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Administration Proposes Virtually Deregulating AT&T

July 22, 1987

WASHINGTON (AP) _ The Reagan administration proposed Wednesday virtually deregulating American Telephone & Telegraph Co. and giving local phone companies more flexibility in setting rates.

In a report highly critical of the current regulatory regime, the National Telecommunications and Information Administration said allowing market forces to determine prices in an increasingly competitive industry would benefit consumers by encouraging efficiency and innovation.

″Marketplace forces and competition need not be perfect to make them preferable to costly and unduly intrusive government regulation,″ said the report by NTIA, the administration’s principal agency responsible for developing national telecommunications policy.

The Consumer Federation of America branded the proposal as ″nothing short of a massive wealth transfer from the pockets of ratepayers to the pockets of shareholders.″

The Federal Communications Commission, which oversees AT&T’s rates and thereby influences the prices of its competitors, is considering changing the way it regulates AT&T, the industry’s long-distance leader. But the FCC is unlikely to go as far as the NTIA proposes.

Additionally, some 28 states have relaxed or lifted regulation of intrastate long-distance services and other states are considering taking similar action, the report said.

NTIA, a Commerce Department agency, proposes to lift regulation of competitive services, which would include all of AT&T’s long-distance services except its toll-free, 800 service.

The agency also says states should lift controls on intrastate long- distance, mobile radio, paging and private line services as well as billing and collection services.

Rates for basic local phone service for residential and business customers probably would continue to be regulated, although in a different way, because there are no effective alternatives for those services.

″We believe over time rates will decline because of there would be incentives to reduce costs,″ said Alfred C. Sikes, assistant secretary for communications and information at the Commerce Department.

The NTIA report criticizes the current ″rate-of-return″ regulation of AT& T and local companies, which allows them to pass along virtually all of their expenses to customers while still earning a profit on their investment.

″There are a lot of inflated costs that end up getting passed through the system,″ Sikes said.

The current approach engages regulators, companies and consumer groups in a ″ritualistic game″ in which companies routinely ask regulators for rate increases larger than they need and consumer groups propose increases that are too low, he said. Regulators wind up setting rates somewhere in the middle.

″I am convinced rate-of-return regulation serves only lawyers, accountants and rate specialists ... and the business reporters that follow what they do,″ Sikes said.

Sikes estimated that regulation costs consumers about $1 billion a year.

The agency proposes that non-competitive services that would continue to be regulated - including local rates - be subject to price ceilings that would allow changes no more often than once a year in accordance with an average telecommunications price index. The index, similar to the Consumer Price Index, would be developed cooperatively by state regulators and the telephone industry.

The FCC is expected within the next couple of months to open an inquiry on alternative methods of regulating AT&T, including a rate cap, which would allow the company more flexibility in pricing.

AT&T spokesman Herb Linnen said ″the company does not seek deregulation, but rather is hopeful that the commission will consider new forms of regulation suited to the volatile and competitive long-distance marketplace.″ Linnen said AT&T’s approach recognizes that deregulation would require action by Congress.

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