State Debate on Phones Stirs Fears at PacBell

Times Staff Writer

The state of California doesn't know within $100 million or so how much it spends on telecommunications each year, has no policy linking its telecommunications and information needs, and relies on what one key legislator describes as an "antiquated" private telephone network designed and built 20 years ago by the monopoly Bell System.

Two committees in the Legislature and a separate government commission are now working hard to straighten out what is generally considered an inefficient and inflexible state telecommunications system. And the sudden state interest in the subject has caused anxiety at Pacific Bell, which inherited the state's business with the Bell System breakup in January, 1984.

If the state were to set up its own telephone company--a solution that one major California study suggested--PacBell would lose more than $200 million in annual revenue, the company contends. And that, PacBell maintains, would mean higher rates for its remaining customers--primarily individuals and small businesses.

Assembly Hearings

For every $85 million in lost revenue, consumers could find themselves paying $1 in higher monthly telephone charges, according to Lee Camp, PacBell vice president for marketing.

Interest in the telecommunications issue is coming from several quarters. Gwen Moore (D-Los Angeles), chairman of the Assembly Utilities and Commerce Committee, began hearings here last week on how to bring the state into the information age. Moore described as "antiquated" the state's Automatic Telephone Switching System, or ATSS, and pointed out the wide discrepancy in estimates of state spending on telecommunications. The state Department of General Services estimates that it will spend about $100 million for telecommunications this year, she said, and the state auditor general maintains that the true cost, depending on how telecommunications is defined, could be twice that.

In addition to Moore's committee, the Senate Energy and Utilities Committee began related hearings last week. And the Commission on California State Government Operations--the Little Hoover Commission--is scheduled to offer recommendations next month on what the state should do to improve its ability to transmit data and to use modern technology to reduce travel costs, boost productivity and, in general, manage its diverse affairs more effectively.

New System by 1990

By 1990, PacBell plans to improve the state's ATSS network to a fully digitalized, computer-controlled operation in which voice, video and data transmissions are integrated, said Don Hamilton, who manages the state's account for the San Francisco-based utility. When that is accomplished, Hamilton told the Assembly committee's hearing, ATSS will be comparable to the best that can be assembled by any other vendor.

But PacBell remains worried that the state and other government entities might create their own telephone company or otherwise abandon its network and take their revenue with them.

The Legislature last year considered a proposal offered by Sen. Alfred E. Alquist (D-San Jose) that called for state and local governments and the public universities to pool their telecommunications requirements and resources into their own telephone company known as the California Telecommunications Services Cooperative, or CalCom. The Senate measure died quietly as the session ended after having been substantially watered down, but the concept has yet to be administered last rites.

The concept apparently was born in a report by a Cal State San Diego professor, John Witherspoon, who warned that, unless local and state governments begin dealing with their telecommunications and information needs rationally, their costs will escalate rapidly. He maintained that creating a cooperative telephone company linking public agencies could offer a way to control costs while exploiting technology.

The Witherspoon report is being analyzed by the Little Hoover Commission

Moore, however, is adamant that the government should not encourage, by its own example, other big telephone customers to build private networks that bypass the system that serves the general public. But, Moore contends, the state must find ways to profit fully from the expanding potential of the information age.

Fixed Costs

PacBell maintains that taxpayers would lose any savings realized by a state-run telephone company. The company maintains that consumers would pay higher rates for telephone service, because the fixed costs of maintaining the local network would remain the same with less revenue to pay for it.

Already, said Bill Woods, an AT&T; Communications vice president, 11% of the state's biggest businesses have built private telecommunications networks bypassing the local public network, and another 11% intend to do likewise in the next two years.

"If this scenario is allowed to continue, those who remain on the public network will have to pay an even greater share of the local companies' fixed costs," Woods told the Senate committee.

PacBell estimates that 1% of its customers generate 40% of its revenues.

The "bypass problem," as the phenomenon is usually called, stems directly from the end of the Bell System's elaborate internal subsidies, according to Camp. "That is exactly what makes bypassing attractive," he said.

Before AT&T;'s local companies were spun off into seven independent regional telephone companies, Camp explained, $3.2 billion in subsidies from such profitable services as toll calling and Yellow Pages advertising supported unprofitable services, especially local calling and installation charges, offered by Pacific Telephone, PacBell's predecessor. Nearly two-thirds of that amount financed residential rates, he said.

Modest Increases

The subsidies enabled Pacific to restrain increases in its basic monthly residential service charge, which increased only modestly over the last 35 years, from $4.75 a month in 1950 to $8.25 today, Reed Waters, PacBell vice president for regulatory affairs, told the Senate committee. Had the charge been linked to increases in the consumer price index over those years, Waters said, it would today top $25.

To replace the internal Bell System subsidies, federal and state regulators imposed "access charges" that long-distance carriers must pay to local telephone companies for using their networks to originate and complete calls, and these charges have been largely passed on to long-distance customers in higher rates. Those charges, considered misplaced by the local companies and onerous and unjustified by the long-distance carriers, provide an economic incentive to heavy telecommunications users to avoid paying inflated rates by avoiding PacBell's network.

In PacBell's $1.36-billion rate case, which was formally filed with the California Public Utilities Commission last week, the utility is seeking to begin shifting those charges to local customers. It estimates that $800 million in revenue should be shifted from the carriers, and proposes accomplishing the shift in $200 million increments. This is vehemently opposed by consumer groups, such as San Francisco-based TURN (Toward Utility Rate Normalization).

But, Waters emphasized to the senators: "There is no effective way to prevent 'bypass' other than by an effective price structure."

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