Business: Faults Found

Every man who ever fumed about the phone bill had reason last week to be pleased. Every man accustomed to getting $9 a share in annual dividends on his American Telephone & Telegraph Co. common stock had reason to be anxious. For, in the most far-reaching and drastic report of its kind ever submitted to Congress, Federal Communications Commissioner Paul Walker recommended that telephone rates be cut 25%, and that FCC be given more absolute control over A. T. & T. than any Government agency has ever held over any U. S. industry except in time of war.

Commissioner Walker’s 1,100 pages of indictment and proposals are the result of three years’ investigation. They would still be the Commission’s secret had not the Commission learned that communication circles had somehow “tapped its wires.” Rather than give A. T. & T. a chance to prepare a counterpunch while FCC studied the report, lively little Chairman Frank R. McNinch decided to make Commissioner Walker’s findings public at once. But he specifically told Congress that it “is not a report by the Commission, but is instead a report submitted to the Commission and is now being studied by the members of the Commission with a view to subsequent determination, at the earliest practicable date, as to the form and content of the report which the Commission will later submit to the Congress.”

Commissioner Walker’s major premise is that, because of A. T. & T.’s system of cost accounting and its relations with its manufacturing subsidiary, Western Electric Co., its costs are far too high and could be reduced enough to bring telephone rates down 25% “without interrupting existing net earnings.” Other Walker assertions and proposals:

¶ “Failure to deduct depreciation reserves in arriving at rate base values has permitted the Bell System to earn a return on amounts far in excess of the investment made by the owners.” Rates should be based on the “prudent investment” theory espoused by Franklin Roosevelt.

¶ “The Bell System has successfully evaded effective State regulation, despite the separate corporate entities of the operating subsidiaries. . . . The System is treated as a unit for purposes of profit, and as a group of separate corporate legal entities for purposes of regulation.” A. T. & T. is a utility and a monopoly and should therefore be regulated by the Government.

¶ Western Electric is “the manufacturing and supply department of the Bell System, having a monopolistic position comparable to that of the American company and partaking of all the attributes of a public utility. …” The Bell System pays Western Electric unnecessarily large prices for telephone equipment and apparatus. These costs should be reduced as the major means to cutting telephone rates.

¶ The Bell System has held patents and improvements, such as the modern handset, in abeyance for years in order to avoid huge losses on equipment in hand.

¶ Large executive pensions should be drastically reduced.

¶ Cost of institutional advertising should be borne by the stockholders, who benefit by it, instead of by the telephone subscribers, who pay for it now through their bills.

To put these sweeping recommendations into effect, Paul Walker asked that the Communications Act of 1934 be amended to give FCC authority: 1) to “review, approve or disapprove all Bell System policies and practices promulgated by the central management group”; 2) to “permit regulation of the Western Electric Co. by the FCC as a public utility”; 3) to “fix temporary rates whenever it appears that the return on net book cost is excessive”; 4) “to regulate Bell System financing”; 5) “to limit the scope of Bell System activities to the communications field” (Bell System at various times has been involved in radio, cinema, artificial larynges, photoelectric eyes).

When A. T. & T. President Walter Gifford read these recommendations he exploded in wrath: “The investigation . . . was one-sided from start to finish. We were denied not only the right to cross-examine investigation witnesses and to be heard in our own behalf but were denied the right to have included in the record written material which we had prepared and considered necessary to point out serious and important errors affecting most of the investigators’ reports. Commissioner Walker’s report must be appraised in light of these facts. … It presents much that is imply not true. . . .

“This country has the best, the most extensive, the most widely used and the cheapest telephone service in the world. In spite of this, it would appear that fault has been found with almost everything this company has done throughout its existence. This just does not make sense. . . .”