PUC Orders PacBell to Sell Local Service to New Rivals

In a hotly contested decision that sets the stage for competition in the state’s local and long-distance phone markets, California regulators ordered Pacific Bell to sell local phone services to new competitors at discounts as much as 17%.

The California Public Utilities Commission voted 3 to 2 on the level of the discounts. Business lines will be discounted by 17% for Pacific Telesis Group subsidiary PacBell and 12% for GTE California. The two phone companies will be forced to sell residential lines at discounts of 10% and 12%, respectively.

Under the federal telecommunications reform legislation passed earlier this year, local phone utilities are required to sell access to their networks to competitors at wholesale, minus “avoided costs” such as billing and marketing, which only the direct provider would incur.

At issue was what PacBell’s actual costs are, and how to calculate what the utility would save by not being the direct provider. PacBell had proposed a 5% discount. The long-distance companies lobbied for 28%. Both camps criticized the decision, but said it would enable them to go forward with their plans to compete in each other’s markets.

Long-distance companies such as AT&T; Corp., MCI Communications Corp. and Sprint Corp. are expected to buy the discounted local service and resell it under their own brand names while they construct their own local networks in the state.

And PacBell needs to demonstrate to state and federal regulators that it faces serious competition in its local market before it is allowed to offer customers long-distance service.

“It certainly takes a huge step forward in our meeting the federal checklist so we’re pleased with the progress,” said Lee Bauman, the company’s vice president for local competition. Still, he said it “requires us to resell basic services below our cost.” He said Pacific Bell hasn’t decided whether to appeal the order.

“The discount we’re getting is not as much as we think is fair, but it is enough for us to get started,” said Lee Blitch, AT&T;’s vice president of market development for the Western region. He said AT&T; still intends to begin providing local service by midsummer.

The state PUC is studying PacBell’s cost structure as part of a decision on how to ensure universal service to poor and rural communities in a less regulated market. The report, due this summer, is expected to help settle many of the outstanding questions.

Analysts said the decision Wednesday slightly favored the long-distance firms. PacTel shares fell 37.5 cents to $26.75 on the New York Stock Exchange.

“No one’s really delighted by it, but the long-distance companies probably made out a bit better,” said Brian Adamik, an analyst with the Yankee Group in Boston. “The question is where will PacBell make it up, and my guess is one of the ways they’ll try to offset their short-term loss is through new services like Caller ID. A lot of them are pretty fat by a profit margin perspective.”

But for consumers, the question is how the various computations of savings and costs will translate to phone rates. And as the phone companies battle it out, that is still unclear.

PacBell sent several long-distance executives a “Welcome to California” basket Wednesday, complete with a bottle of Napa Valley wine, an avocado, a map, a pronunciation guide and a tape of songs such as “California Dreamin’.”

It was less than well-received, at least in some quarters.

“I considered it offensive,” said Dick Severy, director of regulatory and government affairs for MCI’s Western region. “I told one of my attorneys who is paying attention to the cost studies he should look to see how much they allotted for the welcome baskets.”