Lower Long Distance Rates
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PAUL SOLMAN: How good a day was it and for whom? Well, for more, we turn to Gene Kimmelman, co-director of the Washington office of Consumers Union, and here in Boston, William Taylor, a telecommunications consultant with NERA, a Cambridge, Massachusetts, consulting firm. Gentlemen, welcome to you both. Mr. Kimmelman, you helped broker the deal between AT&T and the FCC that resulted in today’s plan. For us consumers, who wins, who loses?
GENE KIMMELMAN, Consumers Union: Well, it’s really a wonderful day for the people at the bottom end of the economic ladder. First of all, what has gotten no attention at all is the federal regulators have committed to insure subsidies for low-income families all across this country so that everyone can afford a basic telephone line.
Still, 20 percent of people below poverty don’t have a simple telephone line. So this is a very important step. Secondly, there is no increase in the flat rate, the monthly rate for consumers who have one telephone line, and in addition, rates will go down based on AT&T’s commitment 5 percent for daytime calling, 5 percent for evening calling, 15 percent if you make your calls at night, and 15 percent on the weekend. So for the consumer who has seen long distance rates inch up year after year since we relaxed the regulation of AT&T, they’ll finally get a rate cut; they’ll finally have some savings. They come out ahead.
PAUL SOLMAN: Okay. So, Mr. Taylor, who loses?
WILLIAM TAYLOR, Telecommunications Consultant: Consumers lose who make few long distance telephone calls and have many lines. That’s not many people. So on the whole, I think I agree with Mr. Kimmelman that consumers as a whole have won. Businesses as a whole, I believe, win as well because business, by and large, make many, many calls for every line that they have, and even though they will now pay more per line, they will save enough on their long distance charges, assuming that AT&T and MCI and Sprint pass those charges through, to more than break even.
PAUL SOLMAN: But now who gets penalized? If I have multiple lines in my home, my price goes up for each of those lines, then I get hurt?
WILLIAM TAYLOR: Yes. That’s the only price that I can see that has gone up for consumers in this decision that’s today.
PAUL SOLMAN: And what about businesses? Suppose I have a pizza parlor and I have a lot of lines because I need lines coming in or something, but I don’t make long distance calls.
WILLIAM TAYLOR: You too will pay more but, remember, you’re still not paying the full cost of the line that you’re using. So yes, your bill–a bill for a pizza parlor may go up, but we still haven’t reached what we economists would call an efficient level of price to begin with.
PAUL SOLMAN: Okay. Mr. Kimmelman, let’s talk about telecommunications companies, themselves. Who wins and who loses there?
GENE KIMMELMAN: Well, AT&T has promised to pass through every penny, every dollar it saves from this plan. And that’s about $900 million based on the numbers the FCC released today. We anticipate that’s about 500 million for residential customers, actually maybe 600 million even, and the rest for business.
So they’re not going to profit by this but possibly with bringing down rates, they’re going to earn more goodwill with the public; maybe there will be more calling; maybe they will make money that way. What the FCC has done is started squeezing out the fat in telephone network pricing with this decision, something the local telephone companies don’t like. We’d ask them to cut out $8 billion. We think there’s a lot of excess in the pricing. They only did about a quarter of that today, but I’m sure the local phone companies won’t like that.
PAUL SOLMAN: Mr. Taylor, is that true, AT&T is going to cut and cut and cut?
WILLIAM TAYLOR: Well–
PAUL SOLMAN: Pass on savings.
WILLIAM TAYLOR: AT&T has promised to pass on in the first year a given amount. What would force AT&T and then MCI and Sprint to pass on the future access charge reductions that come from this decision today would be more competition. I think we all agree that more competition in long distance is the secret to giving consumers the benefit from the rate reductions that the FCC made today.
PAUL SOLMAN: Do you agree with that, Mr. Kimmelman?
GENE KIMMELMAN: I absolutely agree with Mr. Taylor. We need more competition. Unfortunately, we’re seeing a lot of consolidation in markets, particularly among the local telephone companies–Bell Atlantic and NYNEX, and everything–and so we’re fearful that some of the companies are moving in the opposite direction. The Justice Department cleared that, and we’re absolutely stunned that they did. So we want more competition, but until that occurs, we really need the regulators to keep squeezing out fat, bringing prices down to competitive market levels.
PAUL SOLMAN: Mr. Taylor, you–
WILLIAM TAYLOR: Well, I think part of the FCC’s plan is to permit the forces of competition to do that. They deliberately took in this decision today what they called a market-based plan to reducing access charges. I think Mr. Kimmelman is a little careless about where access charges came from. It isn’t fat that’s being squeezed out. It’s a form of contribution to keep local service prices low that has been with us since 1984.
PAUL SOLMAN: Now, in fairness, you’ve worked for local telephone companies. Mr. Kimmelman, would you like to respond to that?
GENE KIMMELMAN: What the FCC did was today adjust the productivity factor to reflect the declining cost that local telephone companies have experienced as we put more computers in the network fiberoptic lines, so their profits have been soaring because we haven’t ratcheted down the prices appropriately as costs have come down. That’s the real change. It wasn’t a fundamental access charge change. It was an adjustment in the amount of money they’re allowed to keep. And their profits have been soaring, so this was long overdue.
PAUL SOLMAN: But reasonable people could disagree a to the amount and whether or not they were really getting pressed too hard. Is that fair?
GENE KIMMELMAN: Well, reasonable people can disagree, but as I said, you know, we looked at the off-the-shelf prices of equipment today, and we thought prices could come down $8 billion. So this is really just the tip of the iceberg of cutting fat, as we see it.
PAUL SOLMAN: Okay. Mr. Taylor, is this FCC plan a done deal?
WILLIAM TAYLOR: No, probably not. There are parts of the plan and very important parts of the plan that have been put off for later decisions. Part of that is the–how the subsidy between rural customers and urban customers is to be handled, and that’s to be decided once people know better what the cost of providing rural service is. That big decision has been put off for later. Other points that are put off for later, whoever feels he’s lost in this debate will obviously appeal it to the court, and I think everyone is expecting an appeal.
PAUL SOLMAN: Mr. Kimmelman, you’re expecting appeals.
GENE KIMMELMAN: I’m sure there will be legal challenges. There always are. We’re actually hoping the FCC will come back and cut more. There’s a lot more to be done. Mr. Taylor’s right. We think there’s a lot more opportunity for both local and long distance rate reductions.
PAUL SOLMAN: Mr. Kimmelman, do you think universal service will really be preserved at affordable rates by this plan? I mean, how sure are you of that?
GENE KIMMELMAN: Well, one can never be absolutely sure. But I’m very confident. I mean, to have an expansion of subsidies for the people who can’t even afford a phone, that was a very welcome decision today. It really protects the people at the bottom end of the income scale. Also, even the schools and libraries program focuses the discounts on low income school districts so that were there inadequate resources to bring computer equipment and hook up to the Internet, there’s a greater opportunity now that those school districts will actually be able to keep up with the information age.
So I think they’ve really shown a commitment here to go to the people at the bottom who aren’t helped automatically by the marketplace and give them a boost. And that’s a welcome sign at the same time as they’re cutting long distance rates. So I’m hopeful that we really are going to have affordable phone service if the regulators keep up their task.
PAUL SOLMAN: Okay. Very briefly, Mr. Taylor, how come the Telecommunications Act of 1996 has not driven down prices until this moment? But you only have a few seconds.
WILLIAM TAYLOR: It’s done its best. As of right now we have–
PAUL SOLMAN: But prices were going up.
WILLIAM TAYLOR: Prices were. Competition has been opened in local markets. Local companies, the Bell Companies are not yet in the long distance markets. That’s something that’s yet to come. We’re still working that out. No one would say we have full and effective competition in either market.
GENE KIMMELMAN: And we fear they deregulated too fast so the prices shot up, and now we need adjustments to put a lid on those rates.
PAUL SOLMAN: Well, thank you, gentlemen, we’re going to have to leave it there. Thanks both of you.