Dial M for Money

...The company, Commissioner Nicholas Johnson noted in his lone dissent, is "clearly concerned as much with publicity as with profits...

...In most areas of decisionmaking, the power is really outside of the domain of Congress or the President...

...What is essential is that the Commission do something so that a policy will emerge...

...The negotiating process depends on the skill and dedication of the negotiators—and a company with a single position faces a multi-member Commission with a variety of positions...

...In a typically outspoken appearance last fall on the CBS program "Face the Nation," Commissioner Johnson declared that the FCC "suffers from the problems that confront many of what we call subgovernments in Washington—the virtual domination of its day-to-day activities by the very industries that it is supposed to regulate...

...The catch came several paragraphs later...

...No account is taken of the effects of relaxation of the income tax surcharge...

...Confident that he meets his own job specifications, Commissioner Johnson cheerfully issues his dissents and statements attacking the communications monopolies and promoting a public role in their supervision...

...out, those deliberations were carried out in dubious circumstances...

...They lobbied everybody in sight except for Nick Johnson and his staff...

...If this should turn out to be the case, it would be the first time that the FCC took an adversary stance toward the industry it is supposed to regulate...

...Rather than take the broad view and use the discretion to further public interest objectives, the Commission continues to prefer the more familiar, if less intelligible, path...

...It would make sense, he suggests, to give the FCC jurisdiction over all telephone rates, intrastate as well as interstate—but he sees not a chance of that happening...

...The issue of "separation" has plagued regulators for decades, and no solution is in sight...

...Each agency must determine the rate base it deems proper for its jurisdiction and approve a rate schedule consistent with that base...

...any matter of that kind that involves tremendous economic interests...

...I think he ought to be able to read and write...

...Had the Commission wished to help the average telephone customer, Pearson said, it could have allocated a larger portion of AT&T's costs to the high-profit interstate side of the company's ledger, thus permitting reductions in the hundreds of millions of dollars in local rate increases now pending before state commissions...

...The only record published was the FCC's three-page release, which AT&T helped draft, and Commissioner Johnson's dissent, in which he noted: "There are severe limits to the Commission's ability to function in this type of a proceeding...

...He was law clerk to Supreme Court Justice Hugo L. Black in 1959-60, taught law at Berkeley from 1960 to 1963...

...In his testimony before the Proxmire Subcommittee (where he made itxlear he was speaking for himself, no...

...The concept of a sub-government is very important to an understanding of how its decisions are really made in Washington...

...and the subcommittees and staff within Congress that is responsible for this area...

...It came in the form of a three-page press release issued on November 5 by the Federal Communications Commission...

...In responding to those attacks, network executives voiced apprehension that the Commission's licensing powers would be put at the Administration's disposal for purposes of political retribution...

...One result of the confusion over cost separations, Commissioner Johnson noted in another opinion last August, is that the telephone rate system is riddled with hidden subsidies...

...Its jurisdiction over the broadcasting industry is a far more prominent and controversial aspect of its activities—and is likely to become still more so in the light of the Administration's recent attacks on the broadcast media...

...Its annual gross of about $14 billion exceeds the budget of each of the fifty states and of most foreign governments...

...a patchwork remedy for the failings and special cases of the marketplace...

...In the second place, Bell has notoriously 'undercharged' for those services in which it is engaged in competition—making up the difference by soaking those subscribers over whom it has a monopoly...

...When the surcharge rate is reduced to five per cent on January 1, 1970, Johnson suggested, AT&T will need $70 million less gross revenues to maintain its current profit level...

...Some have urged the case that government regulation results in higher prices and less technological innovation and that, in almost every instance, the country would be better off with unregulated and unprotected monopolies...

...release stated...

...Since the same equipment (and personnel) is often used to provide both local and interstate services, the problem of assigning costs, income, and profits is enormously difficult...

...And in that area of decision-making," Johnson said, "generally the decisions are dominated by a group made up of the trade magazines...

...The FCC's press handout was drafted in close consultation with officials of AT&T's Bell System—a curious procedure routinely followed by the Commission...

...He welcomed the "recognition by the FCC of our need for a higher interstate rate of return...

...And the consumer will be the loser...

...The Bell System release was an embarrassment to the Commission...

...This would apply to areas of subsidy, of Government contracts, with bestowal of monopoly rights as in broadcasting, setting of rates...

...By June 30, 1970, when the remaining five per cent is scheduled to be lifted, another $70 million less gross revenues will be needed by Bell...

...Unlike the 1967 ruling establishing the 7 to 7.5 per cent rate of return, which was arrived at after formal hearings and an extensive record, the November 5 decision was reached after an informal review conducted, according to the FCC's release, "as part of the continuing surveillance of the Bell System's interstate operations, and . . . participated in by representatives of the Commission's staff, Bell System officials, and several outside consultants who are expert in economics and finance...

...Precisely two weeks after the Commission issued its November 5 press release, the company announced an increase in its annual dividend rate to $2.60 a share, effective January 2. The rate had previously risen from $1.50 a share to $1.65 in 1959, to $1.80 in 1961, to $2 in 1964, to $2.20 in 1966, and to $2.40 in 1968...

...When the Administration was searching for two new appointees to the Commission last summer, The New York Times quoted a White House aide as specifying that "we need someone . . . who's not totally unacceptable to the industry...

...As a public utility, a monopoly, and a common carrier of vital telecommunications, the Bell System poses regulatory problems of extraordinary complexity...

...The company's spokesman, Vice Chairman John D. deButts, made explicit what the Commission had deliberately left vague...

...What sets the FCC apart from other "sub-governments" in the Capital is its maverick Commissioner, Nicholas Johnson...

...I think he ought to bring a measure of independence to what he does...

...a potential revenue increase for AT&T cleverly disguised as a rate reduction...

...Professor Louis Jaffe of Harvard wrote in 1957 that "it seems clear that the FCC is dealing a heavy blow to good government...

...There was no leavening from outside consumer representatives . . . —even though the New York City Consumer Affairs Department requested (and was denied) the opportunity to appear...

...Virtually all of the information was selected, packaged, and presented by Bell—there was no direct case from our staff or outside representatives...

...I am not prepared to go quite so far...

...In fact," says Johnson, "the majority's additional compromise from what it should have sought from Bell may cost the consumer $250 million a year...

...There was no point in lobbying them...

...With [the] FCC ruling in its pocket, AT&T can now argue that the FCC has okayed an increase in its profits, and that state regulatory agencies can do no less...

...In Michigan, the Public Service Commission called for a Congressional investigation "since the background on which the FCC reached its decision is not a matter of public record but was developed in . . . discussions between the FCC and the Bell System...

...In Richmond, where seldom is heard a discouraging word about big business, Commissioner H. Lester Hooker of the Virginia State Corporation Commission charged that the November 5 announcement constituted "a most outrageous and high-handed attempt by the AT&T to cater to the wishes of the FCC which is detrimental to the users of local telephone exchange service in the various states...

...College students, who make extensive use of the long-distance lines, would probably disagree, and might point out that the great majority of local calls are placed to and from business—rather than private—telephones...

...I think he should not want to use the position as a means of getting a job in the industry...

...Bell's rate of return on interstate operations has not fallen below 7.5 per cent since 1961, and exceeded 8 per cent in 1966 and 1967...

...its Long Lines Department serves the network for interstate long-distance calls...

...The present system, says an FCC aide, is "fundamental nonsense...

...In the first place," he wrote, "the telephone company itself deals in 'cream skimming.' The really high-cost-low-revenue subscribers—those who live in rural America—would never have had telephone service had they waited for Bell to ring...

...But AT&T Vice Chairman deButts had every reason to feel "greatly encouraged": The company pulled off a massive coup on November 5—one that will enrich it to the tune of several hundred million dollars at the customers' expense...

...I would say that he ought to have sufficient sense of internal confidence and security not to feel that he needs the job in order to have an income, the knowledge that he can always leave and get adequate compensation doing something else...

...the trade associations...

...Two years later, to the profound relief of the shipping interests, the President named Johnson to a seven-year term on the FCC, and the new Commissioner stepped instantly into the unheard of role of industry critic and consumer spokesman...

...At the Commission, a professional staff of about 100 is responsible for overseeing the sprawling AT&T empire, satellite ". . . AT&T is not only the world's largest company but one of the most formidable entities of any kind...

...Thanks in large measure to the FCC's benevolence, AT&T is one of the few American corporations that have never missed a dividend in this century...

...Bell believes it can push this agency around—and with good reason," an FCC employe told me...

...In a 1960 report to President-elect John F. Kennedy, Dean James M. Landis described the Commission as "a somewhat extraordinary spectacle...

...Such costly installations as special modifications for military data transmissions, underground cable systems specially "hardened" against air attack, the recently installed fifth trans-Atlantic cable, and other items requested by the Pentagon in the interests of "national security" are built into the costs that determine the general rate structure charged against the public...

...Each change of one-tenth of one per cent in Bell's net profit rate, he notes, has a $24 million effect on the amount of gross revenues the consumer must pay...

...I think he should take The Nader Story the job seriously, not take himself altogether that seriously, but take the job seriously...

...I think he should not want to be reappointed...

...Two years later, Federal Circuit Judge Henry J. Friendly urged the Commission to "develop enough courage to penetrate the fog it has helped create...

...It's a not uncommon phenomenon in this town...

...With assets of close to $40 billion, AT&T is not only the world's largest company but one of the most formidable entities of any kind...

...the FCC), Johnson outlined what he regards as the prerequisites for an effective regulatory commissioner: "I would start by saying he probably ought to have an IQ of at least 110, somewhere along in there...

...It is a last resort...

...At first glance, the FCC's "public notice" looked like a handsome present for the nation's telephone users, and it was reported as such by all the news media...

...There are no limits to the lobbying efforts by the company...

...The FCC, in effect, has greatly strengthened AT&T's case for increased local rates and has greatly enhanced the possibility that these local increases will be granted by state regulatory commissions...

...In the case of the FCC's November 5 decision, the dissenting Commissioner listed these errors: "No estimate is made for growth in Bell's 1970 earnings, although Bell has enjoyed steady growth...

...For Bell, separations procedures merely transfer revenues and costs from one pocket to another...

...the Government agency that is involved in dispensing the economic largess...

...Separations procedures involve arbitrary cost allocations which traditionally have been made on the basis of informal negotiations, out of the public eye, in accord with the criteria of political expediency," FCC Commissioner Johnson wrote in a dissenting opinion a year ago...

...With William McGaffin of the Chicago Daily News he has written two books: "Nothing But the Truth" and "Scandal in the Pentagon...

...Another form of subsidy, according to Commission sources, is extended to the Defense Department by telephone subscribers...

...be responsible about it...

...He said he was "greatly encouraged that the Commission has taken into account the substantial changes in economic and operating conditions" since 1967...

...Thus, it is anticipated that the rate adjustments announced today will not, in themselves, prevent the company from achieving earnings in the aforementioned range...

...The FCC wants to avoid trouble with NARUC (the association of state commissioners) and the Congress...

...This leaves open significant discretion in cost allocation that can be used for good or ill—that can be used to pursue the political desires of private parties and particular regulatory agencies, or that can be used to extend and broaden public interest considerations in accord with the social benefits and costs of allocating book cost to particular jurisdictions...

...And I am still looking, at this juncture, for ways to add a little salt and pepper of competition to the rather tasteless stew of regulatory protection that this Commission and Bell have cooked up...

...He has made marvelous enemies...

...Whatever the merits, however, they played only a peripheral part, if any, in the FCC's deliberations...

...Requested rate increases for New York State alone would, if approved, bring in $175 million in added revenues, and the total rate increases in the various states would bring in a sum in excess of $300 million...

...Bell's contempt for the consumer is clear," says Johnson, "not only for refusing to lower exorbitant rates but also for its shocking acquiescence in the decline in the quality of telephone service its slipshod performance has permitted," says Johnson...

...Some have argued," Johnson told Senator William Proxmire's Joint Subcommittee on Economy in Government last fall, "that the regulatory commissions serve little purpose in our society save as a device to serve big business, at the taxpayers' expense, by permitting industry to do with impunity what would otherwise send its corporate officials to jail...

...An alternative approach, proposed •in legislation now pending in Congress and scheduled for hearings next spring, would create a joint Federal-state board, composed of four members designated by the FCC and three by the National Association of Regulatory Utility Commissioners (NARUC) to exert sole authority over common carrier cost separations...

...It rests with a very small group of individuals who have an economic interest in the outcome...

...Francis Pearson, the chairman of the Association, complained that the prospective reduction in long-distance rates favored a "limited number of affluent telephone users who make approximately 2.5 billion interstate long distance calls a year" at the expense of local telephone users who make about 147 billion calls annually...

...Noting that it had ruled in September 1967 that an AT&T profit margin (net return, after taxes, on investment) of 7 to 7.5 per cent was "fair and reasonable," the Commission now disclosed that it was of the view, "in the light of current conditions, and with due regard to the proposed reductions, that interstate rates producing an earnings level which exceeds the upper limit of the 1967 range (7.5 per cent), are not unreasonable...

...tors and their spokesmen in NARUC...

...Predictably, the Commission's November 5 news release triggered an angry reaction from the state regula". . . the Bell System poses regulatory problems of extraordinary complexity...

...the principal spokesmen for the industry, those from the major companies making up the industry...

...Whether a reduction in long-distance rates is, indeed, a favor merely to a privileged few is arguable, although it is natural that this line of reasoning would appeal to state regulators...

...Although interstate rates were reduced nine times in the decade, Bell has consistently succeeded in earning extra profits—a record that suggests to Johnson that "Commission decisions systematically err in Bell's favor on rate of return matters...

...No estimate is made for possible lower unit costs, although Bell proudly reports its cost-reducing achievements...

...its General Department furnishes business services to the other company components, including Bell Laboratories and Western Electric, the manufacturing arm of the System...

...He was formerly a reporter and editor for The Washington Post and the Newhouse National News Service...

...He noted that the company had claimed a requirement for profits in the range of 8.5 to 9 per cent, and that this had been "taken into account" by the Commission...

...The state commissioners (many of whom must stand election) want to avoid having to raise rates to the home owners, and therefore seek to shift as much cost as possible away from their regulatory jurisdiction...

...It seems incapable of policy planning, of disposing within a reasonable period of time the business before it, of fashioning procedures that are effective to deal with its problems...

...We are .confident," said AT&T Chairman H. I. Romnes, "that this record of progress can be sustained, supported as it is by the innovative resources of our business and by the continued high level of demand for communication services...

...But I am not satisfied with the job the FCC has been doing...

...Relatively speaking, the cost to the taxpayers is small: The FCC's $20 million annual appropriation represents about one-hundredth of one per cent of the Federal budget —the cost of operating the Defense Department for about two hours...

...Within this framework the Bell System has been able to exert dominant influence over the resulting separations methods because of its singular dominance in dealing with the diverse and fragmented regulatory authorities of fifty states and one Federal commission...

...As the critics pointed "'Bell's contempt for the consumer is clear...

...Couched in careful bureaucratese, the FCC release announced: "Reductions in rates for interstate long distance telephone calls will be submitted shortly by the Bell System telephone companies to the Federal Communications Commission...

...in the reverberations of his "Face the Nation" appearance, a group of Southern broadcasters petitioned President Nixon to remove Johnson four years before the expiration of his term...

...that segment of the Washington Bar which represents the industry involved...

...Since 1949, when the Hoover Task Force found the Commission to have "failed both to define its primary objective intelligently and to make many policy determinations required for efficient and expeditious administration," virtually every independent scrutiny of the FCC has resulted in an indictment of the agency...

...Telecommunications is, of course, only one phase of the FCC's responsibility, and the one that attracts the least public notice...

...A member of the FCC staff says some Commissioners were "hopping mad...

...If revenues appear too high in interstate services, and a rate cut seems likely, it can shift some additional costs to the interstate side of the business and make rates of return look lower...

...It is content to leave primary control in the hands of the Bell System...

...Democratic Representative Jonathan B. Bingham of New York called it an "outrageous deception...

...AT&T issued its own press release on November 5, and it didn't bother to clear the language with the FCC...

...The FCC has jurisdiction over the interstate and foreign services furnished by Bell, while state and local agencies—including regulatory commissions in each of the fifty states and the District of Columbia—exercise control over intrastate business...

...It owns 100 million telephones and handles well over 100 billion calls a year...

...Whatever decisions are made —whether adjustments are made, how much, what the company agrees to and how much the Commission compromises—are not normally explained publicly in the way formal decisions are____" In the course of these murky negotiations, the FCC majority restored to Bell $50 million of the rate reductions it had originally proposed...

...Inasmuch as a state line is an artificial boundary for separating jurisdictions," Johnson continued, "the cost allocations must remain inherently arbitrary...

...If you could find one who actually likes to read and write, so much the better...

...He was with the blue-ribbon Washington law firm of Covington and Burling when President Johnson appointed him Maritime Administrator in 1964...

...Born in Iowa City, Iowa, in 1934—the year, as he likes to point out, when Congress passed the Federal Communications Act—Johnson is a Phi Beta Kappa graduate of the University of Texas and an honors graduate of that university's law school...

...In addition, AT&T has previously agreed to file reductions of about $87 million representing an offset to increases in revenues resulting from higher rates recently filed for program transmission, Telpak and teletypewriter exchange (TWX) services when the latter increases become effective...

...It is expected that the reduced rates will save users pf telephone service about $150 million per year...

...The American Telephone and Telegraph Company, after negotiations with the Government, has agreed to the largest reduction ever in its long-distance rates, it was announced today," The New York Times reported under the front-page headline, Phone Rates Cut in Distance Calls...

...They had to get government assistance through the Rural Electrification Administration, their own cooperative telephone services, and non-Bell microwave carriers...

...The Bell System acts, in effect, as a holding company for the local, state, and regional telephone companies associated with it which provide "local exchange" service...

...Whatever one might say of the history of FCC involvement in separations, it can scarcely be accused of regulatory enthusiasm...

...And Johnson added, "Since the surveillance process generally takes at least a year from the time excess earnings occur, to Commission recognition, to Commission action, to tariff filing, the majority's failure to take account of the probable effects of the surcharge changes may cost the consumer $100 million in 1970...

...Despite the ceiling set by the FCC in 1967, the Bell System's interstate earnings "are expected to exceed 8 per cent" in 1969, the Commission acknowledged, and the company projects an 8.5 per cent profit for 1970 under present rates...

...Like other public utilities, AT&T makes its contribution to financing the Vietnam war by patriotically passing the surcharge on to the consumers...

...First glances can be quite deceptive...

...He denounced it (quite correctly, as will be shown) as "a deal behind closed doors," and added: "What particularly concerns me is this: AT&T currently has requests pending for increases in rates for local telephone service in seventeen states...

...No one has ever suggested that government regulation is a panacea for men's ills," he wrote not long ago...

...The men selected—Chairman Dean Burch, who headed the Republican National Committee during Barry Goldwater's 1964 Presidential campaign, and Commissioner Robert Wells, a Kansas broadcaster—turned out to be totally acceptable...

...Chances of enactment are rated poor...

...The Commission anticipates that the new rates will permit the companies to achieve earnings in a range needed to attract capital under today's conditions...

...communications (including Comsat), international cable communications, and private microwave systems...

...The close collusion that characterizes the FCC's relations with AT&T extends to the full spectrum of its dealings with industry and reflects the climate that pervades all regulatory agencies...

...Consistent with experience following prior rate reductions, we also anticipate that the interstate revenues and earnings will be stimulated to some extent by the reductions in rates the company is now proposing," the FCC ERWIN KNOLL is the Washington editor of The Progressive...

...When that happens, as I feel certain it will, AT&T will more than recover the $150 million reduction it has made in interstate rates...

...But he is one Commissioner among seven, and so the Bell System has reason to be cheerful too...