Bully on the Line? : Competitors are accusing Pac Bell of ‘predatory’ practices--and state regulators are listening.

For about two months now, Pacific Bell has offered voice mail, an electronic telephone-answering service, to its customers in San Pedro and in the Silicon Valley community of Milpitas. But already a competing voice-mail company, Amvox Inc., has accused Pacific Bell of “anti-competitive behavior” through its monopoly hold on local telephone service.

Amvox pointed out in a complaint filed last month with the California Public Utilities Commission that Pacific Bell encourages customers interested in the new service to call a toll-free, seven-digit number for information. Competitors such as Amvox can match that convenience only by leasing costly toll-free service from its competitor, Pacific Bell--and even then the call requires dialing 11 numbers.

Moreover, Pacific Bell is offering a free message-taking service to launch its voice mail system--a practice Amvox called “predatory,” or pricing a service at below cost to drive out competitors.

“I really am not worried about them as an equal competitor,” said Harry Schwedock, chief operating officer of Amvox, a unit of Amway that claims 41,000 customers in California. “But I am very worried about them with the playing field as tilted as it is.”

While Pacific Bell denies Amvox’s allegations, many entrepreneurs seeking a foothold in emerging competitive areas of the telecommunications business find that the complaint has a familiar ring. Critics say that Pacific Bell and other regional phone companies have repeatedly abused their monopoly position to squeeze potential competitors in unregulated businesses.

And the complaints are growing louder as the PUC considers loosening its regulation of Pacific Bell and GTE California, a move that the newcomers say would open the door to further competitive abuses as long as they control telephone access to customers. Although deregulation proposals have been put forward ostensibly to stimulate competition, opponents argue that relaxing oversight of Pacific Bell and GTE would free them to bully struggling young entrants to the fast-evolving telecommunications industry.

In fact, they urge adoption of toughened regulations that would require the two local giants to keep their monopoly on basic telephone service entirely separate from new offerings, such as voice mail and information services, to keep the big companies from having an unfair advantage.

Among those who voiced their concerns during a special hearing last week of the Assembly Utilities and Commerce Committee were:

- Telephone-equipment repairers who groused that Pacific Bell’s Yellow Pages directories are filled with ads plugging its own repair service, ads that competitors would have to pay dearly for.

- Home-security companies, dependent on local phone lines to connect customers to the firms’ alarm-monitoring networks, which disputed Pacific Bell’s claims that their phone connections are far below cost and therefore their rates should be doubled or more.

- Cable television companies, which cited a long history of “unreasonable” rent charged by local phone companies for use of their poles to string TV cable, disputes that already have resulted in federal legislation and some state regulation.

Such concerns over the future of competition in the fast-changing world of telecommunications are coming to a head after months of PUC hearings examining alternative ways to regulate local phone companies. These alternatives seek to give Pacific Bell and GTE California greater flexibility in setting prices, to shorten the time needed to offer new services and to create stronger incentives for innovation by ending limits on profitability.

AT&T; Gets Some Freedom

The PUC and the Federal Communications Commission have already given American Telephone & Telegraph, the nation’s dominant long-distance phone company, some freedom in setting its long-distance prices. Similarly, the PUC granted Pacific Bell freedom to negotiate rates for certain switching and high-speed transmission services with major business customers.

But even AT&T; and its chief long-distance competitors--MCI and U.S Sprint--depend on local phone companies to reach their customers. And they joined the smaller and newer telecommunications firms in opposing proposals offered by Pacific Bell and GTE California, pointing out that the phone companies’ monopoly on local connections represents a “bottleneck” through which all telecommunications services must flow.

“We’re not against competition” from the phone companies, said Jerry O’Brien, director of telecommunications for API Alarm Systems in Culver City. “We’re against unfair competition. A monopoly service should be regulated. But if there’s competition, if it’s not a monopoly, then it should be a separate entity.”

A separate company would then have to buy and pay for network services on the same basis as other companies, he explained.

Pacific Bell has proposed scrapping the PUC’s present trial-like procedure for establishing telephone prices and policies. This procedure establishes service costs and adds a maximum profit, then computes the utility’s annual revenue needs and sets its rates accordingly. The Pacific Bell plan would put these “general rate cases” on hold for three years while freezing residential rates and giving the company some freedom to increase or lower prices for business services.

GTE California’s proposal also would suspend rate hearings and impose rate caps, although somewhat differently.

The PUC Division of Ratepayer Advocates has developed another alternative--the only one that calls for a general rate cut before any freezing of residential prices. “A rate freeze is of no great advantage to rate-payers if they are entitled to a reduction,” observed division director Terry Murray. A rate cut is overdue, she said, because basic telephone costs have been declining with improved technology that has been paid for by customers. But after “getting the starting point right,” she added, the division would consider proposals to split with company shareholders and customers what now would be designated as “excess earnings” subject to refund.

The PUC’s hearing officer exploring these regulatory alternatives, Administrative Law Judge Charlotte Ford, said she expects to complete her recommendations in midsummer. If so, the commission could decide the issue in September. All five PUC commissioners were appointed by Gov. Deukmejian, and are considered to be sympathetic toward deregulating telecommunications.

“We all have a big stake in our state’s telecommunications policies,” Assemblywoman Gwen Moore (D-Los Angeles) said at the opening of last week’s hearing by the utilities and commerce committee, which she heads. “They will determine, more than we can imagine today, how we will live our lives tomorrow.”

Moore’s committee was told repeatedly that competition in telecommunications services is essential to bring the full benefits of the so-called information age to California. But true competition, those testifying said, hinges on tough regulation that prevents anti-competitive practices, such as allowing Pacific Bell and GTE to subsidize their new businesses with profits from their phone services.

“All the (anti-competitive) problems are resolved by separating” the old businesses from the new ones at the big phone companies, asserted Schwedock of Amvox. But without strict separation, abuses are inevitable, maintained Dennis E. Love, president of Extension Connection in Marin County.

Love formed Extension Connection in 1985 to repair telephone wiring inside homes and small businesses when that field was deregulated, but he has seen his dream of creating a nationwide franchise of independent repair services fade in the face of costly litigation with Pacific Bell. Love’s original fleet of nine trucks has shrunk to two, and his office now has moved from spacious rented quarters to his own home.

Central to his problems, he insists, was the printing of a wrong telephone number by Pacific Bell’s Yellow Pages subsidiary two years ago in $25,000 worth of ads he placed in the utility’s Marin County and San Francisco directories. After months of negotiations with Pacific Bell’s lawyers, Love won a settlement for an amount he considers to have been far less than what his publicly traded company lost in business and hefty legal expenses. Then this year’s directories appeared last month with Extension Connection’s ad left out, “inadvertently,” according to Pacific Bell Directory.

Schwedock understands such frustrations among colleagues trying to compete against the big regional companies, telling Moore’s committee:

“When we have a competitor to whom we pay over 35% of our revenues for services essential to our business, when we have a competitor who has no need to raise capital, when we have a competitor who has more lawyers than we have employees, when we have a competitor who has a long record of anti-competitive abuses, we worry.”