NEW YORK -- In the first plan of its type in the nation, Time Warner Inc. intends to use its cable-television system in Rochester, N.Y., next year to provide telephone service to residential and business customers in competition with the local phone company.
Such direct competition between cable and telephone companies has long been foreseen. But it has not yet occurred for ordinary customers because local utilities have resisted such head-to-head competition and because government regulations have prevented it.
But yesterday, state regulators in New York opened the door to local phone competition, reaching a preliminary agreement with the Rochester Telephone Corp. In exchange for giving Rochester Telephone greater freedom to retain profits it earns from greater efficiency, the company has offered a detailed program for letting rival companies connect with its network.
The ability of rival companies to connect with a traditional telephone network is crucial for competition to occur, because this allows customers who subscribe to different services to communicate with each other as if they were using the same company.
The new agreement comes amid a broad effort by state and federal regulators to spur competition in local phone service, a trend most experts say is likely to bring lower prices and new services.
Last month, MFS Intelenet Inc. got the go-ahead from the Maryland Public Service Commission to offer local exchange services to business customers in competition with Bell Atlantic-Maryland.
(The competition in the communications industry cuts both ways -- Bell Atlantic Corp. was given permission by a federal court last August to offer video services in its market, and the company hopes to begin offering TV programming over phone lines in the Maryland and Virginia suburbs of Washington this year.)
Executives at Time Warner said that yesterday's agreement sets the stage for it to offer ordinary telephone service throughout Rochester by the end of 1995.
"This settlement is the basis for being able to make economic sense out of local phone competition," said Thomas J. Morrow, president of Time Warner Communications, the unit leading the company's entry into the telephone business. "The phone companies obviously make huge profits. We think we can lay claim to a fair share by offering better service and more services."
Time Warner officials said their Rochester cable-television network had already been upgraded with fiber optic lines that reach into every neighborhood. As a result, they said, they only need to install switching equipment to offer two-way voice communications.
As envisioned, Time Warner or some other rival would assign phone numbers the same way that phone companies do now. Customers would use a regular phone but dial out over a coaxial cable-television line. If they are calling someone served by Rochester Telephone, the call would be relayed to a switch owned by that company and forwarded.
Each company would then pay the other for each of the calls it had helped complete.
One key element in achieving yesterday's agreement was that the companies worked out a broad approach to pricing these interconnecting services, agreeing that each would charge the other the same rate for completing calls. That, Mr. Morrow said, made it possible to profitably offer local phone service.
John K. Purcell, corporate vice president of Rochester Telephone, said his company could prosper under competition by being freed from restrictions that limit its efficiency.