SBC’s Win in Illinois Is a Warning for Calif.

SBC Communications Inc., openly disdainful of the regulated rates competitors pay for access to its phone lines, has intensified its campaign to raise those rates -- and probably the prices customers pay.

Nowhere has the company’s campaign been more decisive, or more visible, than in Illinois, where in four days this month it pushed through the General Assembly and the governor’s office a bill that almost doubles the rates in that state.

With the victory in Illinois, SBC sent an unmistakable message to California, where it is the largest local phone service provider, and other states with low regulated rates: It will do whatever it can to correct what it sees as major flaws in the pricing of network parts.

“It’s safe to say that we’re going to continue to be advocates for reforming the system and bringing rates more in line with our costs,” said Selim Bingol, a spokesman for the San Antonio-based company.

The company is challenging the arcane rate system that is the foundation for competition in local phone service. Without low-priced access to the networks owned by SBC and the other Baby Bells, competitors say they don’t stand a chance of winning customers. SBC counters that rivals win customers at its expense.

Bingol said the fight in each state may take a different tack. “We have not made any determination of what vehicle to use in California.”

In Illinois, the SBC bill was introduced on a Tuesday, passed one house the next day and the other house Friday. Gov. Rod Blagojevich signed the bill into law within hours, cutting short a rate-setting case pending before state regulators

The result: On June 9, SBC can start charging its rivals nearly twice as much -- $22 instead of $12 -- every month for renting the network parts required to deliver a dial tone. The rate SBC charges a customer for service will remain less than $19 a month.

AT&T; Corp. and others have sued to overturn the Illinois law.

They contend that the Bells, long accustomed to operating as monopolies with guaranteed profits, make money leasing their networks to rivals even in states with low regulated rates, and that the Bells list as costs items not allowed by the federal telephone rules.

“SBC likes to put out that wholesale rates are confiscatory and that they are subsidizing us, and that’s not true,” said James L. Lewis, vice president for public policy at WorldCom Inc.’s MCI unit, which is a plaintiff in the Illinois lawsuit. “The prices are not low; they’re cost-based.”

Baby Bells such as SBC increasingly have complained in the last year that state regulators are ignoring their true costs for leasing to their rivals the copper lines that deliver dial tones, the switches that connect calls and other gear.

SBC’s effort in Illinois was an opening salvo in a push to persuade the Federal Communications Commission to change the federal pricing formula that states must follow in setting leasing rates, and require states to use actual rather than hypothetical costs to set rates.

The agency is expected to initiate a review this summer; Bell rivals say such a proceeding now would stall for several years efforts to lower prices in many states that still have little competition.

The Illinois blitzkrieg was a powerful reminder of the company’s resolve. Many politicos in California say a similar legislative rush is unlikely here because consumer advocate groups are stronger and politicians less tied to a political machine.

“I just can’t imagine it,” said Public Utilities Commission member Susan Kennedy.

But consumer advocates don’t underestimate SBC.

“What happened in Illinois gives me proof -- and a warning -- that SBC is very powerful and very influential,” said Denise Mann, telecommunications branch manager of the PUC’s Office of Ratepayer Advocates.

“We are cash-strapped. We have a desperate Legislature. SBC is a big player, one of the single biggest employers in California,” with 48,500 workers, she said. “And they have a great constituency base -- very pro-woman, black and Hispanic. They look good to a legislature.”

Indeed, SBC fashioned the Illinois rate measure as a jobs bill and got its two major unions to support it. Illinois was the headquarters for the five-state Ameritech Corp., which SBC acquired in 1999, and is home to 21,000 SBC employees. Though it never promised to create jobs or avoid layoffs, it said the ability to raise rates was crucial to maintaining its presence in the state.

The company said essentially the same thing a year earlier in Oklahoma to win favorable legislation there. Then it moved 240 jobs out of state.

As a jobs bill, the Illinois measure was designed to appeal to the Democratic-controlled House and Senate and Democratic Gov. Blagojevich, a close ally of Chicago Mayor Richard M. Daley, the don of the state Democratic Party. Daley’s brother, former U.S. Commerce Secretary William Daley, is SBC’s president. The company hired nearly three dozen lobbyists, including Mayor Daley confidant Victor Reyes.

A long list of opponents, including Lt. Gov. Patrick Quinn and Atty. Gen. Lisa Madigan, derided the measure as anti-competitive. Quinn called the law a hidden consumer tax that benefited SBC and would lead to higher consumer prices.

One of the unions supporting SBC in Illinois was the International Brotherhood of Electrical Workers. Its international president, Edwin D. Hill, said it wouldn’t do the same in California. Unlike in Illinois, he said, California regulations foster “economic growth and job creation.”

SBC has no qualms about its approach. These are desperate times for an industry long suffering from too much capacity, falling demand, large debts and growing competition, especially from wireless carriers. Losing revenue from regulated pricing has been an added burden.

“It was a serious problem in Illinois,” SBC’s Bingol said. “And this is a serious issue for any state where these wholesale prices are below our costs.”

SBC earned $5 billion in the first quarter on sales of $10.3 billion but blamed money-losing leasing rates for helping drag revenue down 1.8% from last year’s first quarter.

Verizon Communications Inc., the nation’s largest local carrier and the second-biggest in California, wants “real-world” costs, not hypothetical assumptions, used to determine pricing, said Michael E. Glover, Verizon’s deputy general counsel. “The formula needs to be reformed.”

California legislators and PUC commissioners vow they would never let SBC get away with something so bold as it did in Illinois.

“The Senate has pretty clearly been a pro-consumer kind of place,” said Sen. Debra Bowen (D-Marina del Rey), who chairs the Senate Energy, Utilities and Communications Committee. And Assemblywoman Sarah Reyes (D-Fresno), who chairs the Assembly’s Utilities and Commerce Committee, said, “We don’t set rates in the Legislature. The rate setters in this state are the PUC.”

Michael R. Peevey, the PUC’s president, said he would oppose an end run around the commission. “How they do politics in Illinois and how we do politics here is significantly different,” he said.

Consumer advocates aren’t so sure.

They note that last year, after the PUC’s Office of Ratepayer Advocates helped defeat a bill favorable to SBC, then-Assemblyman Rod Wright, who sponsored the bill, persuaded lawmakers to turn all 18 positions in the office’s telecom division into limited-term jobs ending in two years.

Assemblywoman Reyes is seeking this year to reinstate nine positions as full-time slots; Bowen is trying to get all the positions returned.