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Why Your Phone Bill Could Go Up-a Lot

The proposed breakup of the Bell System means higher local rates -- especially for smaller companies.
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The planned breakup of the Bell System, and the resulting competition, will probably produce some important benefits for almost all businesses: Long distance prices will fall, innovations will proliferate, and equipment suppliers fighting for market share will offer good buys for careful shoppers.

But no one knows just how local phone service will function after American Telephone & Telegraph ceases to own local operating companies. And instead of reducing basic prices, the end of Bell's monopoly will encourage price increases in the most essential services.

There are at least two good reasons to expect the rates for local telephone service to soar: Bell's high long-distance prices have subsidized most local services, and the phone companies in the Bell System have traditionally depreciated their equipment slowly, keeping rates down.

Bell's long distance revenues now contribute billions of dollars every year that are used to maintain local lines and equipment. But those revenues have been under pressure as other providers of long distance service have moved in on Bell. Cut-rate long-distance carriers like MCI Telecommunications Corp. charge up to 50% less than Bell for long distance calls. By luring away some big long-distance customers and thus skimming off the most lucrative part of the telephone business, the competing carriers have already begun to steal the revenue that finances the subsidy.

Now that Bell will be separated from the local phone companies, the subsidy could disappear completely, and the local companies will probably have to inflate other rates as the subsidies decline. Before it committed itself to spinning off the local companies, AT&T had argued that to obtain enough revenue to maintain the current rates, local phone companies would have to charge carriers like MCI at least $293 a month for each line connecting a business to MCI's network. The local companies now charge about $130.

That $293 figure is realistic, says Page Montgomery, vice-president of Economics and Technology Inc., a Boston consulting firm that often represents telephone customers at rate-making hearings. It's unlikely, however, that the local phone companies will be able to charge the long distance carriers anything like $293, because big long-distance users can completely avoid local lines in the city where the call originates. Already many corporate head-quarters have microwave antennas on their roofs, linking them directly to MCI or other long distance carriers, which then transmit calls to the destination city on their own networks.

Innovative competition is also forcing the phone companies to depreciate their equipment more swiftly. In the past, the phone companies kept rates down by depreciating equipment slowly, but innovation is rapidly making old equipment obsolete, so the commissions that set telephone rates are being forced to allow faster depreciation and therefore higher rates. AT&T formerly depreciated a switchboard, for example, over nearly 18 years. But technological change means that switchboards now have to be depreciated over 6 1/2 years. The costs have to be passed on to users.

So anyone who depends on cheap local service faces hard times. James McCraney, director of the communications division of the California Public Utilities Commission, estimates that the basic charge for a business telephone could roughly triple -- from $7 to $20. Residential rates could rise by a comparable amount.

Politicians probably won't allow such dramatic increases in basic rates, but in isolated areas rates may increase even more than threefold. Someone has to compensate the local phone companies for declining long distance revenue and faster depreciation, and services for the person who lives far off the beaten track have been among the most heavily subsidized in the past. "That guy's going to have to pay what it costs to get the service out there," says McCraney. "We're going to be desperate. To keep the basic service affordable, we'll have price changes that would have been absolutely unacceptable before."

Businesspeople must move adroitly to cope with the changing telecommunications business. If they haven't already, they must begin analyzing their phone service and charges, and examining the alternatives offered by both Bell and other companies. The payback on a new telephone system must be short, however: Technology is changing so rapidly that no one knows what sort of phone system may be available -- and necessary -- four years from now.

In addition to smart comparison shopping, businesspeople need to pay closer attention to the rate-making process. As the basic phone rates are radically restructured, the state rate-making commissions will have a dramatic impact on how much each of the various types of customers will pay for phone service.

It's especially important that small business have its say at the rate hearings. "When I go to rate hearings, I'm usually there representing bigger businesses and there's usually a consumer advocate speaking for residential customers," says Page Montgomery. "The only interest that's not addressed is the smaller business."

Last updated: Apr 1, 1982




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