Choice Is Key in Phone Rate Change

This week’s decision by California regulators to let phone companies set their own prices was based on a key assumption: Customers have more ways than ever to make calls.

A majority on the state Public Utilities Commission believes that there is robust competition for telecommunications services and that prices are dropping. Consumer advocates, among others, counter that no effective competition exists to challenge big phone companies and that rates are going up.

Both sides are right -- illustrating how deregulation has shaped the competitive landscape in complicated and contradictory ways.

You don’t need a land-line phone from AT&T; Inc., the state’s dominant carrier, to make a call anymore. You can use the cable TV line, a cellphone, the Internet and even those ubiquitous free Wi-Fi hot spots.

But quality and reliability can vary greatly when compared with plain old telephone service. Plus, the two biggest cellphone carriers, Cingular Wireless and Verizon Wireless, are owned by AT&T; and Verizon Communications Inc., California’s second-largest phone company.

You can save some money by buying everything, especially the touted “triple play” of voice, pay television and high-speed Internet access, bundled together from one provider. Or you can face the prospect of paying a lot more for each service separately.

The bottom line, though, is that a majority of California customers have at most two choices for comparable home telephone service: the local phone company and the local cable company.

“The commission is right, and the commission is wrong” about competition and prices, said Steve Kirkeby, a telecom analyst at consumer research firm J.D. Power & Associates in Westlake Village.

State and federal regulators have been ceding more control over telephone networks to their owners. The idea is to give phone companies more flexibility in pricing to help them compete with cable companies, which are largely unregulated.

At the same time, regulators insist that they are watching out for abuses.

On Friday, for instance, the Federal Communications Commission sent an inquiry to Verizon asking it to justify a surcharge it added to the bills of high-speed Internet customers -- a fee that nearly equaled a federal charge that was eliminated this month. Verizon would not comment on the inquiry. BellSouth Corp., which also instituted a new fee, dropped it Friday.

None of the current changes would be possible without the rise of the Internet and the high-speed connections that are proliferating -- a market that is controlled by cable and phone companies.

Cable companies use Internet technology to offer voice service, and phone companies are starting to use it to deliver television.

“What’s really driving the market is broadband competition,” said analyst Keith Nissen at research firm In-Stat. That’s a key reason, he said, that cable is the only true competitor for phone service.

Cable companies have been aggressively marketing their packages this year.

Kirkeby of J.D. Power pointed out that Comcast Corp., for example, was offering a “3 for $33 each” promotion in 20 markets that gives customers digital TV, digital voice and high-speed cable-modem Internet service for $99 a month. “That’s a pretty good price,” he said.

Cox Communications Inc., the pioneer in cable phone service, controls more than 40% of the phone service in some markets, including San Diego. Cox has been the West’s top-ranked phone company in J.D. Power’s consumer satisfaction surveys over the last few years.

“Cable is able to sell the triple play with the phone service as an equivalent of the standard telephone line,” Nissen said.

Others, mainly Internet phone service providers such as Vonage Holdings Corp. and free Internet calling from Skype Technologies, can’t do that, Nissen said. In addition, they can’t offer much more than phone calls, so the established phone carriers aren’t really worried about them, he said.

Paris Burstyn, an analyst at research firm Yankee Group, said price cap regulations were “very, very old,” a remnant of a monopoly era.

“In today’s market, technologies are expensive, and you don’t want to discourage phone companies from making their money back on investments,” Burstyn said.

The main reason for regulation in the first place has been to curb abuses of monopoly power by the local phone companies, which own the networks and the important last mile of lines to homes and businesses. Giving consumers more choices -- in other words, increasing competition -- means that less regulation is needed.

Since Congress passed the Telecommunications Act of 1996 to spur competition in local phone service, the FCC has tried numerous times to foster new players. But its efforts have largely failed in the courts, at the White House and in the marketplace.

That’s because thin profit margins in the phone business discourage the construction of new networks, Nissen said. Regulators long have kept the price of residential phone service artificially low by subsidizing it with higher rates for businesses.

In Europe, where residential consumers paid steep prices for phone service, margins were high enough to entice other companies to build networks, Nissen said. Now, Europeans are seeing phone prices plummet as competition increases.