Promises of Telecom Competition Have Yet to Ring True

Nearly three years after the federal Telecommunications Act of 1996, small business is still waiting to see real competition in local phone service.

The freewheeling, competitive and technologically advanced marketplace in local phone service envisioned by Congress has yet to appear.

Local phone service remains, for the most part, locked up tight by the nation’s five regional Bells. The Bells were supposed to open up their customer lists, phone lines, offices, data banks and equipment to new companies seeking to enter the local phone-service business. In return, the Bells could enter the lucrative long-distance market.

In California, Pacific Bell and GTE still dominate local phone service. PacBell was even faulted in a recent California Public Utilities Commission staff report because it met only four of 14 federal requirements to open up the state’s local phone-service market. As a result, the PUC, in a meeting next Thursday, is expected to withhold a recommendation to the Federal Communications Commission that PacBell be allowed to start long-distance service.

This lack of local phone service competition harms small businesses disproportionately.

First, small businesses that provide telecommunications services and want to add local phone connection as part of their package find it nearly impossible to do so.

Take the case of ACS Systems Inc., a telecommunications firm headquartered in Santa Ana. The 14-year-old company began as a software developer but in 1998 decided to diversify. It now provides telecommunications systems for businesses, including intranets, Internet and long-distance phone service, plus the hardware and software to operate these systems and the design, technical support and maintenance to run them.

But the company can’t provide local phone service, a glaring hole in its operations, said ACS sales and marketing vice president Ernest Ellis.

The reason ACS can’t get the missing piece is that although it can buy local phone service wholesale from the Bells at a discount and resell it to customers, the discount in California is only 12% to 17%. At that rate, “there’s no real opportunity for small and medium companies today to make a profit on local phone service,” Ellis said.

Compare that discount with the 45% routinely given by long-distance carriers and that explains why long-distance resellers flourish.

The Bells say their hands are tied because the local-service discount rate is set by the 1996 Telecom Act under a complicated formula. But Ellis believes that rate also suits the regional phone companies’ desire to keep as many of their current customers as they can.

“It makes sense not to allow customers to go away because [the regional Bells] will be in long-distance soon enough,” Ellis said. “They’ll be able to own the customers from soup-to-nuts and lock out smaller telecommunication companies across the country.”

Small businesses are also harmed as phone-service consumers because the giant local carriers and even many small telecommunication businesses are typically not interested in catering to the small-business market.

California Small Business Assn. President Betty Jo Toccoli, who regularly testifies at the state and federal level on utility deregulation, found that she couldn’t even get a quote from carriers 18 months ago when she relocated her company, Total One, to Culver City. Her small financial service and marketing business had zero choice for phone services, she said.

“I’m the one trying to get us choice, and I couldn’t get it for myself,” Toccoli said. “Most of [the carriers] would ask me how much my monthly bill was. They were only interested if the bill was over $5,000 a month.”

The situation may be better now, but only in certain geographical areas, said Helen Mickiewicz, PUC staff counsel. Companies such as Nextlink and ICG, as well as cable companies Cox and Media One, are trying to go after the small-business and residential market by targeting large apartment and office complexes. Cox has entered Orange County and San Diego with this strategy.

The PUC requires that if a large corporation is being served by a local phone-service company, adjacent small businesses must also be served. But the PUC has no say over the price for service the small business will receive, Mickiewicz said.

Finally, the smallest of the small businesses--the still-growing army of consultants and the self-employed--are the most affected by the lack of local phone-service competition because they have the fewest telecom choices of any business segment. That’s because PacBell still controls more than 90% of the residential market.

That means that small businesses, apart from a few television cable companies entering the residential market, remain at the mercy of PacBell or GTE when it comes to price or innovative technology, such as high-speed Internet access.

The bottom line is that the lack of local phone service competition is harming not only small business but the entire state because small business is crucial to the state’s continued economic growth.

The PUC needs to be more aggressive, changing policies to spur competition, enforcing those policies and even bringing in third-party consultants to create a more collaborative environment, say consumer and small-business activists.

If the PUC doesn’t step in, small businesses might simply have to wait a few years for technology to catch up.

“If you had asked people in this industry, ‘How long will it take to get local phone deregulation going?’ they would have said three to five years,” Mickiewicz said. “The only people surprised that it’s taking this long are the members of Congress who passed the 1996 deregulation act.”

Meanwhile, some innovative form of new wireless communication technology could be developed that would leapfrog over existing phone lines, switching boxes, wires and offices to provide a truly competitive environment, Mickiewicz said. Some companies are actually doing the research now, she said.

“Just wait,” she advises small businesses. “Sooner or later, somebody is going to come knocking.”

Times staff writer Vicki Torres can be reached at(213) 237-6553 or at vicki.torres@latimes.com.