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.
CONCUR:
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.