In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO., AND THE ASSOCIATED BELL SYSTEM COMPANIES Charges for Interstate and Foreign Communication Service; In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO. Charges, Practices, Classifications, and Regulations for and in Connection With Teletypewriter Exchange Service
Docket No. 16258; Docket No. 15011
FEDERAL COMMUNICATIONS COMMISSION
9 F.C.C.2d 960 (1967)
RELEASE-NUMBER: FCC 67-1047
September 13, 1967 Adopted
[This Web page reproduces only the opinion of Commissioner Johnson in this case. The other rather lengthy opinions may be found in the Lexis or Westlaw commercial online services, or the hard-copy F.C.C. Reports at 9 F.C.C. 2d 960, 980.]
BY THE COMMISSION: COMMISSIONERS LOEVINGER AND JOHNSON CONSURRING AND ISSUING SEPARATE STATEMENTS.
Concurring opinion of Commissioner Nicholas Johnson:
I concur in the action taken today with regard to reconsideration of the Commission's interim decision. I have already set out my views on [*981] many of the substantive matters raised by Bell, and here reconsidered, in my opinion concurring in the interim decision. See the ATT Rate Case ["In the Matter of American Telephone & Telegraph -- Charges for Interstate and Foreign Communications Service * * *"] FCC 67-776 (docket 16258) (July 5, 1967) (concurring opinion).
In summary, it has been my view that (1) a most thorough review and reevaluation of the conventional public utility principles and procedures we apply in telephone regulation are long overdue, but (2) accepting generally those principles and procedures, the FCC Commissioners and staff, and state commissioners hearing this case, have done a workmanlike, expeditious, and equitable job of disposing of this case. Accordingly, I concur in the Commission's disposition of A.T. & T.'s petition for reconsideration.
Since the Commission's July 5, 1967 opinion was issued there has been considerable confusion as to the effect of the FCC's action on A.T. & T.'s rate of return. A few simple facts may be useful.
A.T. & T.'s petition for reconsideration characterizes the 7-7 1/2 percent rate of return allowed by the FCC as "a bare bones rate of return contrary to the law and the evidence." This theme has been found in much of the commentary in the mass media and from investment houses.
Just how bare are these bones? How far -- and in what direction -- does the Commission deviate from past practice, law or evidence? What does past performance -- by FCC and A.T. & T. -- indicate about future probabilities on rate of return?
As the Commission makes clear in our opinion on reconsideration, "the range of 7-7 1/2 percent determined on the basis of this record to be proper is essentially the same range we employed in effectuating rate adjustments in recent years" (par. 11). Moreover, as we note, "we have never taken automatic action to effectuate rate reductions merely on the basis of a particular level of earnings. * * *" (Par. 13.)
What does the record show A.T. & T.'s earnings actually to have been during recent years? How does the FCC's 7-7 1/2 percent decision ("essentially the same range we employed * * * in recent years") compare with actual earnings in recent years? How does it compare with State commissioners' decisions? How much money are we talking about for those who pay telephone bills? How have A.T. & T.'s shareholders fared over the years?
During the past 12 years (1955-66) the lowest return on total interstate operations A.T. & T. has ever earned was its 7.27 percent in 1957. For 10 of these 12 years the return has been in excess of 7 1/2 percent. For the past 3 years the return has been in excess of 8 percent. For the past 19 months (January 1966-July 1967), the monthly rate of return has been at, or above, 8 1/2 percent for 9 months. In 5 of those months the rate of return has been in excess of 8.9 percent -- in March 1966 hitting 9.17 percent and in August 1966 9.33 percent!
If the past is only prolog to the future it is highly unlikely that A.T. & T.'s rate of return will ever come close (let alone for long) to the 7-7 1/2 percent range we have established. But suppose A.T. & T. did earn for awhile a 7-7 1/2 percent rate of return. How would this bare bones rate compare with what the State commissions have allowed?
[*982] What have State commissions been allowing A.T. & T; during this period on its intrastate operations? During the past 15 years the median rate of return has been in the range of 5 1/2-6 1/2 percent -- varying from 6.89 percent (Wyoming, 1953) to a low of 4.53 percent (Indiana, 1956). Thus, whatever may be said about the onerous limitations of a 7-7 1/2 percent rate of return for a national monopoly regulated by law as a public utility, it must at least be conceded to be generous by comparison with the rates of return authorized by the States.
How much money are we talking about? Bell's total net plant represents about $30 billion. Thus, a one-tenth of 1-percent change in rate of return represents $30 million in revenue needs. That is, it would but for Federal taxes, the result of which is that roughly $60 million must be earned to produce a $30 million return. As a result, a one-tenth of 1-percent increase in rate of return means subscribers must pay an additional $60 million in annual telephone bills -- roughly $1.30 per subscriber per year.
The difference between the roughly 6 percent allowed by the States on intrastate rate base, and the 8 1/2 percent average rate of return earned by A.T. & T. on its interstate operations during 1967, if applied to total rate base, would be $1 1/2 billion -- or roughly $33 per subscriber per year. The difference between the 7 percent edge of the FCC's range and A.T. &T.'s 1967 8 1/2 percent rate of earnings would be $900 million. In short, however the amounts are calculated they are not inconsequential -- even when spread over 45 million subscribers.
It is also appropriate that the FCC be mindful of the interests of A.T. & T.'s shareholders. It has been. There have been six stock splits since 1950. Adjusting for them, A.T. & T.'s stock has increased from roughly $25 a share in 1950 to a range of $55-$70 a share during the past 3 years. To what extent should telephone subscribers be asked to pay rates sufficient to qualify A.T. & T. as an even greater "growth stock"? A.T. & t/. is a regulated public utility. It is a monopoly, a national monopoly. It is protected by Government from competition. While not guaranteed a profit it is constitutionally assured the setting of fair rates of return and has paid a dividend every year without interruption since its beginning. Investors who seek opportunity for greater growth -- with the attendant greater risks of loss -- have a substantial number of stocks from which to choose. In my judgment, it ill becomes the 3 million stockholders who have voluntarily chosen the safety of an investment in a regulated monopoly to urge that 45 million telephone subscribers be assessed enough to provide A.T. & T.'s stockholders the dividends and growth associated with riskier enterprises not granted protection from competition and an assumed rate of return.
Let me reemphasize to make my position clear. I am not urging that a 7-7 1/2 percent rate of return is, in any absolute sense, too high. My concurring opinion of July 5 urged a reexamination of all aspects of telephone regulation -- including rate of return and the possibility that the most appropriate rate might be higher than even Bell has urged. But I will not repeat the analysis of that opinion here.
For now we are left -- for reasons of Bell's urging and our own -- with the application of present public utility theory. I do not believe [*983] the principles and procedures available to us are adequate to our task. But they are all we have. Applying them to the record before us -- since it is largely a creature of Bell's making -- it is not surprising that a rate of return much below 7 percent would be difficult to sustain. But, in my judgment, even A.T. & T. has not succeeded in amassing a persuasive case for a rate of return in excess of 7 1/2 percent.
Given its past history at the hands of the FCC I think there is little likelihood that A.T. & T. is headed for the Biblical valley of bones, and I regret the efforts to conjure up such ghosts before the eyes of millions of innocent shareholders.