Reaching Out : PacBell Enlists Legislature in Lobbying for Long-Distance

Pacific Bell, seeking a leg up in its campaign for the right to compete with long-distance companies such as AT&T; and MCI, has found an important friend: the California Legislature.

In a heavily lobbied bill that has everyone from AT&T; to dozens of little phone companies and the Consumer Federation of America crying foul, PacBell has enlisted lawmakers squarely on its side in the emerging, theoretically free-market new world of telecommunications.

“The state of California ought to assert its right to protect its largest employer,” says Assemblyman Jim Costa (D-Fresno), the bill’s chief sponsor.

The legislation, which sailed through the Assembly on a 61-1 vote and won unanimous support last week at its first Senate committee stop, requires the California Public Utilities Commission to order PacBell to offer long-distance service within the state.

The realization that California doesn’t have the authority to do this--the Legislature’s own lawyers pointed out that it would violate a federal court ban on regional Bell companies entering the long-distance markets--sent lawmakers scrambling to rejigger the bill.

Now it is predicated on action at the federal level, in effect making the Legislature a lobbyist on PacBell’s behalf before Congress--which is weighing several such measures--or the federal courts. PacBell is the only company that would benefit from the bill. (PacBell serves about two-thirds of Californians. GTE, which serves most of the rest, wouldn’t be affected.)

“Our point is, if Congress doesn’t act and we need to go to (U.S. District Judge Harold Greene), we would like the support of the Legislature and the PUC,” says Phil Quigley, chairman of Pacific Telesis, the parent of PacBell.

And just in case the amended bill is still illegal, PacBell promises to pay for the lawyers when the PUC gets sued.

The arrangement sounds a little cozy to some. “One wonders if the PUC isn’t up for rent then,” says Albert Chu, the PUC’s former legislative liaison. Others wonder about the Legislature going to bat for one company over dozens of others and preempting the normal regulatory path.

A. Michael Noll, a professor and telecommunications expert at USC’s Annenberg School for Communication, says that if the bill is enacted, it will mark a subversion of the regulatory process, foster a revival of the old Ma Bell monopoly and represent a sellout by the Legislature.

“This is so arrogant,” Noll says. “It sounds like PacBell is taking over the state of California.”

That is, of course, hyperbole. PacBell is maneuvering for advantage against the time when, under deregulatory policies being pursued nationwide, it is expected to lose its virtual monopoly on local phone service.

Indeed, though the claim is ridiculed by many, Quigley argues that PacBell already faces significant local competition in urban areas, where a handful of firms offer private lines to big corporations.

Unless it is freed to move quickly into long-distance markets, PacBell contends, it could be overrun by the established long-distance providers and left with little but the market nobody else wants: unprofitable residential local phone service.

“This is a fight between major interests, each one seeking advantage,” says Daniel Fessler, a former University of California, Davis, law professor who now chairs the PUC. He calls the bill unnecessary.

The phone conversations have gotten downright nasty.

If it’s allowed to compete, PacBell says, it will undercut long-distance rates by 20%--a promise opponents say it couldn’t keep without abusing its monopoly power. Both sides have commissioned “studies” concluding that the other guys are obscenely profitable.

Quigley likes to call AT&T; a “genteel oligopoly.” USC’s Noll says that “a monopoly calling someone else an oligopoly is like the Mafia calling the CIA evil.”

In making its case, PacBell has wrapped itself snugly in the California state flag. Pacific Bell is in fact the state’s largest employer, and a political and civic force in virtually every community in California, and dozens of local groups from across the state are backing the bill.

“We’re the home team,” says PacBell lobbyist Ron del Principe.

“But so are we!” cries Sam Medina of Napa, co-founder of NVTS Ameritel, one of 115 small, little-known long-distance companies operating in California, including 52 based in the state. Nearly all their customers are businesses, and their rates are typically 15% below those of AT&T;, MCI and Sprint.

Medina’s complaint is the same as that of the bigger long-distance outfits: Because their customers all must go through PacBell’s switches to get access to their long-distance lines, letting PacBell compete for those calls would enable it to undermine its competitors.

Says AT&T; lobbyist Douglas Kindrick: “It’s hard to carry on a war with someone you buy your bullets from.”

Everyone agrees that more competition is coming to the telephone business, but meanwhile Pacific Bell retains a virtual monopoly over purely local phone service as well as “local long-distance”--toll calls within each of the 10 telephone regions in the state. PacBell is expected to lose that intra-regional monopoly later this year by order of the PUC.

The struggle in the Legislature is over a third market--the $3-billion-plus market for phone calls between those 10 phone regions, such as from Los Angeles to San Francisco. Those calls, like national and international calls, are handled by long-distance carriers--chiefly AT&T;, MCI and Sprint. PacBell and the other Baby Bells are barred from those markets under the 1984 consent decree setting rules for competition in the wake of Ma Bell.

Among other things, the consent decree signed by Judge Greene allows a waiver from this inter-regional long-distance ban if the Baby Bells can show it is unlikely they could use their market power to impede competition in the new market. PacBell has been free to seek this waiver on its own for a decade, but hasn’t tried.

“They understand it would be difficult to convince federal authorities that they meet this test,” says Ray Marshall, a UC-Berkeley economist and former labor secretary under President Jimmy Carter, testifying for AT&T.;

Meanwhile, Congress is debating several measures that would supersede Greene’s court order, letting the Baby Bells enter long-distance markets under certain conditions or letting each state decide.

It may be in Congress, rather than before Greene’s court, where PacBell would have the best luck in invoking the name of the California Legislature.

“Judge Greene is supposed to judge based on the prevailing conditions in each market, not on whether the Bell companies have more campaign money to give to legislators,” says Bradley Stillman, legislative director of the Consumer Federation of America.

The CFA and the main phone utility watchdogs in the state, Toward Utility Rate Normalization and Consumer Action, oppose the legislation in part because it appears to usurp authority from the PUC--a legislative strategy that USC’s Noll says is increasingly being used by the Baby Bells.

The bill does leave a role for the PUC, ordering it to implement safeguards against PacBell abusing its monopoly power. But the utility resists what consumer groups and others want: a litmus test for the existence of local competition before PacBell is unleashed on the long-distance markets. PacBell’s position has fueled suspicion of anti-competitive intentions. Among lawmakers, in any event, there has been little debate on such telecommunications issues. Instead, the focus has been on the need to protect California against “out-of-state companies.”

The measure has been heavily pitched as a jobs bill. The influential Costa says it will “protect or create thousands of jobs” because big non-California companies such as AT&T; have been shifting jobs out of the state and cutting back. PacBell, meanwhile, will have slashed its own work force by about a third, to 42,000, between 1990 and 1998.

The Arguments

If Pacific Bell wins the right to offer long-distance calls within California, it promises to slash phone rates. It’s no surprise that AT&T;, MCI and Sprint oppose PacBell’s entry into the market. But consumer groups and many telecommunications experts also oppose it. At issue is whether a PacBell-sponsored measure sailing through the California Legislature would position the utility to turn its local phone monopoly into a statewide one and force rates higher. Here are claims and counterclaims on the effect of the bill, AB 3720.

For:

* PacBell will undercut the competition on long-distance rates inside California by 20%.

* Thousands of California jobs will be “protected and created” because the state’s largest private employer will be freed to compete in the $3-billion-plus market for long-distance calls between the state’s 10 phone regions.

* The bill will promote competition, innovation and new technology by challenging the “genteel oligopoly” composed of AT&T;, MCI and Sprint, which together control 90% of the long-distance market.

* It brings the law up to date in the fast-shifting world of telecommunications, where new technology makes the notion of a local-phone monopoly a myth.

Against:

* Rates will fall temporarily until PacBell achieves dominance, then rise about 9%.

* There will be a job shift to PacBell from dozens of small, independent, non-union long-distance companies based in California, with a net loss of 38,000 jobs in the state.

* The bill will stifle competition by enabling Pacific Bell to use its control of local phone switches, customer lists and other monopoly advantages to compete unfairly in the long-distance markets.

* PacBell remains a monopoly as the only carrier in its service areas that is allowed to offer a dial tone, making it the “toll booth” through which all customers must pass to get access to other companies’ long-distance services.