What's the Hang-Up?


In a little-noticed building in Anaheim, 375 Pacific Bell employees work in shifts, sitting in neat rows, facing computers and typing in order after order for local phone service.

It's an unremarkable scene, except for one thing: The PacBell employees are not adding new customers, they are giving them away to new rivals in the local phone business.

That makes the Anaheim center--and another one like it in the San Francisco Bay Area--"Exhibit A" in PacBell's push to prove to phone regulators that there is enough competition in the state's $6-billion local phone market to allow the company to jump into the long-distance business.

On March 31, PacBell will become the fifth local phone company in the nation to apply for permission to offer long-distance phone service within its territory.

Under the 2-year-old Telecommunications Act, the nation's regional Bell operating companies--Pacific Bell and the other RBOC spinoffs from AT&T--may; begin selling long-distance service. But first, they must convince regulators that the long-standing local phone monopolies have been broken.

GTE, which is not a Baby Bell and thus the only large local phone company not governed by the Telecom Act, has already begun selling long-distance service in California.

The Baby Bells are having a harder time breaking in. So far, the Federal Communications Commission has cited anemic competition and other shortcomings in turning away four applications from Bell companies, including one from PacBell's sister company, Southwestern Bell.

SBC Communications Inc. of San Antonio, which owns both Southwestern Bell and PacBell, challenged the decision. But last Friday, a federal appeals court in the District of Columbia upheld the FCC's finding that SBC had not adequately opened its local network to competitors.

Other aspects of the ambitious deregulation effort are mired in legal challenges as well, chief among them an SBC case that questions the constitutionality of many portions of the act itself.

"We had a Camelot moment when we passed the act," former Sen. Larry Pressler (R-S.D.), one of the Telecom Act's authors, said in a speech in Los Angeles. "I've been disappointed, quite frankly . . . the companies are squabbling and suing each other."

Last week, in an effort to jump-start competition, Sen. John McCain (R-Ariz.) introduced legislation that would set a deadline for allowing the Baby Bells into long-distance.

In the meantime, PacBell plans to press its case with regulators.

PacBell, which serves about 75% of Californians, will submit its application first to the California Public Utilities Commission. If it receives PUC approval, the company in August will submit the application to the FCC, which will make the final decision.

"Right now, the RBOCs are 0-for-4 [with the FCC]," conceded Bill Blase, vice president for regulatory affairs at PacBell. "But the [Telecom] Act is the act, and we think we've met the requirements."

Others disagree. Consumer groups are hoping for a flat-out rejection from the state and the FCC, and long-distance giant MCI Communications has begun an aggressive advertising campaign aimed at influencing state and federal regulators reviewing Baby Bell long-distance applications.

The ads feature "Ivan," a bearded and heavily accented fictional character in a Russian-style fur hat, who is shown lamenting over high prices and the lack of choice in phone service. He urges regulators to not let local phone companies into long-distance until he has a choice of carriers.

For California regulators, the dilemma is that while there is robust competition for the lucrative lines attached to corporate phones, the state's homeowners have largely been left out of the telecom free-for-all.

But PacBell points out that the rules don't provide a way to measure competition.

Instead, there is an arcane 14-point checklist to determine whether the Baby Bells have done their part to open their market to rivals--regardless of whether they accept the challenge.

In California, the challengers have largely fled the residential market, focusing instead on the high-profit business market.


A scant 1% of PacBell's 11.2 million residential phone customers have switched local phone carriers since state regulators officially opened the local phone market here to competition.

Some of the former PacBell customers are in Orange County, where cable operator Cox Communications is providing local phone service over its network to more than 2,000 customers in Rancho Santa Margarita.

In the next month, the company will expand into Laguna Niguel and Aliso Viejo, and its sister company in San Diego will follow suit later this year.

"The reception we're getting on it has been very positive," said Leo Brennan, general manager of Cox Communications of Orange County. But, he added, those early inroads are small compared with the market as a whole.

A study in San Diego by a consumer group found that the few homeowners who tried plugging into rival local carriers were subjected to confusion, misinformation, and a host of billing and customer service problems.

The Utility Consumers' Action Network, which published a report on its findings late last year, reviewed complaints from customers who tried to switch service to other carriers.

UCAN reported that PacBell employees delayed switching orders, provided misleading information, disconnected customers from PacBell before the new service was established, and removed some former customers' names from telephone directories.

Meanwhile, AT&T;, MCI, Sprint and other newcomers to local service failed to provide written service terms and left consumers with confusing price rates, long waits on hold and a variety of billing errors, UCAN said in its October 1997 report.

Westcott and Sue Griswold of San Diego know the problems firsthand.

In early 1997, the couple switched their local phone service to a major long-distance carrier, which promised that their frequent calls from the Point Loma region to relatives in Poway and Escondido (40 miles away) would be free.


So they called. A lot. And their first bill included large local toll charges. The couple said they have spent more than a year trying to fix the mistake with letters and calls to the company.

"My personal experience has been bad, and I have to believe that other people have had it worse," Westcott Griswold said.

At this point, few dispute that the effort to bring competition to the local residential phone market has failed.

But so far, the companies have resorted to finger-pointing, leaving consumers in the cross-fire.

PacBell says it is not to blame if companies choose to spurn neighborhood and small-business lines in favor of the more profitable business market.

"We can only open the market, we cannot control which part of the market they go for," said James Callaway, president of public affairs for PacBell.

The company says AT&T; and others are sabotaging local competition, to stall PacBell's entry into long-distance.

But AT&T;, MCI, Sprint and other long-distance carriers say they quit selling residential local service because they were being stymied by inadequate wholesale discounts and foot-dragging by PacBell.

"There has been no compliance in any state by an RBOC, and thus we are not in local and they are not in long-distance," said AT&T; Chairman C. Michael Armstrong in a recent interview.

Armstrong said the long-distance carrier, the nation's largest, still has about 300,000 local phone customers and is losing $3 a month on each account.

"We spent $3.5 billion on an economically tenuous venture to reach the consumer," he said.

In an effort to address the residential stalemate, state regulators held a daylong hearing last month to discuss the problems.

Derek Gietzen, president of Genesis Communications, a small long-distance carrier based in San Diego, told the state commissioners that his company gave up offering local phone service in January.

"I'm not intimidated by the local phone companies entering the long-distance market because, to me, they're just like another AT&T.; They're just another big company that I can outmaneuver, out-price and out-service in our niche," Gietzen said. "But we spent 18 months pouring money into [local phone service], and the outlook just kept getting dimmer and dimmer."

Gietzen faults PacBell's strategy of foot-dragging.

"The idea is to do the least amount toward competition as possible and, at the same time, look like you're doing as much as possible," he said.

In its upcoming application, PacBell will argue that the complaints by long-distance companies have been resolved and that the market is open despite the paltry customer totals for rival residential carriers.

Among the evidence PacBell will offer:

* More than 125 companies are authorized to sell local phone service in the state, and 26 are active in the market.

* PacBell has more than 2,100 employees to help ease the way for competition, many of them processing orders to switch PacBell accounts to rival carriers.

* PacBell is receiving 2,000 switching orders a day from competitors and can now process 5,000 orders per day.

* The phone company says it will spend $500 million by the end of this year on efforts to open its market to rivals.

In addition, PacBell will argue that its entry into long-distance will increase competition, which in turn will bring lower rates.

Still, few take PacBell's side.


While critics agree that the long-distance market is not as competitive as it could be, it nonetheless already includes hundreds of competing companies offering savvy consumers good deals.

And Helen Mickiewicz, a staff attorney at the California PUC, scoffed at PacBell's argument that it's not to blame for the lack of residential competition.

"That's like hosting a baseball tournament and standing on a field with a 15-foot fence around the field, and then saying, 'It's not our fault they're not here to play,' " said Mickiewicz. "In order to play, they have to get over the fence."

Consumer groups worry that if regulators let PacBell into long-distance before there is meaningful competition for local service, PacBell will quickly dominate the phone business in the state, and it will no longer have any incentive to play by the rules.

"If one-stop shopping is as popular as surveys show it is, then the company that controls local service is very likely to get customers for all the other services," said Thomas Long, an attorney at the Utilities Reform Network, a San Francisco consumer group. "I don't think PacBell can argue with a straight face that it's in the public interest for them to re-monopolize the telecommunications market."

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