Rivals Face Tough Calls as SBC Lease Rates Rise

Rivals of California’s dominant phone company say the state just gave them a wrong number.

The Public Utilities Commission this week allowed SBC Communications Inc. to increase by 19% the wholesale rates it charges competitors to lease its phone lines, making it more expensive for them to snag customers. With the increase, SBC is now able to charge its own customers 35% less than the wholesale price it collects from such rivals as AT&T; Corp. and MCI Inc.

That puts competitors in a tight spot and casts doubt on whether the lower prices enjoyed for the last two years by California’s customers is over.

“SBC won’t be raising their [retail] rates,” said Tony DiStefano, chairman of Bakersfield-based Arrival Communications Inc., which serves 30,000 business lines in the Central Valley. “And now we get caught in a price squeeze.”

SBC spokesman John Britton scoffed at that notion, saying that SBC itself loses money on customers who buy just the basic service. He said profit is generated through such additional features as call waiting and caller ID.

SBC owns the copper lines that connect most California homes and businesses to the national phone network. State and federal law intended to promote competition requires SBC and other regional phone companies to sell rivals access to those lines because building a new network would be prohibitively expensive.

On Thursday, the Public Utilities Commission allowed SBC to charge competitors an average of $16.53 a month to lease the platform of lines and gear needed to provide a dial tone to customers. Under a previous PUC ruling, SBC sells that same service to its own customers for an average of $10.69 a month.

Even the PUC acknowledges that the price difference may seem odd.

“As a practical matter, the new rates create an extraordinarily difficult position for competitors to have [SBC] offer a retail rate that is lower than the wholesale rate,” said Helen M. Mickiewicz, an assistant PUC general counsel.

The retail price for basic telephone service was set low by the PUC to ensure that even the poorest Californians can afford a line into their homes.

SBC profits from the extras, such as call waiting and voicemail, and from bundling services, including long distance, cellphones and satellite television programming. Britton said 58% of its customers buy packages of services.

When SBC leases its platform to, say AT&T;, it also gives AT&T; the opportunity to sell those calling features. Even though the calls are handled by SBC’s equipment, AT&T; reaps the profit.

And that’s what has long irritated SBC, which contends that even the higher rates approved Thursday won’t drive competitors out of California, one of the most lucrative telecommunications markets in the country.

But for those competitors that have their own switches and need only the copper line to homes, the rate increase makes it difficult to compete, much less expand.

“My cost of business goes up, and I can’t pass it on without losing market share,” DiStefano said. “Some people might be willing to pay a premium to AT&T; because they trust the name. But they don’t know Arrival.”

The situation could change in five months, when federal rules on wholesale rates expire, allowing SBC and others to raise some prices 15% or more.

At that point, competitors could absorb the increases, raise prices or lobby the PUC to force SBC to raise its retail rate.

Trying to force a retail rate increase “creates a public relations problem,” said the PUC’s Mickiewicz. “Who wants to go around demanding that [retail] prices go up?”

Bill Harrelson, an MCI lawyer, agreed that arguing for higher prices isn’t practical.

“We always believe that competition should drive prices down,” he said.