AT&T;, PacBell Duke It Out

The gloves came off Thursday as AT&T; Corp. pounded rival SBC Communications Inc. for “whining” and offering “chicken little, sky is falling rhetoric” about regulations that SBC blamed for much of its 15% drop in third-quarter net income.

The long-distance giant also said it was “absurd” for SBC to challenge regulatory scrutiny “in a year when it hit a shameful milestone of $1 billion in announced fines, penalties and consumer overcharges.”

AT&T;’s unusually harsh comments came after SBC, which owns Pacific Bell and local networks in 12 other states, said its quarterly earnings fell to $1.7 billion largely because federal and state regulations force it to lease local lines to competitors at prices well below maintenance costs for those lines.

SBC said in a follow-up statement that AT&T;’s reaction is unsurprising given its “self-interest in preserving an unsustainable model where it invests nothing, leases a network at below cost and pockets all the money.”

The competitive heat is rising as SBC prepares to offer long-distance service in California, the nation’s biggest such market, valued at up to $12 billion. AT&T; already has started offering local service to PacBell customers.

SBC, Verizon Communications Inc. and other local phone service providers launched an aggressive lobbying campaign last spring to persuade federal officials and state agencies across the country to change the rules that govern competition and rates.

SBC Chairman Edward E. Whitacre Jr. told Wall Street analysts in a conference call that the “destructive effects” of such rules have allowed the two biggest long-distance carriers -- AT&T; and WorldCom Inc. -- to invade SBC territories in California and four Midwest states and “cherry-pick high-revenue customers,” those most likely to order extra services.

Those five states, each with local networks controlled by SBC, have the country’s lowest lease rates, he said, and the two companies have won 75% of the 751,000 local lines SBC lost in the third quarter.

In California, for instance, PacBell must lease its local home lines and switches to competitors at a wholesale rate of about $13.50 a customer while, it contends, it costs PacBell as much as $27 a customer to maintain those lines and switches.

“In every case,” Whitacre said, “we keep the cost of maintaining, repairing and provisioning the network.”

But AT&T; would hear none of it, stating that SBC has “continued its laborious drumbeat of whining about laws that Congress put in place to bring competition, choice and lower prices to local telephone consumers.”

In fact, PacBell never provided a cost study that state regulators had demanded before they set interim lease prices in May.

AT&T; said SBC’s complaints failed to highlight its 65% growth in high-speed telephone lines “and the 318,000 long-distance lines gained from AT&T; and other long-distance companies.”

“This quarter, SBC also took multimillion-dollar charges against earnings for work force reductions and unprofitable international investments,” AT&T; said. “It’s time for SBC to start competing and stop blaming others for its self-imposed business failures.”

AT&T; spokesman H. Gordon Diamond said that whereas his company pays wholesale prices for local customers, regional phone companies such as SBC get discount prices for long-distance lines that AT&T; and other long-haul carriers must provide.

Some California Public Utilities Commission members are openly skeptical of SBC’s claim that onerous regulatory policies are to blame for the company’s flagging performance.

In an Oct. 1 letter to Whitacre, PUC President Loretta M. Lynch and member Carl W. Wood said, “We have not seen any evidence in California that regulation is causing SBC PacBell financial hardship.”

Whitacre said a poor economy and other pressures also hampered SBC’s third-quarter earnings, which amounted to 51 cents a share. The San Antonio-based company earned $2 billion, or 59 cents a share, for last year’s third quarter. Sales dropped 5.5% to $12.8 billion.

Excluding SBC’s proportionate share from its 60% stake in its Cingular Wireless joint venture, the firm earned $1.8 billion, or 53 cents, on sales of $10.6 billion.

Wall Street analysts, on average, expected earnings of 54 cents a share, according to a Thomson First Call poll.

SBC shares fell 20 cents to $25.65, and AT&T; dropped 29 cents to $13.11. Both trade on the New York Stock Exchange.

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Times staff writer Elizabeth Douglass contributed to this report.