Phone Systems Get Permission to Compete With Cable : Telecom: Cable industry, consumer organizations criticize FCC ruling, saying cost will be borne by existing customers.

Brushing aside the protests of cable television operators and consumer groups, the Federal Communications Commission on Thursday gave local telephone companies the green light to build networks to compete with cable TV.

The ruling lifts a cloud of uncertainty over so-called video dial-tone services by throwing out two dozen petitions challenging the FCC’s 1992 decision to allow phone companies to carry video programs on their network.

Thursday’s decision was cheered by investors because it is expected to spur a multibillion-dollar upgrade of the nation’s aging local phone system over the next decade. The improvements will benefit not only video programmers, but also computer users who require high-capacity phone lines to transmit data.

The ruling was decried by the cable industry and consumer groups, who say phone companies will make their existing users shoulder the massive cost of developing the new video networks. They fear the companies will thus be able to compete unfairly against cable TV operators.

“The FCC has failed to establish rules for the road to protect consumers . . . while granting the telephone companies the authority to build,” said Bradley Stillman, legislative counsel for the Washington-based Consumer Federation of America. “Using the most conservative numbers, we are talking about an additional $16 per month on the phone bill of every American household for the next 20 years” to pay for video dial tone, Stillman said.

Upgrading the telephone network for video is expected to cost between $100 billion and $400 billion, analysts say. The overhaul will require phone companies to extend their deployment of costly fiber-optic cable and install new phone switches capable of handling video.

In principle, the phone companies will not be allowed to fold the cost of the video networks into their regular capital improvement programs, which would enable them to pass the costs along to telephone ratepayers. But as a practical matter, it will be difficult for the FCC’s staff of 26 auditors to determine how much of the cost of a new network should be attributed to the video-carrying capability and how much to the more traditional function of handling phone calls. The FCC decided Thursday to evaluate such cost allocations on a case-by-case basis rather then impose definitive regulations.

For years--concerned about federal and state regulatory constraints that keep them from directly entering the cable business--phone companies had been reluctant to risk money modernizing their phone networks to deliver video signals. Instead, they sought rule changes that would allow them to profit from the creation and sale of programs rather than just transmitting video content as a common carrier for others.

The FCC still prohibits phone companies from directly investing in cable firms in their own service area, or even contracting with a so-called anchor programmer that would supply the bulk of their video programming.

But in recent months, as fiber-optic prices have fallen, phone companies have found the lure of video dial tone more compelling. The falling prices have made it more cost-effective to replace aging copper lines with the fiber-optic cables needed to take play in the $20-billion cable TV business.

What’s more, with business and telecommuters clamoring for more line capacity to transmit computer data, more phone companies now believe that offering broad-band common-carrier services could offer additional income.

“The race is on to offer these (broad-band) services,” said Bill Deatherage, a telecommunications analyst for S.G. Warburg & Co. in New York. “I think (phone companies) will be very aggressive once they get” their individual video dial-tone applications approved.

The FCC has already given Bell Atlantic limited permission to offer a commercial video dial-tone service, but 28 other applications have been delayed while the agency formulated final rules.

“From our perspective, the drive to upgrade the phone network does not come as much from the possibility of new (video) revenues than it is driven by the possibility of cost savings and providing . . . new kinds of telephony,” said Steven Harris, a vice president at Pacific Bell. In the past, he said, “the regulatory process has been both a direct holdup and put a cloud over investment.”

But opponents vowed to press on with their fight.

“This is an incredibly bad decision that flies in the face of all logic and the record before the FCC, and we will appeal it,” said Decker Anstrom, president of the National Cable Television Assn., a Washington trade group.

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