Lines Drawn in Battle Over Long-Distance

Looking to expand into California’s $17-billion long-distance business, SBC Pacific Bell is hoping to finally grab a piece of the lucrative telecommunications pie that federal law has kept out of its reach for decades.

But the company’s long-distance application now before the state Public Utilities Commission comes with a lot of baggage: a near monopoly in its core business, declining rates of customer satisfaction and a history of sales and marketing abuses.

The stakes--for the company, its customers, competitors and regulators--are huge. An SBC PacBell move into long distance would radically alter the state’s massive telecommunications market and affect not only long-distance and local phone service, but also Internet service providers and the market for high-speed Internet access over phone lines.

“The fundamental issue is whether you end up with a company that is going to be so powerful that it can squelch all competition in any direction,” said PUC Commissioner Geoffrey Brown.

The company’s application has sparked a lobbying duel, pitting SBC PacBell and its allies--labor unions, chambers of commerce and business customers--against consumer groups and competitors, namely long-distance carriers MCI WorldCom Corp. and AT&T; Inc.

SBC Pacific Bell, which recently changed its name from Pacific Bell to reflect its ownership by San Antonio-based SBC Communications Inc., contends that its ability to offer long-distance service would be a boon to consumers. They would get more choices, better deals on packages of local and long-distance service, and the convenience of one phone bill and one-stop shopping.

But competitors and consumer groups, citing the company’s record in providing local phone service in California, say the move would be a disaster. They say SBC PacBell, facing little competition in the local phone business, would quickly seize a sizable piece of the state’s long-distance business and feel no pressure to keep local prices in check, improve its customer service or rein in its aggressive sales programs.

To win approval, which could come as early as next month, federal law requires SBC PacBell to prove that rival phone companies can compete for local customers on an equal footing with the long-time monopoly. In addition, California law requires the PUC to determine whether SBC PacBell’s expansion into long-distance is in the public interest.

That might be a tall order given the company’s dominance of the state’s telecommunications landscape. SBC PacBell has about 19 million phone lines in service (more than 75% of the state’s total) and had nearly $11 billion in operating revenue in 2000, according to Federal Communications Commission reports. Its closest competitor, Verizon Communications Inc. (formerly GTE), has fewer than 5 million phone lines.

Within its home territories, SBC PacBell controls 94% of phone lines (75% statewide) and has a stranglehold on just about every telecommunications service sold in California: local phone service, pay phones, phone books, corporate phone systems, 411 directory assistance and the mushrooming market for high-speed Internet access using DSL--digital subscriber line--technology.

The company believes it has met the state’s requirements of ensuring fair competition and that the residential market has few competitors because rival companies prefer to focus on more lucrative business customers.

“We have sliced it and diced it and done more than [what was done] in any other state,” said Cynthia Marshall, SBC PacBell’s senior vice president of regulatory affairs. “Our position is that we meet the requirements ... and we feel that it’s time for [California] consumers to reap the benefits that consumers have in other states.”

For the potential benefits of their plan, company officials point to New York, where local giant Verizon Communications has moved into long-distance. There, residents are seeing stepped-up competition and savings in both long-distance and local service, consumer groups say.

But competition is thriving in New York largely because state regulators didn’t approve Verizon’s long-distance application until the local phone market was irreversibly open, reasonable wholesale rates were established for rivals and an enforcement plan was in place to levy fines if the company reverted to monopoly behavior.

None of that has happened yet in California, opponents say. Most residential customers still have no choice for local phone service, and the PUC hasn’t finalized penalties for future performance problems at SBC PacBell and hasn’t set low wholesale rates for competitors.

“[SBC] PacBell has fought a five-year battle to restrict entry of competitors into the state’s local phone market,” Mark Cooper, director of research at the Consumer Federation of America, said in a recent report. “If you let PacBell in on the basis that these other things will be fixed at some point in the future, then that’s essentially empowering the wrong guy to get a head start.”

The Greenlining Institute and other state consumer advocacy groups--the company’s harshest critics--also want regulators to curb SBC PacBell’s marketing violations before rewarding it with long-distance entry.

Since 1985, SBC PacBell has been fined more than $30 million for marketing transgressions and regulators repeatedly have forced the company to alter misleading sales scripts.

This month, a consumer group sued the company for charging customers for Internet service that hadn’t been ordered. In addition, state regulators ruled that the company’s service and repair performance has degenerated, a violation of its promise to maintain or improve customer service after being bought by SBC.

This year, the PUC fined the phone company more than $25 million and ordered substantial changes in the way its employees sell services and lucrative add-on features such as call waiting.

That investigation uncovered a boiler room-like atmosphere at SBC PacBell, where service representatives were offered sales incentives and urged on by management fliers that read, “Offer high, watch ‘em buy; offer low, nowhere to go,” and “Stamp out disclosures!”

In that case, Commissioner Brown said, SBC PacBell made “serious mistakes ... that were pervasive, that were comprehensive and that were long standing.” A PUC administrative judge labeled it “recidivist” behavior because the phone company had been fined and forced to pay refunds in a similar case in 1985.

SBC PacBell has denied any wrongdoing and has taken the PUC to court over the case.

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DSL Regulation Murky

This year, California’s Internet service providers filed a complaint accusing the phone company of using anti-competitive tactics and its ownership of local lines to squeeze out rival DSL providers and ISPs that compete with SBC PacBell’s own Internet service.

Although regulation of advanced services like DSL is murky, the ISPs say the state should step in to prevent SBC PacBell from extending its monopoly to Internet access, a service that is considered critical by more and more consumers and businesses.

Prices in the local market also have sparked controversy.

Opponents say SBC PacBell has been steadily raising fees and prices for many local phone services, including directory assistance (fee up 84% to 46 cents); inside wire insurance plans; repeat dialing (per-use fee up 27%); person-to-person calling (fee up 36%); high-speed Internet access (up 40%, to $50 a month); and business toll calls.

Without sufficient local competition, whatever savings consumers might see in long-distance easily could be offset by price increases for local services, consumer groups say.

SBC PacBell says there have been more price cuts than increases, citing the company’s discounted service packages, its 5% price reduction for caller ID, and 7% price cut for custom calling features such as call waiting.

In New York, Verizon’s long-distance rates are providing some savings, but its plans offer rates of 5 cents to 9 cents a minute and some carry monthly fees of $4.75.

SBC, the incumbent in Texas, started out with competitive pricing when it entered the long-distance business in its home state. The company quickly unseated AT&T; as the state’s largest long-distance carrier, and shortly thereafter raised prices to 10 cents a minute, or 7 cents a minute with a $4.95 monthly fee.

Reacting to the rate hike, a Wall Street analyst said at the time: “SBC feels like they are in control and they can set the price.”

In California, at least two dozen companies already offer long-distance service at lower prices than those charged by Verizon and SBC PacBell.

In the state’s local phone market, most of SBC PacBell’s phone service rivals concentrate on business customers. And even that competition is faltering, as Teligent Inc., WinStar Communications Inc., GST Telecom, ICG Communications Inc. and other challengers file for bankruptcy protection or retreat from the market to save money.

The most successful local competitors in California have been the cable telephony operations of Cox Communications and AT&T; Broadband, which have signed up several hundred thousand Californians for local phone service. Cox, for example, has signed up about 100,000 phone customers in San Diego, and has added phone service to about 24% of the households in its Orange County territory.

Their success stems mostly from the fact that those companies have their own wires into homes and therefore rely less heavily on cooperation from SBC PacBell.

Other rivals are suffering in part because they are forced to pay steep wholesale prices to use SBC PacBell lines and network piece-parts. They need to lease that equipment because they can’t afford to replicate the huge network built over decades and paid for by SBC PacBell and its ratepayers.

Under the 1996 Telecommunications Act, those wholesale prices must be “reasonable and just.” A previous, more utility-friendly PUC in 1999 approved rates that totaled up to more than SBC PacBell’s retail price of $11 a month for a residential line, creating a huge disadvantage for SBC PacBell’s potential rivals, said Mark Cooper of the Consumer Federation of America.

“If you lose money every time you get a customer, that’s not a good business,” he said.

The wholesale price squeeze is a big reason MCI, AT&T; and Sprint abandoned earlier efforts to compete in California’s residential local market, said Richard Severy, director of public policy at WorldCom, MCI’s parent company.

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PUC May Reset Prices

“We are in [the local market] in those states where the economics are there, and where the Bell company’s systems allow us to process orders and transfer customers,” Severy said. MCI now competes for local customers in eight states, including several where the incumbent phone company has not yet gained entry to long-distance.

The FCC told state regulators that California’s wholesale prices are “problematic,” Brown said. In late September, the commission pledged to set lower prices despite objections from SBC PacBell.

Following that move, MCI tiptoed back into California, and in November started offering local service to a small number of consumers. The company said it wants to test PacBell’s ordering systems and prepare for a full launch if the pricing improves.

PacBell is challenging the PUC’s plan to reset prices, but consumer groups are urging regulators to push ahead.

With phone service and Internet access playing an ever-larger role in the lives of Californians, the PUC can’t afford to make mistakes on the PacBell case, said Cooper of the Consumer Federation.

The commissioners “need a stern resolve to make sure that the regulatory system and structure will produce what we all hope, which is more choice and lower prices,” he said.

“From our point of view, this is a critical moment in California for telecommunications consumers.”