Would Public-Private Phone Venture Call for Trouble?

Should a city government that regulates an industry become a financial partner with a company to sell services within that industry?

That’s the central question posed by telecommunications giant Pacific Bell as it competes with a proposal in Santa Ana by SpectraNet, a San Diego-based firm, to operate as the city’s telecommunications provider for 30 years.

Last year, SpectraNet signed a long-term contract with Anaheim to hook up government offices and then businesses and homes to a broad band fiber-optic network that will handle all phone, television, data and Internet transmissions. City phones were switched over in July.

Santa Ana is expected to choose a telecommunications provider in January from a half-dozen bidders, including SpectraNet and Pacific Bell. SpectraNet hopes to market its partnership concept to Orange and Irvine.

Under the agreement with Anaheim, a joint city-SpectraNet company pays the city an annual fee of $450,000 a year plus 30% of its revenue. The city is required to help market the service to other government entities, businesses and residents.

Though specific proposals for Santa Ana aren’t yet available, a memorandum of understanding signed a year ago by SpectraNet and city officials proposes the same arrangement.

In approving the Anaheim-SpectraNet partnership, Mayor Tom Daly hailed the move toward a “universal telecommunications system” that would be funded without cost to city taxpayers. City officials said federal deregulation of the industry in 1996 provided a unique opportunity for private capital to fund an essential city service and assure that all areas would benefit equally, not just wealthier or business zones.

In its bid to Santa Ana, Pacific Bell included an unusual four-page letter outlining why the idea of a public-private telecommunications venture was a bad one.The letter, signed by Mark Leslie, Pacific Bell’s area vice president for external affairs, warned the city against adopting the “municipalization” approach for phone service.

“Pacific Bell does not believe the city can be a telecommunications provider, or receive financial payments from a partner, and implement telecommunications policy and regulation in a neutral or nondiscriminatory manner,” Leslie wrote.

In other words, it would be as if the city decided to own a chain of gas stations with, say, Arco, and continued to regulate where and how gas stations were built by competitors elsewhere in the city.

That’s not a bad analogy, said Robert Poole, executive director of the Reason Foundation in Los Angeles, a think tank specializing in privatization. But while gas stations are inherently competitive, utilities have operated as natural monopolies with governments granting companies exclusive franchises.

“The thing that bothers me the most is the conflict of interest with the city in its regulatory role,” Poole said. “This is entrepreneurial government, all right, but it raises some very disturbing questions about how far government should go in these areas.”

Said Adrian Moore, Reason’s director of economic studies, “Government should be providing only those services that only government can provide, and this isn’t one of them.”

However, he noted the irony in protests by Pacific Bell, which until recently had a virtual monopoly over local phone service.

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There are other questions to be answered about such long-term agreements with cities, including the ability of the partnership company to invest enough money or respond quickly to changing technologies. SpectraNet itself estimates it will cost $75 million to connect Anaheim’s commercial areas and another $200 million to hook up every Anaheim home.

Last month, California cried uncle over its 6-year-old Calnet phone system, moving to turn it over to a private company. The state system--which isn’t at full capacity and has been losing $2 million a year--is burdened with $20 million in leases on aging switching equipment that won’t be paid off until 2005.

In an Oct. 14 letter to Santa Ana Mayor Miguel A. Pulido Jr., Stan Oftelie, president of the Orange County Business Council, cautioned the city from leaping too soon into a long-term telecommunications agreement.

“The decisions pending before the City Council may have wide-ranging implications and consequences extending well beyond the city’s boundaries,” Oftelie and Executive Vice President Julie Puentes wrote.

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Perspective is a weekly column highlighting trends or events that define Orange County or an issue affecting Orange County. Readers are invited to call Los Angeles Times correspondent Jean O. Pasco at (714) 564-1052 or send e-mail to Jean.Pasco@la times.com