For SBC’s Chairman, a Distance to Go

Ed Whitacre is not a happy guy these days.

The chairman of SBC Communications Inc., the parent of SBC Pacific Bell, is exasperated about the rates that regulators in California and elsewhere say it can charge rivals such as AT&T; Corp. in return for use of the lines and equipment needed to compete for local telephone customers. Whitacre says the rates have been set so low, SBC can’t recover its costs.

Nor is Whitacre’s company having an easy time getting into California’s $10-billion-plus long-distance market. The California Public Utilities Commission recently ruled that though the company has complied with the necessary federal conditions to expand into long-distance, it has failed for now to meet a separate state requirement. Regulators say the company still must prove that its move into long-distance would create “no substantial possibility of harm” to competition in the state.

All the while, SBC has been taking its share of shots. AT&T;, for one, last week attacked Whitacre’s company for its “whining” and “Chicken Little, sky-is-falling rhetoric.” And in the last 18 months, lax service, abusive marketing and improper billing by the phone company have triggered regulatory rebukes, refunds and more than $50 million in fines from the PUC.

In the face of all this, Whitacre sat down Friday for an interview with The Times. Later in the day, he was set to meet with the five PUC commissioners to discuss many of the same issues.

Question: What’s your take on the state of the industry?

Answer: The telecom industry’s in a heck of a turmoil and has been for some time. It’s not getting any better, and probably is getting worse. Part of the reason is the economy. Part of the reason is there is some substitution and technological change, and part of the reason is regulatory-related.

Q: In the regulatory arena, you have been critical of the prices for something called UNE-P, which is the package of local lines and equipment you lease to competitors for a single wholesale price. What’s wrong with that system?

A: We’re having to sell [wholesale access to the company’s competitors] at below our costs, and that’s the unfair part. It’s like McDonald’s cooking a hamburger and Burger King being able to buy it for a nickel and putting their name on it. It’s exactly the same thing. No business, no matter how large, can do that for very long.

Q: How many customers do you figure you’re losing to competitors such as AT&T; as a result of this situation?

A: We’re losing 1 million customers a quarter, and roughly a third of them are in California. But that number will probably go up, because our competitors have only started aggressively selling here in the last couple of months.

Q: Currently, you are charging your competitors around $15 per customer to use your lines and equipment. And you claim that you need that figure raised to $30 to cover your costs. Isn’t the pricing debate really centered on whether the costs are what you say they are?

A: There is a huge debate, but all we have to do is look at SBC’s audited financials and the data we turn in to the FCC [Federal Communications Commission]. That’s really a fake argument.

Our revenues are down 6%. They’re down mostly because of [the low wholesale rates], though the economy is a piece of that.

Q: Why isn’t that revenue loss just a function of losing market share in a newly competitive market, just like AT&T; loses long-distance market share every year?

A: I’m going to have fewer customers with competition, and I don’t mind competition. I’ll sell to AT&T;, I’ll sell to MCI WorldCom, but don’t make me sell it below my cost. What’s going on is not competition; it’s confiscation of SBC’s network.

Q: When California set new interim wholesale rates this year, regulators said you defied orders to provide them with cost data. So how can you now complain that current prices don’t reflect your costs?

A: I won’t say we’re totally blameless in this, but they have cost data now.

Q: If you get your way, and California regulators double the current wholesale package price, wouldn’t that just discourage competition for some 10 million local phone customers here?

A: No, I don’t think so at all. I’ve already got a lot of competition. You have cable telephony; you have Cox [Communications Inc.] down in San Diego that’s got a ton of customers, you’ve got AT&T; here with a ton of business customers.

Q: You have slashed investment in your telephone networks, and you are saying that, too, is because of the bad wholesale pricing. How so?

A: When [rival companies] get a huge discount, I’m not going to spend anything because I can’t get my cost of capital back. You destroy all the incentive to invest with this artificial, regulatory-created competition. It’s economically not sound.

Q: Are regulators receptive to that kind of an argument, or do they feel like you’re using capital investment as a bargaining chip?

A: They probably feel like I’m using it as a bargaining chip, and AT&T; has said that about us. And others have said we’re trying to apply pressure. But really we’re not. When your revenues go down 6%, any business then would move to reduce its costs.

Q: How will you resolve the PUC’s recent split ruling on your long-distance application, where you have passed federal muster but not state?

A: The California commission recently voted that we had done everything required by the law. And now it’s at the [FCC], and they vote yes or no, and if they vote yes, we’re in long-distance.

Q: So not passing the state requirement won’t stand in the way?

A: Absolutely not. This is a federal law. It’s at the FCC for the last 90 days, and since we’ve spent years and hundreds of millions to dollars to comply with the federal law, and since it’s good for California, I hope it goes on.

Q: What are you going to do in California should you get approval to sell long-distance?

A: I’m going to bundle it with other services. We would hope to bundle things like local service, long-distance, wireless and DSL [digital subscriber line service] with Yahoo. We would hope to sell that in a bundle for a set amount of money.

Q: The 3,000 people who are going to be laid off in California by the end of the year, where are they coming from?

A: Most of those people are coming from the side that does new capital investment. So these are not people that affect day-to-day service, like installation, maintenance. These are people who do new construction. We’re striving very hard not to have any impact on service, and we can pull that off.

Q: You own roughly half of Cingular Wireless, a company that is said to be in talks to merge with either T-Mobile International (formerly VoiceStream Wireless Corp.) or AT&T; Wireless Services Inc. What’s the status?

A: I’d like to consolidate. I’d like to buy. But I’m not going any further than that with my answer.