On balance, Bell breakup means higher costs for phone service

For most Americans, phone bills today are nearly 20 percent higher than three years ago. Falling long-distance telephone rates have not made up for the rising cost of local phone service, according to a recent report by the Consumer Federation of America (CFA), a Washington-based consumer group.

On your phone bill, the cost of local service is broken down into segments: local usage charges, taxes, monthly long-distance access charges ($2), and installation. These local charges have risen from an average total of $10.55 a month to $15.40 a month since the AT&T divestiture, the federation says.

Interstate long-distance rates have fallen 17 percent since the breakup of Ma Bell, while in-state long distance has risen about 4 percent. Local usage charges, however, have climbed 39.8 percent.

When lower long-distance rates are balanced against higher local charges, the net result is that most residential customers are worse off, says Gene Kimmelman, legislative director of the CFA.

Unquestionably, business and residential users who rely heavily on long distance have seen their phone bills drop. But, Mr. Kimmelman argues, a small percentage of households are heavy long-distance callers.

``What the data show is that more than 50 percent of the households make less than $6 worth of long-distance calls per month,'' Kimmelman says. ``If local rates keep rising, even as long-distance rates are reduced, we're going to maintain a net loss for consumers.''

To be sure, the rise in local phone service cost was not unexpected.

Richard H.K. Vietor, a telecommunications expert at the Harvard Business School, says most analysts expected local rates to rise after the AT&T divestiture. Local rates, he says, ``had to more accurately reflect the cost of local service,'' since long distance was no longer subsidizing local usage.

Another expectation was that American Telephone & Telegraph would thrive while the baby Bells would struggle. That hasn't happened.

Before the breakup, many state public service commissions granted their regional ``baby Bells'' rate increases, hoping that would cushion the blow after divestiture. Government regulators and phone company officials expected AT&T to dominate the lucrative long-distance market, while the seven regional companies went into a low-growth, highly regulated market.

But although AT&T has dominated long distance, its profits have lagged. The local operating companies, however, have been perking along with profits two to four percentage points higher than other utilities - and frequently much higher than non-regulated companies.

In many cases, public service commissions approved those higher local phone rates during a time that inflation was running at a much higher level.

During the three-year period preceding the breakup, phone bills rose 24.2 percent, just outpacing a 17.5 percent inflation rate. Since the breakup, bills have gone up 20 percent, but inflation has been only 9 percent.

As a result, each of the Bell companies is making very close to the maximum profit (14 to 16 percent return on equity) allowed by the service commissions. Given current economic conditions that include low inflation and relatively low interest rates, the levels of return on equity in the telephone industry are seen by industry analysts as being ``very comfortable.''

How much profit is too much for the regulated companies? CFA says phone companies have overcharged customers $3 billion in each of the last three years.

``The operating companies are making a very healthy profit,'' Professor Vietor says. ``I don't know how much is too much. They're doing very well, and competitive companies like AT&T have been hurting. I suppose there was a sort of naive expectation that the reverse would be true.''

Analysts also say the regional Bell companies are requesting very few rate increases and are ``lying low.'' The CFA argues that rate decreases are in order.

But that's not the way phone companies view the matter. An official with New York Telephone, a part of NYNEX, says that the 16 percent rise New Yorkers have seen in their local bills has been minimal - and well earned on the part of the phone company.

``Back when the breakup occurred, there were even predictions that local rates would double,'' says William F. Thies, a division manager for pricing at New York Telephone. ``We've held expenses down and we're proud. We think we've done a very good job.''

But Kimmelman contends that with reductions in personnel costs and inflation at the local phone companies, state regulators should adjust rates downward.

``There is no automatic mechanism,'' he says, ``for reducing rates. Everybody was happy when phone rates weren't rising. But we're saying that now it's time for them to come down.''