It was 1986, and the Federal Communications Commission, pursuing telephone deregulation as almost a holy war, threw open the doors of competition to the potentially lucrative business of repairing and installing telephone wires inside a customer’s premises.
It was just the opening Dennis Love, a young Marin County entrepreneur hellbent on competing with Pacific Bell, had been waiting for. Spurred by the promise of riches and corporate success, Love opened The Extension Connection to provide telephone installation and wire repair services in the San Francisco Bay Area. Soon the firm was publicly traded and Love hoped to franchise it nationally.
But three years later, after, Love alleges, Pacific Bell twice botched his ads in its Yellow Pages and repeatedly undercut his prices, Love’s company was dead. And Love, now 36 and working as a part-time computer consultant, filed for bankruptcy.
“Pacific Bell destroyed me, just destroyed me,” Love said Wednesday after filing a $140-million antitrust suit against the company in U.S. District Court in San Francisco. “They destroyed my business and left my personal life a mess.”
Love may have a good case, or he may simply be an inexperienced entrepreneur unable to successfully take on a huge corporate giant. A Pacific Bell spokesman said because the company had not received a copy of the suit, it couldn’t comment on its allegations. General Telephone of California, named as a co-defendant and asked to pay penalties of $15 million, also had no comment.
But regardless of the merits of Love’s suit, the issues it raises illustrate one of the major problems bedeviling telecommunications executives, regulators and consumers since 1984, when the nation’s telephone system was freed from many of its regulatory shackles. The problem: how to keep track of the non-regulated businesses such as inside wire repair offered by the newly freed “Baby Bell” regional phone firms.
Throughout the country, consumer activists repeatedly complain, the Baby Bells’ newly competitive businesses are abusing their freedoms with unfair pricing strategies and aggressive marketing tactics that prey on consumers’ confusion over deregulation and the myriad of new services and companies it spawned.
Already there have been several complaints and settlements. Earlier this month, the Justice Department fined US West a record $10 million for antitrust violations. In addition, Southern Bell, Wisconsin Bell, Pacific Bell, Bell of Pennsylvania and Nynex have all been slapped with a variety of antitrust or improper business practices charges.
“The relationship between regulated and unregulated businesses in the same corporate entity is absolutely uncharted territory; we shouldn’t be surprised at all (about) the problems we’re having trying to get it to work,” said Doug Conn, a researcher with the Center for Telecommunications and Information Studies at Columbia University.
The crux of the issue in Love’s suit is whether Pacific Bell charges its customers what it actually costs the company to provide inside wire repair and installation services.
Love alleges it doesn’t. Instead, he claims, Pacific Bell subsidizes that business with fees generated from its ongoing monopoly telephone service, an illegal practice known as “cross subsidization” that allows it to undercut competitors’ prices.
In his suit, Love charges that both Pacific Bell and GTE locked up huge portions of the inside wire maintenance market in California by offering below-market rates for their annual insurance policies. He said Pacific Bell’s $6-per-year rate and GTE’s $12-per-year rate were far below what outside competitors could offer.
Further, he charged, because the phone companies administer the “611" repair hot lines, competitors are effectively frozen out of any repair business referrals.
At the same time, Love said he was particularly singled out for anti-competitive abuse when Pacific Bell twice ruined his Yellow Pages ad. The first time, in 1987, the phone book contained a wrong number for Love’s business. In 1989, the entire ad was omitted, an action Pacific Bell called “just one of those ironics” and attributed to human error.
Although Pacific Bell has not been disciplined by either federal or state regulators for inside wire charges, authorities have found evidence that the company has artificially set some of its prices for the service.
According to a report from the California Public Utilities Commission issued in December, Pacific Bell’s $6-per-year residential insurance charge, which has attracted no competition, is too high. Furthermore, the report said, its charges to business for the insurance and maintenance services--where Pacific Bell does have competition--are too low.
“They are subsidizing the rates where they do have competition with money raised from the areas where they have no competition,” said Chris Blunt of the commission’s compliance division. “They want market share.” Blunt said the PUC continues to monitor the phone company’s activities in that business.
In a separate matter, the Federal Communications Commission has twice told Pacific Bell that it cannot pass off charges from its unregulated business operations to its captive ratepayers to maximize its profits. In 1989 and 1990, the FCC canceled a total of $51 million in inside wire business costs that Pacific Bell had claimed were rightfully part of its ongoing telephone business costs that should be covered by phone rates.
DEREGULATED PHONE PROFITS The most popular deregulated businesses among telephone holding companies.
Cellular phone service
International ventures, including cellular, cable television, credit checking
Customer equipment maintenance
Sources: Federal Communications
Commission; Probe Research
NONREGULATED PHONE BUSINESSES
Total revenue of nonregulated businesses at the Baby Bells and GTE for the first nine months of 1990.
Non- Total regulated revenue revenue Company (millions) (millions) Ameritech 7,144 141 Bell Atlantic 7,997 841 BellSouth 9,180 334 Nynex 8,316 138 Pacific Telesis 5,870 57 Southwestern Bell 5,658 98 US West 6,100 116 GTE 7,182 360
Source: Federal Communications Commission