FCC Proposes New Method to Cap AT&T; Rates : Says End to Ceiling on Profit Would Also Benefit Long-Distance Customers

The Federal Communications Commission proposed on Tuesday to scrap its traditional way of regulating American Telephone & Telegraph’s long-distance telephone rates in favor of a method that the commission said could boost the company’s profit without harming consumers.

Under the proposal, adopted on a 4-0 vote, the FCC would end its longstanding practice of basing AT&T;’s prices on the company’s expenses plus a specified profit margin, currently 12.2% above its costs. Instead, the commission would simply set limits on how much the company can charge its long-distance customers.

The proposed change is intended to give AT&T; an incentive to cut its costs by becoming more efficient. Under such a regulatory system, lower costs would translate into bigger profits and, presumably, lower rates for customers.

The proposal was the brainchild of Dennis Patrick, 35, who succeeded Mark S. Fowler as FCC chairman in February.

“We would protect the public from rising prices by a cap, which would be adjusted downward over time,” Patrick said. “The commission won’t adopt this approach unless we believe it will be equal to or better than the current approach in ensuring the lowest-cost service for consumers.”

Supporters of the price-cap method--which has been adopted by about a dozen states for regulating intrastate toll calls--maintain that a so-called cost-based pricing system gives AT&T; no incentive to reduce expenses.

Commissioner’s Concern

The FCC adopted its regulatory system more than 20 years ago, when AT&T; held a monopoly on telephone service through the Bell System, which was dismantled on Jan. 1, 1984. The price-cap approach would initially be applied only to AT&T;’s between-state long-distance service. But it would later be extended to the long-distance access charges collected by the nation’s seven “Baby Bell” companies, including Pacific Telesis.

During the commission’s deliberations, Commissioner Patricia Diaz Dennis said she would insist that a final proposal include provisions to ensure that customers, as well as AT&T; shareholders, benefit from cost savings and improved productivity. “Any alternative form of regulation must be measured by its ability to limit exploitation of market power and produce a greater incentive to be efficient and reduce not just costs but rates,” she said.

The FCC sets long-distance rates only for AT&T;, which is the dominant carrier with an estimated 80% share of the market. Indirectly, however, the FCC’s rate setting affects such long-distance competitors as MCI Telecommunications and US Sprint.

In fact, MCI in March joined AT&T;’s call for the FCC to further deregulate AT&T;’s long-distance business. AT&T; for some time has urged the commission to give it more freedom in setting rates, arguing that the emergence of competition in the business provides protection for consumers.

The FCC has required AT&T; to lower its rates by 30% since 1984 to offset new line charges passed along to consumers through local phone companies, and MCI and other carriers have matched the cuts. MCI applauded the FCC initiative, but US Sprint had no immediate comment.

AT&T; welcomed the proposal, calling profit regulation “a vestige of the monopoly era (that) is outmoded in today’s highly competitive long-distance market.”