CORPORATIONS: A Present for Ma Bell

By granting a rate increase to American Telephone & Telegraph Co. last week, the Federal Communications Commission took an action that will help to buttress the U.S. stock market, prop up capital spending and hold down interest charges. When AT&T rates and profits rise, many things happen in the broader realm of business. First, AT&T stock gets a lift; because it is the most widely held issue of all—3,750,000 investors directly own 549 million shares—a rise in “telephone” tends to give a psychological impetus to the whole market. Second, the company can more easily draw upon earnings to finance expansion and modernization; AT&T, the nation’s biggest capital spender, this year will invest some $8.5 billion on such projects, or nearly 10% of all capital spending in U.S. business. Finally, AT&T, which is the largest private borrower, will not have to make such great demands on the capital markets; that, in turn, tends to keep interest rates in check.

The rate increase was particularly welcomed at the phone company because for much of the past five years it has been getting the wrong numbers. Inflation has hoisted its costs and hurt net profits, which last year were $2.2 billion on revenues of $18.5 billion. The failure to anticipate the surge in demand for telephones caused snarls in service. But last week’s FCC decision, approving the AT&T request for an increase on interstate calls, will raise pre-tax earnings by $145 million a year. This increase is in addition to a $250 million boost that the commission granted in January, 1971.

The most significant factor was that the FCC did not simply permit a rate increase, but raised the phone company’s allowable return on invested capital. The new ruling lifts the company’s return on long-distance calls from 7.7% to 8.5%. The company will also eventually be permitted, through increased productivity, to increase its rate of return to 9%. AT&T officials argue that the company needs an even higher return—up to 9.5% if they are to effectively meet ever-rising demand. President Robert Lilley notes that the cost of installing a telephone has risen by $182 to $600, in the last decade.

Phone company officials estimate that the cost of making a long-distance call will jump by an average of 2%. The increase must still be approved by the Price Commission, but most FCC commissioners believe their action falls within the guidelines. The agency’s 5-to-2 decision will also put the company in a strong position in seeking increases from state utility agencies, which have authority over local and intrastate rates. At present, AT&T has petitions for rate increases totalling almost $1 billion pending in 14 states, including Ohio, Massachusetts and New Jersey.

Even before the price boost, AT&T, under John Dulany deButts, who has been chairman since February, was slowly moving ahead again. DeButts and his aides have trimmed labor costs and made sharper projections of future needs. Productivity has also been improved in recent years by adding advanced technology like the electronic switchboard, which handles all the routine details of long-distance calls, freeing operators to help with unusual problems. Third quarter earnings increased by 20% over the same period last year, to $642 million. Since last May, AT&T’s stock has risen ten points, and last week alone it added 2% points, closing at 53½. Anticipating a further rise in market value, AT&T managers plan to float a new stock issue soon.