The theory was that the competition resulting from the breakup of A.T.&T. in January 1984 would lead to lower long-distance prices.

Accordingly, long-distance prices are falling sharply.

After being caught flat-footed, it has cut many long-distance prices as much as 70 percent.

The price-cap plan, they said, could end the downward trend in long-distance prices and limit competition in the industry.

But as long-distance prices have declined, the cost of local telephone service has risen 1 to 2 percent.

Yet, as long-distance prices have dropped, local telephone service has jumped in cost, which is just what the F.C.C. had intended.

Many analysts predict that it will be at least a year and possibly much longer before the existing system for regulating long-distance prices is changed.

Although average long-distance prices would decline 3.8 percent, the company proposed a smaller reduction for the quarter of its interstate calls that travel 124 miles or less.

That would indirectly produce a very small drop in long-distance prices, the commission said.

Over the same period, local communications prices are up 70.2 percent while long-distance prices are down almost 34 percent.