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Competition calling: Anyone there? Local phone service open to all comers, but choices still few; Breaking up is hard to do; Stubborn technology, bickering over fees slow process


Telecommunications reform is supposed to save Americans billions of dollars, but you can hardly tell that at First National Bank of Maryland, one of the first companies to switch its local phone service contract away from Bell Atlantic Corp.

"Maybe a year from now we'll have a view," bank spokeswoman Joan Gillespie said. "We haven't implemented it yet, so we're not in any position to [compare] service and cost."

More than a year after Congress paved the way for the nation's first large-scale competition on local phone service, stories like First Maryland's are a lot more common than people had expected. Competition is coming, but more slowly than many thought it would.

Baby Bell companies and the new players that want to enter the market blame each other, while consumer advocates worry that mergers like SBC Communications Inc.'s $16.5 billion takeover of Pacific Telesis Group Inc., completed last week, will create exactly the sort of monopoly last year's telecommunications reform law was supposed to break up.

Consumers are seeing some tangible benefits from deregulation. Maryland, rates for intrastate long-distance and local toll calls fell by up to 20 percent in January, after the state Public Service Commission forced Bell Atlantic Corp. to cut rates it charges the long-distance carriers to carry calls between a customer's phone and long-distance networks, which lack the home-by-home connections of local phone systems.

Obscure -- though no longer small -- carrier WorldCom Inc. has unveiled a home phone service package that undercuts a similar Bell Atlantic offering by about $3 a month, or 10 percent. Even Comcast Corp., the cable TV company, has asked for permission to enter the phone business in Maryland, and has unveiled its cable modem-based Internet service, which is far faster (as well as significantly more expensive) than traditional phone-based Internet offerings.

Nationally, there are scattered examples of competition, especially in Connecticut, where local carrier Southern New England Telephone has pushed into the long-distance business, and in major urban centers.

"You drive around San Francisco and you see billboards everywhere offering AT&T; local residential telephone service," said James Gattuso, a Federal Communications Commission official during the Bush administration who is now at Citizens for a Sound Economy, a conservative foundation.

But not all customers benefit equally. Cable TV rates nationally rose about 8 percent last year, Kimmelman said, and many new players in the phone business are concentrating on business customers rather than consumers, leaving Mom and Pop without the choices many thought they would have by now.

"We don't play in residential," said Ron Vidal, WorldCom's vice president of new ventures.

No one's switched yet

"There are no residential customers in Maryland who have switched to another [local] provider," People's Counsel Michael J. Travieso said. "It does matter. The whole concept of reform was to give people choices."

The Big Three long-distance carriers, the only ones planning a major effort to move consumers away from Bell Atlantic, aren't likely to offer local phone service in Maryland before fall, if then. Their network-sharing deals with Bell Atlantic still haven't been worked out, despite state arbitration that ended six months ago.

The long-distance companies say Bell Atlantic and other Baby Bells are simply stalling. For example, AT&T; contends that Pacific Telesis is claiming it has the administrative ability to process only about 400 daily requests to switch local phone service in a state with 20 million people -- and even then is trying to talk switchers out of it before they turn the customer over to AT&T.;

"We've been finding all kinds of problems, from the inept to the intentional," said MCI chief policy counsel Jonathan B. Sallet.

Long-distance companies and consumer groups are also concerned about the mergers, especially the $23 billion merger proposed by Bell Atlantic, which covers the area from Virginia to New Jersey, and Nynex Corp. which serves New York and most of New England. Competitors say teaming up the most obvious potential competitors in local service makes no sense. The Justice Department is considering whether to let that deal go forward.

"The act reduced price and ownership limits on the theory that there would be rampant competition," said Gene Kimmelman, director of the Washington office of Consumers Union. "If mergers entrench monopolists, it defeats the purpose."

Bell Atlantic general counsel James R. Young argues that the mergers are less important than they look. He insists that Bell Atlantic would have been no more formidable a competitor in local service in Nynex's territory than AT&T; or Sprint will be, because unlike them it has no customers in the states Nynex serves.

"The most important thing the Telecommunications Act did was dramatically lower the barriers to entering the local phone business," Young said. "No merger is going to change that."

A daunting task

The slow pace of telecommunications reform is part a story about lost nerve, partly about technology developing more slowly than big-talking tycoons thought it would, and partly about the simple size of the job. It entails unraveling a $100 billion-a-year monopoly in local service, a $100 million-a-year near-oligopoly in long distance and a series of local monopolies in cable TV -- then aiming them all at each other.

"It's like [AT&T; chairman] Bob Allen said, it was an act of Congress, not an act of God," said Gerry Salemme, AT&T; vice president for regulatory affairs.

Indeed, a group of three Baby Bells suspended a plan last fall to build a microwave-based transmission system for cable-like TV programming. Among other problems, the technology worked poorly in the rain.

Cable modems are spreading very slowly, in part because cable companies are strapped for cash. Cable titan John Malone, head of Denver-based Tele-Communications Inc., said late last year that TCI, which provides cable to Baltimore City, would slow down its drive into phone service and the Internet to save money and concentrate on protecting its core cable TV business.

"This is one of the most unpredictable businesses there is," said Gattuso. "Sometimes technology you think will be the next thing doesn't work out."

Hopes for deregulation were higher when the law passed last year, and experts say the next few months will be crucial. Regulators will be making a number of key decisions by summer that will help determine just how much consumers actually save on their phone bills.

By May 8, the Federal Communications Commission is due to decide how to cut the "access charges" long-distance companies pay Bell Atlantic and other Baby Bells for carrying interstate long-distance calls between customers' phones and the long-distance carriers' networks -- the federal version of the charges Maryland ordered cut by $32 million for intrastate calls last November.

Long-distance carriers like AT&T; and MCI pledge to pass along any cuts dollar-for-dollar, and have launched a fierce public-relations war to persuade the FCC to slash the fees by up to $10 billion.

Sallett said access charges are the most important issue driving how much consumers will save because of telecommunications reform in the short run. MCI claims the charges represent 40 cents of every long-distance dollar and are eight times higher than Baby Bells' costs to provide the service -- mostly because the long-distance carriers have so few other places to buy the same service.

AT&T; said Baby Bells charge about $20 billion annually for access, which it said costs $3 billion.

"We can't pass along what isn't saved," Sallett said.

Bell Atlantic snipes back that AT&T; and MCI talk a better game than they pitch when it comes to cutting prices. Young dismisses numbers showing long-distance rates have fallen to about 13 cents a minute from more than 50 cents in 1984, saying the long-distance companies have cut prices for free-spending customers while raising the basic rates paid by consumers who aren't sophisticated enough to shop for a better deal.

Closer to home, Maryland's PSC is set this spring to set final rates for "unbundled elements" -- the a la carte use of particular parts of Bell Atlantic Corp.'s existing phone networks by newcomers that want to get into the business by building part of a new system and leasing parts of the old one.

That decision will set the stage for the long-distance firms to wean themselves from a strategy of simply reselling service they buy wholesale from Bell Atlantic -- a plan both AT&T; and MCI plan to use at first -- to a hybrid strategy that will give newcomers more leeway to introduce cost-cutting automation and technology.

Waiting on technology

In the long run, Salemme said, technology is going to mean more than any regulator's 100-page opinion on the right price for renting unbundled elements. AT&T; and others are working on ways to bypass the Baby Bell networks completely, using

wireless solutions to replace the unbundled elements that cover the "last mile" between long-distance networks and the home. Likewise, Bell Atlantic and other Baby Bells are preparing their networks to handle long distance traffic without help from AT&T; and MCI.

"We're moving from a centrally planned economy to a competitive economy," WorldCom's Vidal said. "The act is just an enabler for competition, not competition itself."

Pub Date: 4/06/97

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