and the like will be utilized primarily by large businesses. The rest of us will require few of them but will still have to subsidize them. For example, the network is being made digital at enormous expense to accommodate high-speed data transmission. Yet for standard (voice) service the current technology, known as analog, will continue to be used. Digitalization will require conversion of each phone conversation from analog to digital and back to analog again, a totally unnecessary cost that will be slapped on all local users.

The claim has frequently been made that long-distance users have been paying excessive rates to subsidize local service. That is misleading. The costs of providing local voice service are quite low; it is the long-distance and newer services that are expensive. People who need only a Chevy are thus being forced to buy a Cadillac.

Bell and its friends have been propagating the subsidy myth for more than fifty years, ever since the Supreme Court ruled that local-service clients could not be forced to pay for the entire system. Despite wide acceptance of the subsidy claim, it remains unproved, as Judge Harold Greene, presiding in the A.T.&T. antitrust case, concluded. For one thing, much communications equipment is used for both local and long-distance service. Dividing the cost of those facilities among different services is necessarily arbitrary, and it is this arbitrary allocation that underlies the subsidy claim.

Moreover, prior to the divestiture, the operating companies had been paying A.T.&T. enormous sums in annual "license fees' for administrative assistance, patent licenses and almost all their legal and other services; they have also bought equipment from A.T.&T.'s subsidiary Western Electric. There is no reason to think that A.T.&T. had been charging bargain prices, since the operating companies provided a captive market of customers, to whom they could routinely pass along the high prices. And it is becoming clear that the quality of much of the Western Electric equipment has been inferior to that of its competitors, and is often grossly overpriced.

The subsidy myth pervades the access charge debate as well. In December 1982, the F.C.C. ruled that the $7 billion aggregate currently paid on a per-call basis by interstate long-distance users as their share of the fixed costs of the phone system should be shifted to local users on a flat-rate basis. The theory is that the local customers have to pay for those costs anyway, so the so-called marginal cost of long-distance callers using those facilities is zero. Ultimately that charge will amount to about $9 per line every month for access to the interstate long-distance network, and probably an additional monthly $6 to $9 per line for intrastate toll calls.

Those access charges are unfair and unnecessary, and they will cause great hardship. There is no evidence that long-distance service is overpriced, or that it has been impaired. In the recession years 1981 and 1982, the Bell system's revenues from toll calls jumped 28 percent, while the business of other long-distance carriers grew many times that. Even assuming there had been some subsidy from long distance to local, if it helped lower local rates and make universal service possible, it would have been one of the more useful subsidies among the many that pervade our economy.

Furthermore, at least 50 to 60 percent of residential customers and 75 percent of business users make few long-distance calls. Why should they pay a heavy charge for long-distance service? Conversely, why should long-distance users and the carriers get a free ride on the local system? The latter are making enormous profits, and the users most affected are businesses that can easily pass along the charges in negligible price increases. In gas, electricity and other utilities, the usage rates invariably include part of the fixed costs. Up to two years ago, everyone in the phone industry, including A.T.&T., thought cost-sharing made good sense. After all, if a college student drives home for Thanksgiving, isn't it only fair that his passengers share the costs, even if he would have driven home without them?

The F.C.C.'s marginal-cost pricing theory, on which its access charge proposal is based, is little more than blue smoke and mirrors. Regardless of whether the theory itself is valid--and there are serious theoretical problems with pricing some goods at marginal cost while competing goods are priced differently--few regulators have bought marginal-cost pricing, despite many economists' almost religious faith in it. The theory is based on assumptions, projections and gross estimates, and requires masses of cost and other data that are usually unavailable, especially in the telephone industry. As A.T.&T. vice president Howard Trienens put it last August, "Individual [telephone] services have never been and are not today priced in relation to cost.'

The justification for making local subscribers pay a flatrate access charge is the belief that big customers would "bypass' the local system by setting up their own facilities if usage-based rates were too high. There may be something to that, but not much. The F.C.C. has conceded that the potential extent and impact of bypassing "are still open questions.' Indeed, the bypass problem never came up until June 1982. Just a month before that, A.T.&T.'s own "Bell Laboratories Record' described the bypass idea "more as a concern than a threat.'

There has always been a lot of bypassing anyway, largely as a result of the telephone companies' private-line offerings to large businesses and the government. Also, since 1959, when it was first allowed, many customers have built their own systems, because the telephone companies could not or would not meet their security, quality or cost requirements. Yet the system has not suffered from any of that.

The bypass threat would be more convincing if the telephone companies weren't constantly demonstrating their lack of concern about it. For example, A.T.&T. will save about $3.5 billion in costs this year if the proposed $2 monthly access charge for the first year takes effect. It has proposed a long-distance rate reduction of only $1.75 billion, and plans to pocket the difference. But this "reduction' contains hefty increases for heavy users, the very customers A.T.&T. claims would set up their own systems if they were charged too much. And how, in fact, does one avoid bypass of the local system by raising the rates for that system through shifting access charges to the local users?

Indeed, the most probable bypassers will be poor people giving up their telephones because the rates are too high. That would mean higher phone bills for the rest of us. In a 1978 study, A.T.&T.'s top economic experts concluded that higher rates would force many people off the system. Those experts are now backpedaling furiously to explain away the 1978 findings, but other studies come to similar conclusions.

And suppose large users do bypass the local system. How much more would it actually cost other customers in those places? Pacific Northwest Bell estimates that if all its large users totally bypassed the local network--and a total bypass is highly unlikely--the company would have to raise local rates by $3.14 per month to make up for the lost revenues. That is less than the proposed $4 monthly access charges for intrastate and interstate long-distance service during the first year and much less than the approximately $9 in interstate access charges alone that the local user will pay once the process of shifting those charges to the local system is completed.

Why is A.T.&T. demanding the increases? The answer is a familiar one: when a utility faces competition in some areas and has a monopoly in others, it will try to load as many costs and get as much revenue as it can from its monopoly customers. A.T.&T. provided an example of this with its so-called $1.75 billion reduction; the company lowered rates on outgoing long-distance calls, where it faces some competition from M.C.I. and others, but raised prices on long-distance calls coming over toll-free 800 numbers, where it has no competition.

The decisions by Ronald Reagan's F.C.C. would radically change conventional pricing methods in the communications industry. They are but another instance of the government-mandated transfer of wealth from the poor to the rich under this Administration. Whether Congressional and local action can reverse the redistribution is uncertain. The House has overturned the access charge and the depreciation decisions, and in the upcoming session, the Senate will take up legislation to delay the imposition of the access charge. Reagan might veto whatever Congress does, however, since he opposes even a delay. If Reagan is re-elected, his anticonsumerism will make him lead the fight to have the access charge imposed.

That is all in the future, though. What is certain is that if the F.C.C. is allowed to continue its policies, the average American will be much poorer, and A.T.&T.'s stockholders and management much richer.
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Title Annotation:for telephone use
Author:Schwartz, Herman
Publication:The Nation
Date:Jan 21, 1984
Words:2239
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