goldstein%delni.DEC@decwrl.dec.com (Fred R. Goldstein dtn226-7388) (02/07/89)
A recent posting by our moderator, Patrick Townson, mentions that the FCC has put off a decision on transferring AT&T from rate of return regulation to rate cap regulation. Commissioner Dennis Patrick has been pushing this change for some time, but meets opposition from members of Congress. >A decision by the Federal Communications Commission on a rate-cap method of >pricing for AT&T long distance services had been scheduled for last week, >but after getting pressured by a few congressmen, Commissioner Dennis R. >Patrick has decided to defer action on the proposed changes for at least >two months. >AT&T had been strongly hoping for a decision one way or the other this past >week. In a press release, they expressed their disappointment and frustration >at Dennis Patrick's latest decision to wait at least until March before >ruling. Patrick admitted earlier this week he had been approached by 'some' >members of Congress and strongly urged to defer any decision on changes. > >Now why do you suppose 'some' members of Congress would feel so strongly >against the plan? Perhaps some of you can tell me. > >Sign me a curious young whippersnapper, > >Patrick Townson Here are some reasons why Congress, as well as many of the American people, may oppose this proposal: AT&T's current Rate of Return regulation guarantees that they will make a fair profit, but not an excessive one. This is standard practice for utilities and other monopolies. While AT&T is technically not a monopoly any more, it can be argued that a company with a huge market share (such as the 75%+ that AT&T has in interstate toll and private line) is not subject to serious competition, but functions merely as a "rate umbrella" over the marketplace. The rest of the industry is not able to absorb capacity from consumers who might choose to defect. In any case, only AT&T offers such a full line of services. With the current plan, prices are pretty much guaranteed to fall as the underlying cost of service falls. This is predictable and can be used make business plans. Without regulation, a total monopoly can raise prices until consumers simply refuse to buy more. This pretty much determines long distance prices in much of Europe, where crass revenue maximization is the rule. A rate cap seems like a fix to that, but if the underlying cost of providing a service (the basis for rate of return regulation) is declining rapidly, then inflation-based rate increases are far in excess of costs. This wouldn't happen in a truly competitive market, but telecom isn't one. Note that some less-competitive services, like private line, are not benefiting the way toll is. The other major problem with the cap is that it allows predatory pricing. John D. Rockefeller put a lot of competition out of business in the early years of this century with his Standard Oil Trust. He'd just go into a market and underprice the competition until they sold out or folded, then he'd have a monopoly and raise prices. AT&T's competition is rather fragile. It's in AT&T's interest to preserve the appearance of competition (MCI) but Sprint is on thin ice, and a number of other carriers are already gone (SBS) or operating under Chapter 11 protection (Western Union Domestic). MCI supports the cap because, I'd speculate, they're in line to be the "second telephone and telegraph" needed to preserve AT&T's claim of a competitive market. When AT&T jacks up prices, MCI will jack 'em up too. There won't be anyone left to turn to. Such is the threat of a rate cap. If there were antitrust enforcement, this wouldn't be so important, but there isn't, so it is. fred (I speak for me, and me alone. Opinions may be licensed for a small fee.)
fangli@ihlpl.att.com (02/11/89)
I may be biased to comment on "Rate Cap" but I do feel the urge to clear some fictions from facts. >Here are some reasons why Congress, as well as many of the American people, >may oppose this proposal: > >AT&T's current Rate of Return regulation guarantees that they will make >a fair profit, but not an excessive one. This is standard practice for >utilities and other monopolies. While AT&T is technically not a >monopoly any more, it can be argued that a company with a huge market >share (such as the 75%+ that AT&T has in interstate toll and private line) The last number I saw on a market study newsletter was 68%. If my memory serves me correctly the number was quoted from an FCC publication. >is not subject to serious competition, but functions merely as a "rate >umbrella" over the marketplace. The rest of the industry is not able Since the big breakup, AT&T' bread and butter business is eroding constantly. Especially in high profit business market, AT&T's share are much lower than the 68% figure. Thanks to our competitors, they skim the cream and left all the not-so-profitable area to AT&T. >to absorb capacity from consumers who might choose to defect. In any >case, only AT&T offers such a full line of services. > >With the current plan, prices are pretty much guaranteed to fall as >the underlying cost of service falls. This is predictable and can >be used make business plans. > >Without regulation, a total monopoly can raise prices until consumers >simply refuse to buy more. This pretty much determines long distance >prices in much of Europe, where crass revenue maximization is the rule. >A rate cap seems like a fix to that, but if the underlying cost of >providing a service (the basis for rate of return regulation) is >declining rapidly, then inflation-based rate increases are far in >excess of costs. This wouldn't happen in a truly competitive market, >but telecom isn't one. Note that some less-competitive services, >like private line, are not benefiting the way toll is. > >The other major problem with the cap is that it allows predatory >pricing. ( some stuff deleted) AT&T's >competition is rather fragile. When I read their (MCI & SPRINT) business growth rate and earning capability, I would not come to the same conclusion as yours. >It's in AT&T's interest to preserve >the appearance of competition (MCI) but Sprint is on thin ice, and Sprint has a very aggressive marketing plan and they did so successfully (everyone remember the scratchy 45 vs CD, it's rather ridiculous in a technical point of view) but they are only plagued by their own mismanagement of billing system. >a number of other carriers are already gone (SBS) or operating under >Chapter 11 protection (Western Union Domestic). > If you read the telecom news carefully you'll know that there are price cap on both end in the FCC proposal. AT&T is not allowed to raise its price over the upper cap and also not allowed to drop its price below the lower cap but allowed to adjust its price in a restricted way (very limited number of times) for each service provided without having to file for tariff approval. >MCI supports the cap because, I'd speculate, they're in line to be the >"second telephone and telegraph" needed to preserve AT&T's claim of >a competitive market. When AT&T jacks up prices, MCI will jack 'em up >too. There won't be anyone left to turn to. Such is the threat of >a rate cap. A upper cap will prevent American people from paying an outrages price like those charged by AOS. A lower cap will eliminate any predatory pricing possibility thus provides a competitive market. And the market will determine what price people are willing to pay, so what's the catch? > >If there were antitrust enforcement, this wouldn't be so important, but >there isn't, so it is. > AT&T does not seek removal of regulation. AT&T is seeking approval of "price cap". Part of the reason that AT&T seeking the approval of "price cap" is that it will give AT&T the flexibility to change our rate without go through lengthy tariff approval. Whenever AT&T's competitors offer promotional "discount rate" to AT&T's customers, AT&T are not allowed to follow because of regulation demand that AT&T has to get approval for each and every rate changes. The result are 1) our market share keep eroding, 2) the consumers did not get the best possible price they deserve. > fred >(I speak for me, and me alone. Opinions may be licensed for a small >fee.) Fangli Chang (If you want to know the formal opinion of AT&T ask AT&T's spokesperson, I'm the spokesperson of myself and my family only)