SBC, It’s All in the Way You Look at It

For telephone customers of SBC Communications who have suffered through periodic service outages, days-long waits for repair service, abusive sales tactics and other such peculiarities of our Texas-based local phone utility, two state public utilities commissioners last week issued a report that might come as quite a surprise.

The report praised SBC for generally “good service quality.”

Written by PUC President Michael R. Peevey and Commissioner Susan P. Kennedy, this assessment was, to say the least, at odds with an earlier report by a PUC administrative law judge who cited SBC for “significant” and “numerous” service problems that in some respects amounted to a “degradation of service quality” over the last few years.

The Peevey-Kennedy appraisal also followed on the heels of a December PUC ruling to the effect that SBC had opened its local phone monopoly to so much competition that it should be allowed to enter the lucrative long-distance business, even though the company’s share of the residential local phone business in its franchise area is 93%. I know of Third World dictators who don’t insist on that ratio of the votes for president, even when they’re running unopposed.

These are just a couple of indications that our state utility regulators may be preparing to get out of the way as SBC -- and to a lesser extent Verizon, the state’s smaller incumbent local phone company -- strive to entrench themselves as dominant providers of telecommunication services in California.

Of course, the regulatory issues are seldom stated so bluntly in PUC proceedings. The topic of the latest bureaucratic cross-fire was ostensibly an oversight system the PUC implemented in the early 1990s, when it anticipated an explosion of competition in communications. The presumption was that fusty old utility principles, such as rate-of-return calculations and quality-of-service standards, would be rendered obsolete by the magic of the open market.

The PUC, therefore, created what it called the “New Regulatory Framework,” to be abbreviated as NRF and pronounced “Nerf,” which gives a pretty good idea of how much backbone it presents to aggressive revenue-seeking outfits such as SBC. Its main flaw, of course, is that the heaven of immaculate competition never materialized in the phone world. Only months after enactment of the federal Telecommunications Act of 1996, which was supposed to unleash the open market, SBC took over Pacific Telesis and the other “Baby Bells” likewise started gobbling each other up.

Although proponents of deregulation argue that local phone companies now face fierce challenges from wireless networks, independent long-distance companies and cable TV systems, the majority of consumers still get most of their phone service at home via the twisted pair of copper wires controlled by the offspring of Ma Bell. In California, says Denise Mann, a telecommunications expert at the commission’s office of ratepayer advocate, “SBC and Verizon still have a physical stranglehold on the way into the house.”

As a result, the PUC lately has been considering whether NRF may have been a tiny bit premature.

I should say here that there are plenty of people who think NRF doesn’t go far enough. G. Mitchell Wilk, who implemented it during his own term as PUC president, now believes that telecommunications regulation is anachronistic: “We’ve got tons more competition today than we did in 1990,” he told me. “If anything, NRF should be replaced by general, broad deregulation.”

That doesn’t seem to be on the table just yet. Instead, we have a deep ideological split on the commission over what sort of regulation is appropriate. Kennedy, who joined the PUC in January, believes the evidence supports SBC’s claim that its California phone service is among the best and cheapest in the nation. She also believes it’s time the PUC faced up to the reality that its regulated phone companies are no longer protected monopolies and wards of the commission, but profit-making public corporations facing competitors on all sides.

“Every time some of my colleagues talk about the ‘shareholders,’ they sound like they’re talking about Ken Lay,” she says. “It’s as though all profit is evil and they’re trying to rip off the consumers. But the consumers and the shareholders are often the same people.”

But that doesn’t absolve the commission of holding the company to strict performance standards and preventing it from stifling newcomers to its business, says Loretta Lynch, the former PUC president who is Kennedy’s ideological opposite at the agency. “We’re a consumer protection agency,” she says, “and we’ve been derelict in doing our job.”

The Peevey-Kennedy report represents a counterweight to one produced three months ago by Sarah Thomas, a PUC administrative law judge who cast a much more critical eye on the phone companies. In some places the reports demonstrate the phenomenon of how two parties can examine the same set of data and come to dramatically different conclusions.

Half-Full Perspective

SBC, naturally, prefers the Peevey-Kennedy version as “a more comprehensive look at our record,” in the words of Lora Watts, president of SBC West. “It shows that service has steadily improved, and definitely improved since the merger. I don’t believe the first discussion did that.”

Thomas certainly took a different tack. She examined the company’s overall behavior, not simply whether it met or exceeded a few technical benchmarks for service quality set by the PUC. She noted, for instance, that since 1995 the company’s Pacific Bell unit (which has now assumed the SBC moniker) has been the subject of six formal proceedings alleging serious service problems. These include a 2001 inquiry into telephone marketing abuse that resulted in the largest fine ever levied by the commission.

She also cited several instances in which SBC provided muddled or confusing data to back up its claims of improved service. My favorite is a neat dodge through which the company concealed how many orders for new service sat around unfilled for more than 30 days, which is a figure the PUC requires the company to compile.

Instead of assembling the data as it came in -- in other words, whenever an unfilled order hit the 30-day deadline -- SBC made a bulk count once a month. To see how this could have a gratifying effect on an embarrassing statistic, consider, as Thomas did, what would happen with an order placed, say, on Dec. 29, but not filled until Feb. 14, which is 48 days later. An SBC official testified that unfilled orders were only audited on the 25th of each month. On Jan. 25, therefore, this order wouldn’t be counted because it wasn’t yet 30 days overdue. At the next audit, on Feb. 25, it wouldn’t be counted because it had already been filled.

By this and other questionable stratagems, SBC was able to report that it had recorded just one overdue order between January 2001 and March 2002.

Thomas quite sensibly ordered the company to start producing data in compliance with the “plain meaning” of the rules. Peevey and Kennedy, while conceding that the measurement was “erroneous,” seemed to find it almost amusing, calling it a “unique and strange” system. Watts says the measurement formula was “in no way an attempt to be disingenuous and was not an attempt to try to hide anything,” but added that SBC will “look at” altering the process.

“We’re committed to providing outstanding customer service,” Watts told me. “That’s the number one goal of our corporation.”

But SBC’s behavior sometimes undermines such assurances. In the era of the Ma Bell monopoly, which we are all supposed to abominate today, AT&T; strived to meet what it called the “five nines” standard of service: The network was expected to be 99.999% reliable. (AT&T; engineers sometimes talked about a goal of less than one day of outage over 40 years.)

Profit Up, Service Down

I don’t know whether 99.999% plays a role in SBC’s corporate goals, unless it signifies the return on investment the company hopes to achieve by laying off more employees. What we tend to hear from SBC is predictions of service cutbacks, declining reliability, fewer staff, all thanks to the idiocy of outfits like the California PUC that refuse to deregulate faster in ways the company finds acceptable.

Consider how the company carried on in announcing layoffs of 11,000 employees, including 3,000 in California, in September. Many of them were “highly trained workers,” SBC announced. Watts herself was quoted as saying “we will try to maintain our customer service levels,” in terms that suggested she wasn’t wholly sanguine about the prospects. (Now she says the company merely laid off workers who were no longer fully occupied because of changes in the business.)

Chief Executive Ed Whitacre, meanwhile, groused about the impact of “unrealistic and outmoded regulation on SBC’s results,” although a few months later the company announced it had earned a profit of $7.5 billion in 2002, up from $7.2 billion the year before.

SBC, moreover, is famous for aggressively defending its turf. If the California PUC is curious about how the company reacts when it doesn’t cotton to the regulatory playing field, it should examine recent events in Illinois. There, unhappy at the state commerce commission’s refusal to see things its way and threatening massive layoffs, the company mustered armies of lobbyists and credulous labor unionists to coerce the state legislature and governor into taking a critical category of oversight out of the regulators’ hands and awarding it even more of a stranglehold on the local phone business. (The law was stayed last week by a federal judge, who condemned it as “a clear usurpation of authority.”)

Can California resist such pressure? Long-term observers of the PUC say the current ideological disagreements among the five commissioners are as nasty and personal as any they’ve ever seen. That’s odd, since all five members are Democrats appointed by Gov. Gray Davis.

When I mentioned this recently to a PUC staff member, he recalled the old adage about how when a group of Democrats are asked to form a firing squad, they assemble themselves into a circle. But companies as savvy as SBC know how to exploit such discord, which means that the people standing in the middle of the circle may well be its customers.

Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.