Regulators Take Aim at High Cellular Rates : Utilities: Southern California’s 800,000 users could see their bills drop by as much as one-third. But service providers say rate cuts would overload the airwaves.

California’s cellular telephone users, who have made the state the mobile communications capital of the nation, may soon enjoy rate reductions for the first time since service began here in 1984.

But the cuts, which could slash rates in one of the nation’s most expensive cellular markets by as much as one-third, are likely to add more congestion to the already overcrowded cellular airwaves, the phone companies say.

The move by the California Public Utilities Commission to cut cellular rates is an unprecedented action that will be closely watched by regulators and cellular phone companies across the nation.

Steps toward the possible rate reduction began earlier this month when the commission ordered cellular network operators to dramatically lower the rates they charge service wholesalers.

While the PUC’s action is widely viewed as a big boost for consumers, cellular companies say just the opposite is true.

“We’re barely keeping pace with the existing subscriber growth,” said Brian Kidney, a spokesman for PacTel Cellular, the state’s largest operator. “The network couldn’t handle the traffic volumes that would be generated by substantially lower prices.”

The PUC ruling comes at a time of growing complaints nationally and in California about insufficient competition in the cellular industry, which got its start nearly nine years ago.

To ensure some level of competition, the federal government awarded exclusive cellular franchises to two network operators in each geographical region. But critics say that usage fees charged for air time by the two cellular franchisees in each region remain remarkably similar--at or near their 1984 level. By contrast, the cost of basic cellular handsets, available from dozens of different manufacturers, has dropped by 90% in eight years.

Cellular pricing, network operators say, has been fueled by high demand, especially in Southern California, home to an estimated 800,000 of the state’s 1.1 million cellular subscribers.

“Cellular is not priced in relationship to its cost but in relationship to what the market will bear,” Kidney said. “Price is the point at which the customer assigns value to a service. . . . We’ve had 30% subscriber growth every year. That shows customer satisfaction.”

*

The PUC’s bold move to impose regulation on the largely unregulated cellular industry could trigger similar moves elsewhere in the nation, some analysts say. Furthermore, they say, regulators could award additional cellular franchises to stimulate competition.

“California often leads the way in regulatory assaults,” said Sharon Armbrust, a telecommunications analyst with Paul Kagan Associates in Carmel. “This could be something that moves to other places.”

There are already some early indications that the federal government could step in to regulate the business, which it has so far treated with a hands-off policy.

The federal Government Accounting Office, in a report in July, said the current duopoly system is “unlikely to provide a product at a competitively set price.”

The GAO called on the Federal Communications Commission, which issued the original cellular franchises, to begin collecting information on costs and pricing from cellular phone companies as a possible first step in determining whether additional federal regulation is necessary.

*

A nationwide survey by Paul Kagan Associates found that PacTel Cellular and L.A. Cellular, the two franchisees in Southern California, charge identical rates that are the fifth-highest in the nation.

Under current rates, a customer’s monthly bill for 150 minutes of network usage would be $107.10 for both companies. The survey results assume that 80% of the time was billed at the companies’ identical charges of 45 cents per minute for peak-time calls and the remaining 20% was billed at their off-peak rate of 27 cents per minute.

However, under fees proposed last week by Cellular Service Inc., a Glendale cellular wholesaler, the bill for this same customer would drop by a third, to $72.90, a decline that many regulators said should have occurred years ago.

“Prices were supposed to drop because there were two providers of the service in every area. But they haven’t,” said John Ohanian, a member of the state Public Utilities Commission. “We believe more competition would be better for everyone.”

The PUC is also scheduled to consider early next month a proposal to begin a sweeping review of mobile communications prices and services in the state.

Cellular companies argue that lower rates would trigger a surge in subscribers, further overloading the already crowded network. Even now, cellular customers complain about busy signals, static and conversation interruptions. Large numbers of new customers, cellular operators say, would increase these problems until the network could be expanded to accommodate the additional subscribers.

With reduced profits looming under a lower pricing scheme, the cellular operators contend that they will have less financial incentive to invest in improvements to the system. The operators say they will appeal the ruling next week, a move that will delay indefinitely any rate cuts.

If the PUC denies the appeal, PacTel has said it will take the matter to court.

On Thursday, the shares of some cellular telephone companies dropped in active trading, possibly because of Wall Street’s concern about the PUC’s ruling. McCaw Cellular Communications shares dropped $2 to $21.25 a share, and the stock was the second most-actively traded on the NASDAQ composite.

On the New York Stock Exchange, GTE Corp. stock fell 12.5 cents to $34, and PacTel slumped $1.875 to $40.125. PacTel was the third most-active Big Board issue, although the company attributed the heavy trading to rumors on Wall Street that company directors will vote against a proposal to split up the company’s operations. PacTel officials denied the rumor.

Even if regulators do not change the current cellular system, competition is clearly on the horizon from new mobile communication technologies.

Fleet Call, which once offered radio communications services exclusively to truckers, has been given federal permission to operate a cellular-like mobile phone system in large metropolitan areas, including Los Angeles, where service is set to begin late next year.

*

But the largest potential threat to cellular service may be the still-experimental “personal communication networks” that are being tested throughout the country.

Although these services offer cellular-style portable phone service, they are primarily suited to tightly limited ranges and are not considered suitable alternatives to cellular for in-motion conversations.

The FCC is studying how to award the franchises for these networks, which are not expected to be in place until at least 1994.

Cellular Telephone Costs

Cellular telephone rates in California, among the highest in the nation, could drop by as much as a third under a state regulators’ ruling ordering cellular service providers to lower their wholesale charges.

Current Proposed Wholesale Charges Monthly access fee: $32.26 None Per-minute charge/peak hours: 36 cents 23.4 cents Per-minute charge/off-peak hours: 22 cents 14 cents Charges to Customers Monthly access fee: $45.00 $27.00 Per-minute charge/peak hours: 45 cents 33 cents Per-minute charge/off-peak hours: 27 cents 21 cents Average Consumer Bill Based on 150 minutes monthly usage, 80% of it at peak hours. $107.10 $72.90

Source: Pactel Cellular, Cellular Service Inc.