`Baby Bells' may have received larger rate increases than they were allowed. Meanwhile, Congress may transfer authority from judge to FCC

Local telephone companies have overcharged customers $3 billion since the breakup of American Telephone & Telegraph in 1984, according to the Consumer Federation of America (CFA). Yesterday the consumer group charged that the ``Baby Bells'' received far larger rate increases than were justified by the increases in their costs. In total, the rate increases meant that families and businesses on average paid an extra $1 to $2, or 5 percent, each month.

Such accusations are ``absurd,'' says Jay McCabe, a telecommunications analyst at Donaldson, Lufkin & Jenrette. The phone companies' rates of return are set by the Federal Communications Commission and by state public utilities commissions. Whether phone companies can make that rate of return depends on the economic environment, he says.

``It's typical for a utility to earn their allowed return in a low-inflation environment, and a utility never earns the allowed rate during inflationary periods,'' he says. Therefore, phone companies would have done well in the last couple of years when the study took place. But if one looked at the last 10 years, he says, phone companies have earned between $10 billion and $15 billion less than they would have been allowed, fives time the ``windfall,'' the CFA documented.

Energy costs, inflation, and interest rates have dropped dramatically since 1984, the CFA says. In that time, the return on equity, a measure of profits, has dropped for the Business Week top 1,000 companies (reflecting lower costs). But it has increased for the Bell operating companies. According to the CFA, the companies Ameritech, Bell Atlantic, Bell South, and Nynex each had about $500 million in ``excess'' profits. PacTel, Southwestern Bell, and US West ``overcharged'' by about $3 million each.

The CFA wants the rates to come down. The CFA's report is timely, says John Guttenberg, legislative director for the North American Telecommunications Association, because of two pending measures.

Congress is considering transferring authority of the divestiture agreement from Judge Harold Green, who has been a vigilant watchdog of the phone companies, to the FCC, which has tended to be more lenient with them. Some fear that would lead to higher rates.

Also, within the next month, the Federal Communications Commission is expected to eliminate a requirement that makes the Bell companies keep their unregulated businesses -- like Yellow Pages, real estate, and equipment leasing -- in separate subsidiaries from their local telephone services. That requirement kept phone companies from subsidizing the losses they incurred in these ventures ($941 million in 1985 for all seven companies) with higher telephone rates.

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