AT&T/FCC Screaming Match Ends, Carrier Woes Remain

BOSTON (06/08/2000) - AT&T Corp. late yesterday dropped a planned increase in basic consumer long-distance rates, ending a bitter 36-hour verbal battle with two members of the U.S. Federal Communications Commission.

But analysts said the screaming match could leave lasting scars on the telecom giant - and possibly on the regulatory agency as well. They predict that AT&T will either have to find some other way of recovering profitability in its deteriorating basic telephony business, or advise Wall Street for the second time this year that it's adjusting its earnings projections downward.

The argument erupted over an increase announced this week by AT&T in basic consumer rates. Those are the rates paid by residential customers who haven't responded any of the thousands of long-distance ads over the past decade.

AT&T planned to raise rates to as high as 29 cents a minute every hour of every day except Sunday. Its previous high rate was 26 cents a minute, and those only applied between 7 a.m. and 7 p.m. weekdays.

Besides the sticker shock of these never-advertised rates, the problem was that just last week the FCC had changed the structure of the nation's access fees - those charged long-distance carriers by local phone companies. The FCC claimed the restructure dramatically lowered long-distance carriers' costs, and the agency brandished a side letter from AT&T promising to pass along the savings to consumers.

The AT&T move scandalized FCC Chairman William Kennard and Commissioner Gloria Tristani, both Democrats. "AT&T promised to pass on savings to all consumers.

Their new rate plan does not do that," Kennard said. "It is in our order and I am going to enforce it." Tristani was even blunter, releasing a six-word statement reading: "I was totally misled by AT&T."

AT&T originally defended the move by noting it had agreed to drop a US$3 monthly fee on basic-rate residential plans and was sticking to that promise.

But late yesterday, following a phone call between Kennard and AT&T Chairman C.

Michael Armstrong, AT&T rescinded the per-minute rate increase as well.

The problem now is that losing the $3 monthly fee chops 0.5 percent off the $64.1 billion company's total revenue, estimates Donaldson, Lufkin & Jenrette.

Earlier this year AT&T reduced its 2000 revenue growth estimates to 6 percent and 7 percent, down from 8 percent and 9 percent previously. Now, "we believe further downward revisions could occur later this year as well," DLJ analyst Richard Klugman said in a note to investors. "The consumer business has been a great cash cow, but it is shrinking revenue at an accelerating rate."

AT&T's new cable business is only one-seventh the size of its telephony business, Klugman says, and "substantial questions remain about weak cable cash flow." AT&T also has admitted recent problems in retaining certain business customers whose account teams have shifted.

The rate-increase gambit this week failed because it didn't meet the "political smell test," Klugman remarked.

The telephone rates in question don't affect business users, many of whom have been able to negotiate rates lower even than currently advertised deals. But analysts who follow business services - and who claim the FCC oversold the benefits of its access-rate restructure - question why the FCC was so surprised by the AT&T attempt to raise rates. The FCC plan consolidates two federal surcharges on residential bills into one, but does not eliminate any of the extra universal-service fees that business users have been recently forced to pay.

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