Congressional Research Service
The Library of Congress
Washington, D.C. 20540
TELEPHONE INDUSTRY ISSLTES
The U.S. t e l e p h o n e i n d u s t r y c o n t i n u e s t h e complex t r a n s f o r m a t i o n i t
began i n e a r n e s t on January 1, 1984, a s a r e s u l t o f t h e d i v e s t i t u r e o f t h e
American Telephone and Telegraph Company. The former 22 l o c a l B e l l
o p e r a t i n g companies a r e now seven independent r e g i o n a l phone companies.
These "Baby Bells" a r e a c t i v e l y s e e k i n g p e r m i s s i o n t o e n t e r i n t o more and
more non-phone b u s i n e s s e s .
Customers remain confused and angered by t h e r e s t r u c t u r e d t e l e p h o n e
i n d u s t r y . They have found themselves w i t h r i s i n g l o c a l r a t e s , d e c l i n i n g
l o n g - d i s t a n c e r a t e s , a c c e s s c h a r g e s , i n s t a l l a t i o n and r e p a i r d e l a y s ,
l e n g t h y t e l e p h o n e b i l l s , and d o - i t - y o u r s e l f i n s t a l l a t i o n .
r a t e s have r a i s e d c o n c e r n s about u n i v e r s a l t e l e p h o n e s e r v i c e . A l a r g e
number of major companies a r e now "bypassing" l o c a l a n d / o r l o n g - d i s t a n c e
phone companies and a r e e s t a b l i s h i n g t h e i r own communications networks.
T h i s I n f o Pack p r e s e n t s a n overview o f c u r r e n t i s s u e s a s s o c i a t e d w i t h
t h e d e r e g u l a t i o n o f t h e U.S. t e l e p h o n e i n d u s t r y and i n c l u d e s a summary of
t h e A.T.&T. d i v e s t i t u r e .
Members o f Congress d e s i r i n g a d d i t i o n a l i n f o r m a t i o n o n t h i s t o p i c may
c a l l CRS a t 287-5700.
NORTHERN KENTUCKY UNlVEHSiTt
FCC Orders AT&T to Cut Rates Further
LongDistance Reductions Will Take Effect on New Year's Day
By Bill McCloskey
The government yesterday ordered American Telephone & Telegraph Co. to reduce rates an additional $650 million to $700 million,
bringing a scheduled New Year's
Day long-distance price cut to almost $1.9 billion, or 11percent.
Federal Communications Commission Chairman Mark S. Fowler
said a large portion on the new reductions will come in the night and
weekend time periods to benefit
people who make long-distance calls
AT&T's competitors said earlier
they will reduce their long-distance
rates to remain competitive.
The cuts were made possible in
large part by reductions in the rates
long-distance companies pay local
phone companies for making the
connection between an individual
phone and the long-distance company's switching center.
Part of the cost of those circuits
is now paid by each customer as a
monthly $2 subscriber line charge.
Even with that $2 cost, the commission estimates that any custome r who makes $4.65 a month in
long-distance calls will save money
on out-of-state toll calls, compared
with 32 months ago when long-distance rates started to drop.
Fowler also predicted local rates
generally will remain flat in 1987
and might be reduced in some
A survey by the Consumer Federation of America, released yes-
@ 1986 The Washington
terday, said that for residential customers the reductions in long-distance rates have not made up for
increases in local rates during the
past three years since the breakup
of the Bell System on Jan. 1,1984.
Fowler said long-distance rates
have come down 30 percent since
the breakup. Local rate increases
vary state by state, but on average
are up about $5 a month, compared
with rates in late 1983.
With New Year's Day football
games in mind, Fowler estimated a
five-minute call from Pasadena,
Calif., site of the Rose Bowl, to the
Ann Arbor home of game participant Michigan would cost $1.68,
compared with $2.53 three years
Fowler also revealed that November Census Bureau figures
show 92.3 percent of all homes
have telephones, a slight increase
over the 92.2 percent reported four
The number has been inching up
from 91.4 percent since the figures
were first gathered three years
ago, but Fowler said FCC statisticians now believe the increase is
"statistically significantn and not
just a quirk in the numbergathering.
AT&T already had planned a
price cut of 8.1 percent, or $1.2
billion, for 1987.
AT&T spokeswoman Edith Herman outlined roughly how the additional savings will be distributed:
rn Calls made between 11 p.m. and
8 a.m. or on weekends before 5
p.m. Sunday would come down
about 5.9 percent. A 2.7 percent
reduction had been proposed.
Rates for WATS lines used by
businesses to accept toll-free calls
from customers were ordered down
by 5 percent, more than double the
rate reduction AT&T had planned.
rn Weekday rates, for calls made
between 8 a.m. and 5 p.m., were
slated for an 11.6 percent cut, but
under the commission-ordered reduction the cut will be 14.5 percent.
rn Calls between 5 p.m. and 11p.m.
are scheduled for a 9.3 percent
price cut, compared with AT&T's
proposed 6.2 percent reduction.
AT&T officials said the total reduction will be $1.86 billion to $1.9
billion, in the 11percent range. Exact figures will be filed by AT&T at
the FCC later.
The commission deferred; for at
least a month, AT&T's proposed 4
percent increase in the cost of private lines businesses use to make
out-of-state connections between
computers, telephones or radio and
The commission estimated that
the lower rates will encourage 200
billion minutes of long-distance calling next year, up from 150 billion
minutes in April 1984.
Increased use of existing lines
and switches will make the telephone network more efficient, the
commission ruled and it ordered
AT&T to factor in those savings in
setting its new rates.
The FCC said AT&T overestimated some costs and the commission refused to allow AT&T to pass
on to customers certain other costs.
Post Company. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright clairqant.
Congressional Research Service with permission of copyright c l a i v n t .
o l Arner~ca
AT81 BREAKUP ON JAN. 1.1984
From December to December of each year
THE WKSHINGTON POSl
dy because they had not seen it. One FCC official
said 1981 through 1984 "were turbulent years"
for consumers of telephone service.
"Since 1984, trends a r e looking very very
good," the official said. "We wouldn't expect any
future state increases of any magnititude, and
the long-distance rates have been coming down,"
FCC officials said long-distance rates have fallen about 2 3 percent since the Bell System
breakup due to increased long-distance calling,
which spreads costs over a larger base of users,
and pricing adjustments in the long-distance industry.
The trend is expected to continue, they said.
AT&T, which dropped prices more than 6 percent in the summer, will announce a rate cut of
more than 6 percent today, officials said.
SOURCE Cons~merF e d w a l l o n
Since the Bell breakup, state regulators have
granted telephone companies about $5.5 billion
in rate increases. The phone companies' profits--which are set by state regulators and closely tied t o interest rates-are running 2 to 4 percentage points higher than other utilities and
most competitive businesses, said Kimmelman.
"Regulators need to initiate rate decreases,
which they are not doing," he said. "We ought to
be entering an era of utility rate reductions because we've got inflation a t the lowest rate in 20
years, and that has not been worked into the
public utility rate-making process."
T h e CFA claims telephone companies have
charged ratepayers about $3 billion too much for
each of the last two years.
Officials a t the Federal Communications Commission yesterday declined comment on the stu-
@ 1986 The Washington Post Company. Reproduced by the Library of Congress,
Despite deep cuts in long-distance phone
rates, consumer telephone bills have risen 2 0
percent since the breakup of the Bell System
three years ago, the Consunler Federation of
America said in a study released yesterday.
Local residential phone bills, which include a
charge of $2 a month for access to the long-distance network, have increased from an average
of $10.55 per month to $15.40 per month, said
the study by the Washington consumer group.
Interstate long-distance service rates have
iallen 17 percent since the Bell System breakup,
based on surveys by the Bureau of Labor Statistics, the CFA study said. Long-distance rates for
in-state calling have increased 4 percent. But the
cost of local telephone service, which includes
the monthly long-distance access charge, installation, the telephone, local usage charges and
taxes, has increased 39.8 percent.
"Many of the promises that accompanied the
restructuring of our telephone system have
failed to reach the American consumer," said
Gene Kimmelman, legislative director for the
CFA. "We were told that widespread, cutthroat
competition would drive down telephone prices
and bring information-age gadgets and services
t o all consumers. Instead, consumers must pay
significantly more to get the same old service
they had prior to the break up."
Because most residential customers do not
make a large number of long-distance calls, the
average consumer's bill has gone up by about 20
percent, said Kimmelman.
Overall, telephone bills rose 20 percent during
the past three years when overall infla t'Ion was
only 9 percent, the study noted. In contrast,
overall telephone bills rose 24.2 percent between 1980 and 1983, when inflation totaled a
much higher 17.5 percent, the study said.
W,I\IIIIIX~OII Rxt St.~ttWntcr
By Elizabeth Tucker
Phone Bills Found Up 20%Since Breakup
AT&T R7iULay Off 27,400
In New Move to Cut Costs
NEW YORK, Dec. 18-AT&T
today announced plans to lay off
27,400 employes-the largest such
reduction in the company's history-and said it would take a $3.2
billion reduction in earnings as part
of the telecommunications giant's
struggle to fit costs to its new, deregulated role in the economy.
"We are doing what we said we
were going to do-resize, reshape
and refocus our business," said
AT&T Chairman James E. Olson at
a press conference here, describing
the actions as a "positive development" that "clears the deck" for the
company's future growth.
The layoff announcement follows
a similar elimination of 24,000 jobs
at the company last summer and,
when this round is complete, will
bring AT&T1s work force to between 290,000 and 295,000. That
is a reduction of about 20 percent
from the 374,000 AT&T employed
AT&T has been struggling to adjust to operating in a competitive
environment and to delivering on
the promises of growth and technological leadership held out when
it and the local telephone companies
"The best way to strengthen our
core business [such as long distance
phone service and te!ecommunications switching equipment] is to attack the cost structure," said Olson.
See AT&T,A14, Col. 1
@ 1986The Washington Post Company. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright clai~ant.
AT&T to Lay Off 27,400,
Take $3.2 Billion Charge
AT&T, From A1
"We've got to reduce the breakeven point.
"We are not on the verge of pulling out of any major market segments," he said, "but I cannot say
with certainty that, two or three
years from now, we will have the
same plants that we have today."
Olson, who said that the benefits of
the moves will appear in 1988, compared the steps to restructuring efforts taken by other large corporations a s they seek to reduce their
costs in a sluggish economy.
"AT&T is doing this for one reason and one reason only," said Jack
Grubman, a Paine Webber analyst
who tracks the company. "Business
stinks and will continue to stink,
probably through 1988. They're incredibly forthright to say that positive results won't happen until
"It was a blockbuster announcement," said James McCabe of
Donaldson Lufkin & Jenrette, who
is cutting his earnings forecast for
Separately today, International
Business Machines Corp. said that
roughly 10,000 of its domestic employes had elected to accept early
retirement under a special retirement option. That is twice as many
as IBM had stated as its goal when
the plan was announced this fall
and, when combined with retirement inczntives in IBM's international operations, could cost the
company $250 million in after-tax
According to Sanford C. Bernstein analyst Richard Martin, that
could save the world's largest computer company between $600 million and $700 million a year.
The company also said it sees no
noticeable improvement in the business climate and plans new cost reduction efforts next year.
AT&T, which, like IBM, is competing in a troubled information
processing marketplace, has seen
the size of its work force drop dramatically since the breakup of the
Bell System nearly three years ago.
According to AT&T President
Robert Allen, roughly 3 0 percent to
4 0 percent of the employes affected
by the proposed layoffs have been
notified. The majority of the
27,000-plus workers will be off the
AT&T payroll by early 1987.
About 11,000 of the proposed
layoffs will be from management
levels, said Olson. According to contracts, those laid off by AT&T will
enjoy preferential hiring treatment
by the seven regional Bell operating
The Communications Workers of
America, the union representing
155,000 AT&T employes, criticized
the timing of the announcement, just
a week before Christmas, and
claimed that AT&T had given the
union different information about the
job cuts than it gave the public, The
Associated Press reported.
The announcement was a "gross
overstatement and unduly alarming," union spokeswoman Francine
The $3.2 billion charge against
earnings will result in a loss for the
fourth quarter but allows a "small
profit" for the year. Roughly $2 billion of the charge is related to in-
ventory writedowns and consolidations and not to the layoffs.
The cutbacks indicate that
AT&T continues to face realtively
slow growth in its core business and
needs to cut costs to generate increased profits.
"The key problem in this company is that they don't know how
they're going to get growth," says
Paine Webber's Grubman.
During the early stages of the Bell
System breakup, AT&T planned to
use its strong technology base and
national presence to compete with
such industry leaders as IBM and
Ihgital Equipment Corp, in the computer marketplace. Freed from regulatory constraints, AT&T was going to generate new business in this
informatioli processing market.
However, the computer industry
slump, combined with AT&T1s own
inability to create and market products effectively, led to roughly a billion dollars of losses over the last
three years. "Our appetite was too
broad and too large," acknowledged
AT&T's Allen. " . . . Also the rnarket was rather weak and sick to go
into either as a new entrant or a s a
major strategic force."
Consequently, after a series of
meetings this fall, AT&T decided to
reduce its ambitions in the inforrnation processing industry. AT&T has
gone outside to Olivetti, a partner, to
recruit a new manager for its cornputer operations. While AT&T says
it will continue to sell minicomputers
and personal computers, it will now
focus on providing "networking" expertise that will allow companies to
link dispdrate computer systems together so they can communicate.
Allen confirmed that AT&T did
negotiate to acquire all of Electronic Data Systems, the General Motors data processing subsidiary formerly run by Ross Perot, which
does have considerable networking
skills. Reports of such negotiations
were hotly denied by GM.
3aby Bells Diversify
nto Non-Phone Areas,
Spark Much Criticism
Lgional Firms Are Accused
Of Unwise Acquisitions,
Using Subsidies Unfairly
howth Is Needed, They Say
Sroff Reporter o.f THEWALL STREETJOURNAL
Several months after U S West Inc.3
birth in the breakup of the Bell System.
two seasoned miners offered it an intriguing proposition: Would the regional Bell
telephone concern like to buy a valley in
the Rocky Mountains?
The miners held precious-metal claims
there and thought that a business park
would be a good use of the surrounding
land. Itching to diversify, Denver-based
U S West listened to the proposal M o r e
"Just because they had an i d ~ xthat
sounded offbeat didn't mean we'd kick
them out the door," a U S West spokesman
says, adding: "We aren't interested in limiting ideas for diversifying."
And diversify it has, along with the six
other regional Bell telephone holding companies that American Telephone & Telegraph Co. divested itself of. Ten days after
the breakup on Jan. 1, 1984, BeII Atlantic
Corp. announced a proposal to buy a leasing company. That set off a continuing
binge of acquisitions by the seven regional
companies. They have been buying Yellow
Pages publishers. cellular-telephone prop.
erties, computer stores, software companies, financial-services concerns and real
estate. So far. the spree has cost an estimated $3.5 billion: and that doesn't include
ventures started from scratch and acquisitions valued at less than $100 million.
"We are actively seeking acquisitions."
says Sam Ginn, Pacific Telesis Group's
Rut regulators, consumer groups, securities analysts and potential Bell competl:ors are growing increasingly uneasy.
Their concerns vary. Some analysts contend that the Bells, in their headlong rush
:o diversify, may be paying too much for
1~quis1tions.Some competitors accuse
:hem of "cross subsidizing" the new buslirsses with revenues from their telephone
monopolies, with phone customers picking
jp the tab. Potential competitors such as
newspaper publishers fear that the Bells
will enter new electronic-based informalion services in which the regimal companies will have an unfair advantage because
of their phone networks.
Most serious of all. industry analysts,
consultants and others wonder whether the
Bells really know what they are doing. One
critic says the seven companies' non-telephone operations lost almost $1 billion in
19%; the companies themselves are generally secretive about financial details. The
doubters note that never before did Bell
executives-nurtured in the 100-year-old
monopoly culture of Ma Bell-manage diverse businesses, face competition, map
strategy or acquire companies:
Management P r o b l e m
"They have little understanding of how
to compete in most industries because
their management team comes from a single industry." says Craig Boyce, an industry consultant and investment banker.
Bell-company officials say their critics
are off base and. at this early stage of the
diversification efforts, are unfairly speculating about eventual results. In their own
defense. the officials say the acquisitions
are largely related to communications and.
therefore. are conservative moves. "We
aren't buying popcorn stands," says Robert Pope, vice chairman of Southwestern
Bell Corp. Bell managers add that the new.
diversified operations and the telephone
companies are separated to preclude cross
subsidies. "We refuse to use our l e v e r a ~ e
in the monopoly." says Howard Doerr. a
Ll S West executive vice president.
The heavy losses at the non-telephone
operations are narrowing sharply, BeII officials say. With non-telephone revenues
ranging from a few hundred million dollars
to about $1 billion at each of the companies, the non-phone operations wil; bean
contributing significantly to earnings next
year or in 1988, the Baby Bells say. At Bell
Atlantic. whose efforts are regarded as
among the more successful, non-telephone
operations will provide as much as JOS of
earnings growth this year. says Raymond
Smith, vice chairman and chief financial
Outgrowth of Decontrol
The acquisition drive stems from the
deregulation of telecommunications. The
Bell System breakup left the Bells to provide local phone service on a reponal
basis. But they see diversification as essential because, they say. lucrative parts
of that business face competition. Also,
phone profits face slowing growth and
can't exceed limits set by regulators.
"These companies are going to increasingly feel a sense of urgency to diversify."
says Jack Grubman. a PaineWebber Inc.
Thus, the deal-making proceeds apace.
Re11 Atlantic, the most acquisitive rrgional. bought a real-estate portfolio in
September and completed acquisition of a
second leasing concern in October-a total
outlay of $290 million. Speaking to analysts
last month. Mr. Smith hinted a t acquisitions in computer software and financial
Meanwhile. Southwestern BeII reaf.
firmed its controversial plan to acqulre
Metromedia Inc.'s cellular-telephone and
Plrnsr Turn to Pngc 24. Colutttn
WALL STREET 3 0 U R N A L
O 1986 Dow J o n e s 8 Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
24 THE WALL STREET JOURNAL WEDNESDAY, DECEMBER 10, 1986
Shopping Spree: Baby Bells Move
Into Many Non-Telephone Areas
C o n t ~ n u ~Fdr o m b'lrst Pnge
pagng Interests for $1.2 blll~on. I t also
agreed to buy related cellular Interests for
about $200 n~lllonmore. At Nynex Corp., a
daring plan to buy a transatlant~clong-distance busmess is moving forward. Last
July, the company pald an estimated $100
mllllon for International Business Machines Corp.'s computer stores.
"We look at six to 12 sltuatlons In any
glven week," says Robert Runlce. U S
West's president for commercial develop.
ment. U S West 1s rumored to be looking at
E.F. Hutton Group Inc., a big securities
So far, the Bells haven't made any huge
mistakes. They have spurned proposals for
acquisitions far afleld such as oil and gas
propertles, a furniture maker and a metals
Nonetheless, doubts are growlng among
securltles analysts, who note the unenvl.
able dlverslf~catlonrecord of non-Bell telephone companies, such as CTE Corp.
AT&T's reversals In the computer market
have forced i t to reemphasize its core communications business. Telephone concerns
have had "tremendous difficulty identifying markets." says E~leenPolsky, an analyst at Drexel Burnham Lambert Inc. "A
lot of companies would be more profitable
today if they hadn't pursued some of their
As deals dry up in areas fam~liarto the
Bells. "you have to call into question thelr
ability to analyze potential acquisitions not
wlthln the confines of telecommunications," PaineWebber's Mr. Grubman
Questions still linger over Nynex's acqu~sitionof the 83 IBM Product Centers,
now renamed Nynex Business Information
Centers. "How much more does Nynex
know about operating those stores than
IBM?" Mr. Grubman asks. Even Mr.
Smith, whose Bell Atlantic acquired the
smaller Compushop computerstore chain,
expresses skepticism about telephone companies' prospects in computer retailing.
"We are all testing to see if the businesscenter strategy is sustamable, and the jury
is st111 out. That is why we bought a small
company at a low price-$21 million for 60
stores." Mr. Smlth says.
Delbert Staley, Nynex's chlef executive,
says outsiders don't understand its strategy. "The problem is people assume we're
in ~t purely for computer retailing," he
says. He adds that through the acquisition.
Nynex gained "a natlonal presence" that
can help it reach business customers and
distribute products and services.
Almost from the start, some crit~cs
have contended that the Bells pay too
much for acquisitions. Edward Greenberg,
an analyst at Morgan Stanley & Co., says
the $215 million that Ameritech paid for
Applied Data Research Inc., a software
concern, was an "astronomical" price. Analysts made the same charge following
Bell Atlantic's $175 million acquisition of
Sorbus, its computer-maintenance unit,
and U S West's $120 million acquisition of
Applied Communications Inc. Each company contends that it paid a full but fair
Outmaneuvering Other Bidders
But the issue of overpaying is looming
ever larger in the wake of Southwestern
Bell's $1.2 billion cellular-phone and paging
transaction. The transaction arose when
the company preempted a planned auction
of the holdings of Metromedla, whose principal owner, John Kluge, wanted to liquidate for estate and tax purposes. With the
move, Southwestern outmaneuvered 30 or
so potential bidders, including two of the
Big Three auto makers, AT&T and two
other Bells that also sought a preemptive
bid-U S West and Pacific Telesk, sources
Southwestern's original proposal, a
$1.65 bllllon offer, included a "crown
jewel" corridor In the Northeast encompassing cellular propertles in Boston, New
York, Philadelphia and Washington-Baltimore. Subsequently. New York and Philadelphia were dropped because of legal
problems at Metromedia, and the price
was reduced. But the initial price is still
being questioned. Says James M. Piepmeier, Ameritech's director of corporate
development: "We ran a number of investment models on those propertles and had
some difficulty getting anywhere near" the
Although the acquisition will dllute
earnings, Southwestern defends it as a
strategic move, a chance to land choice
properties unlikely ever to go on the block
again. ,"We look at this as offering us an
opportunity to get into the national paging
and cellular businesses," the company's
Mr. Pope says. "There is some value in
fulfilling a long-term strategy."
Bell crltlcs and backers ahke say acquisltion prlces have been cllmbing partly because the Bells have been bidding against
one another. The Bells deny this but concede that the same acquisition prospects
are often offered to several of them.
Big Profits Anticipated
Bell officials expect the new businesses
to be highly profitable even though, under
federal regulations, non-telephone revenue
must be kept to no more than 10% of the
total. By 1991, "a company we acquired in
1986 should be earning at a level that will
be as good as or better than any alternative investment," including the phone companies. Bell Atlantic's Mr. Smith says.
But some Bell competitors, citlng the
losses at those operations, are b r ~ n p n g
charges of cross subsidies. The telephone
concerns "are corrupting the ratepaying
process, using the revenues of the local
service monopoly to fuel an ambitlous acquisition blnge," Edwin B. Splevack, the
president of the North American Telecommunicat~onsAssociation, said in testimony
earlier t h ~ syear before a congress~onal
subcommittee. The group's members
make or distribute telecommun~cations
gear and thus compete w ~ t hthe Bells' un.
regulated units that sell such equipment.
Utility regulators also are concerned
about the potential for cross subs~dies.A
subcommittee of the National Association
of Regulatory Utility Comm~ssionerssaid
it found evidence of cross subsidles during
a recent investigation. The panel's report
noted "concern that the lBaby Bells1 are
draining off the capital of the ltelephone
companies1 to finance their growth into unregulated operations and that the Integrity
of basic service is threatened."
Bell officials deny cross subs~d~zing
non-telephone operations. The holdingcompany profits, much of which are invested In non-telephone operations, belong
to the stockholders, they say. "It sure as
hell doesn't belong to the ratepayers," declares U S West's Mr. Doerr, who adds
that phone customers get top-notch service
for a fair price. "Whatever we do with the
proflts, the only people we have to answer
to are the shareholders," he adds.
Like other Bell executives, Mr. Doerr
says the companies are reinvesting heavily
In telephone service. U S West put $1.7 bllllon into it this year, he says.
Complaining competltors. Bell officials
say, slmply want the Bells relegated solely
to the local telephone business. But diversi.
flcatlon is imperative, they add.
"You need to have an englne that motivates the growth of the organization," says
Carl E. Horn. Ameritech's senlor vice
president of corporate strategy. "lf you
don't grow, you tend to d ~ e . "
7800 E. Orchard Rd.. Suite 200
Englewood. CO 801 11
US WEST INC.
1010 Pine St.
St. Louis, MO 63101
Telephone: 3 14-247-9800
New Jersey Bell
Bell of Pennsylvania
Chesapeake 8 ~ o t o m a c
Telephone Companies (4)
New England Telephone
New York Tele~hone
Source: American Telephone and Telegraph Company (A.T.&T.)
SOUTHWESTERN BELL CORPORATION
140 New Montgomery St.
San Franc~sco.CA 94105
Telephone: 4 15-882-6000
PACIFIC TELESIS GROUP
222 Westchester Ave.
White Plains. NY 10604
Telephone: 2 12-395-212 1
675 W. Peachtree St.. N.E.
Atlanta. GA 30375
1600 Market St.
Philadelphia, PA 19103
Telephone: 2 15-963-6000
BELL ATLANTIC CORPORATION
225 W. Randolph St.
Chicago. IL 60606
Telephone: 3 12-750-5000
550 Madison Ave.
New York, NY 10022
F.C.C. Drops a Restriction
By REGINALD STUART
Spec ~ n I<,
l 1hr Hru. Yurk Tlrncs
WASHINGTON, Nov. 25 - The
Federal Communications Commission today droppcd 11srule requiring
the Bell telephone companies to use
separate companies to sell telephone
The regulatory panel said that the
costs to the companies of (he rule
"are high" and that the public interest would be "served better" by
granting the companies flexibiity In
this line of Qusincss.
Competition Expected to Heat Up
The practical effect of the decision,
made in a 5-to-0vote, is that telephone
customers will again be able to order
telephone equipment when they order
The decision, which could save the
Bell companies millions of dollars in
administrative and sales costs, is
likely to heat up competition in the
telephone equipment sales business.
It comes just five months after the
F.C.C. dropped a similar rule for the
Bell companies covering the marketing and sale of "enhanced services,"
including call answering and message storage.
The response to the commission's
decision from the Bell companies was
predictably enthusiastic. U S West,
the Denver-based holding company
for Bell systems in the Rocky Mountain region, called the panel's action a
"very positive" step that recognizes
the need of the Bell companies for
flexibility in dealing with their customers and equipment needs.
The Bell Atlantic Corporation, the
Philadelphia-based holding company
for Bell companies in the Middle Atlantic States, praised the commission's action a s a "long-needed step
in the right direction."
The two separate subsidiary rules
In voting to drop its separate subwere rooted in decisions by the FCC. sidiary rule regarding equipment
in 1971 and 1980 aimed a t promoting sales, the commission issued a set of
competition by restricting the ability "safeguards" that it said would proof the American Telephone and Tele- tect rate payers and competitors of
graph Company to dominate certain the Bell companies. They are similar.
lines of business by marketing to the provisions governing the marthrough its local service companies.
keting and sale of enhanced services.
When A.T.&T. was broken up three
years ago under a Federal court conThe commission will require acsent decree, the separate subsidiary counting measures aimed a t detectrules carried over to the seven new ing and deterring any Bell company
regional holding companies that were from using t h e rate base to subsidize
created to operate the local Bell tele- the sale of telephone equipment. The
Bell companies have to accord their
Under the rule abolished today by non-Bell competitors the same access
the F.C.C., for example, the Bell oper- to the network that they would accord
ating companies were requlred to set Bell employees in cases where access
up separate companies with separate to the network is required to comstaffs to market and sell telephone plete an order for equipment.
equipment. Customers of the Bell
The commission also authorized incompanies could not be steered to
those subsidiaries, and the subsidi- dependent equipment-sales compaaries could not be subsidized by reve- nies to act a s sales agents for Bell
nues from regulated phone services.
@ 1986 The New York Times. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Easing of Limits on Bell Fim7Activities
Is Szggested in Report for Justice Agency
By BOB DAVIS
WASHINGTON - A report commissioned by the Justice Department suggests
that many restrictions on the former Bell
telephone companies no longer make
sense, a source familiar with the report
The report by consultant Peter Huber
provides ammunition for proponents of allowing the regional telephone companies to
manufacture telephone equipment and to
provide certain computer and long-distance services. Currently. the regonal
telephone companies are barred from
those fields as a result of the consent decree that broke up American Telephone &
Telegraph Co.3 Bell System in January
A Justice Department spokesman didn't
discuss details of Mr. Huber's report, but
said that it will form the basis for recommendations that the department is required to make to federal Judge Harold
Greene in mid-January. The spokesman
said the department didn't have any immediate plans to release the report before
The Justice Department hasn't yet
formed its recommendations, but telecommunications industry officials expect it to
suggest some easing of the restrictions on
the phone companies. Earlier this year,
the Justice Department and the Federal
Communications Commission helped write
a bill introduced by Senate Majority
Leader Robert Dole (R..Kan.) that would
shift jurisdiction over telecommunications
policy from Judge Greene to the FCC. Congress recessed without acting on the legislation.
The Huber report has been a subject of
intense speculation in the telecommunkations Held, partly because Mr. Huber, a
lawyer and former engineering professor,
has given few indications of his views during the year he spent researching the 6013
The report was designed as an economic analysis. and the Justice Department spokesman said he believes it doesn't
contain any firm recommendations. Instead, he said, it analyzes whether sufficient competition and regulatory safeguards are in place to warrant allowing
the regional telephone companies to enter
new fields. "That doesn't mean people
can't find preferences in the report" by
evaluating the analyses, he added.
The source familiar with the report said
it argues that market conditions may be
ripe for allowing the regional phone companies to sell gear ranging from large telephone switches to consumer headphones.
Large telephone switches require $1billion and 10 years to develop, according to
the report. so the phone companies would
have little edge over such suppliers as
AT&T. Consumer telephones, on the other
hand, have been widely available from a
variety of suppliers and the phone companies would have little ability to dominate
Similarly, the report makes a case for
allowing the regional phone companies to
sell long-distance service to large business
customers. The phone companies have
been banned from providing long-distance
service because of fears they would undercut competition by shifting costs to residential customers.
But large business customers can construct their own telecommunications networks, the report indicates. and so could
bypass a local phone company abusing its
position. Residential customers don't have
similar power; the report indicates it may
make sense to prohibit the regional phone
companies from providing long distance to
The report also analyzes the market for
seven computerized services, such as storing messages or providing burglar-alarm
service through the telephone. The report
noted there is enough competition to allow
the regional companies to enter some of
these fields, but the source wouldn't specify which ones.
The report indicated that phone companies could be allowed to provide services
that are usually included on private telecommunications
services like electronic mail. voicemessage storage and others.
In New York. a spokesman for AT&T
declined to comment on the report, saying
company officials hadn't seen it yet. But
he noted AT&T has consistently opposed
easing of restrictions on Bell companies in
supplyinglong-distance services or making
telephone equipment-AT&T's two main
Spokesmen for some of the Bell companies, which generally have favored relaxation of the rules, also declined to comment. "We haven't seen (the report) either." said a spokesman for Chicago-based
Ameritech. "But we're hopeful it will spur
regulators and policy makers to remove
the anti-competitive shackles preventing
us from competing and better serving customers."
O 1986 Dow Jones & Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
October 27. 1986
all the Bell regionals foresee a profitabb
future in the mobile-phone business,
which industry estimates see growing
009&7009b by 1990 from a base of 325,000 customers last year.
It takes heny amounts of capital to
build a cellular operation-whether by
acquisition or construction. Plowing
huge sums into a competitive, highgrowth business has unaccustomed side
effects for the typical investor in telephone utility shares. The Metromedia
deal offers an example: Southwestern
Bell's earnings will suffer a 5%5H%
dilution over the short term. And borrowings to pay for the S 1.2 billion purchase initially will add about 3% percentage points to the company's debt
ratio, reports Robert Dickemper, vice
president for strategic planning. That
ratio stood at 42.9% last month. "We
bought a system that's up and running,"
he explains. "This is one of the fastgrowing segments of the telecommuni-
B A R R O N ' S
cations industry, and we bought a
stream of cash flows that were of value
to us." But company officials won't disclose revenues or operating results from
the cellular business.
In addition to publishing and cellular, most of the rcgionals am vying t~
seU computer and telecommunications
equipment nationwide, to both corporate and retail customers. Nynex, for
instance, owns a nationwide string of
100 businesscquipment retail stores,
thanks to its purchase of the 33-state
IBM Product Centers chain. Pacific Telesis and Bell South, among others, are
marketing their communications expertisc overseas. PacTel's international unit
is stressing business opportunities in
Asia, with contracts in hand to advise
South Korea on telecommunications
services for the 1988 Olympics, to install
a paging system in Bangkok and to play
a role in the rapid modernization of
China's phone system.
Other regionah am croAing profit
estate and financialcenters out of 14
services units created to serve internal
company needs. US West's Betawest
Properties more than doubled its hold@ this Yw, to $690 million. The Parent's local phone companies cumnuy
about 60% of the leased space,
but the unit is prospecting in some of the
redon's overbuilt markets for new deals.
10% but the cash flow is tremendou5"
=YS investOr-rdations manager Wayne
Wolberg- In fact, US West recorded a
$12 million net gain on a Property sale
quarter ended in June.
Another US West sub finances computer leas?
e v a b l e s with 75% of
Its $60q d o ? m assets c o m g from
deals wth putslde customers. US West
is now w
g permission to offer insurance and brokerage services through its
finance unit, but has yet to disclose
specir~cplans. (The break-up decree
A q , SbmW
As did all the regionals, Ameritech
slashed its workforce to trim costs. The
number of telephone employees has
dropped nearly 20% since divestiture,
giving Ameritech the second-best ratio
of employees to phone lines in service,
after Bell Atlantic.
Flexibility in pricing, thanks to deregulation measures by several states in
which Ameritech operates, has given the
company new tools to compete and sell
enhanced services to its bread-and-butter business customers. Illinois Bell, for
Continued on Page 35
Edward M. Greenberg, Morgan
Stanley's telephone analyst, is revising
his earnings estimates based on the latest
quarterly results. He's scaling back his
previous projections of an average 7 1
rise in earnings next year to 376-570. Few
prognosticators have yet to calculate
precise figures for each company, although John Bain of Shearson Lehman
Brothers is leaving intact the generally
higher numbers for 1987 profits that he
released earlier this month.
Against that backdrop, future performance will depend more heavily on
the new ventures and competitive strategies each of the regionals has chosen. A
closer look at the companies highlights
how each has coped and fared as divestiture's third anniversary nears.
The Bell Regionals: Selected Financials
In fact, the most recent earnings reports from the Bell regionals indicate a
slackening of profit gains. The companies posted an average 6.2% rise in
earning for the three months ended
Sept. 30, vs. 10.7% in the year-earlier
period. That trend could indicate that
easy profitability gains from cost-cutting
measures have run their course.
MQmm Rrrc~~lcs NHIPaSkuc
AIT $18,566.1 $7,611.4
BEL 20,298.5 8,227.8
BLS 25,6453 11,055.7
Pacific Telesis' '
. 35.70 , 215.2
' . SBC 19.702.7
. USW lR,393.3 7,197.8
Source: companv rcprts. All figures in millions except per-share data. 'Adjusted for 2-for-1 split. 'Adjusted for 3-for-I split. 'Since drvestiture on
currently requires court approval for
each new business venture, and bars the
regionals from manufacturing equipment or selling information-processing
services. The companies are lobbying
hard in Washington to scale back those
rules (see accompanying story. page
Revenues from each company's diversified ventures aren't disclosed, but
it's certain they're overshadowed by
phone company operations-by a factor
of about 10. And for most ventures,
profits are a year or more away. Still,
new enterprises are transforming the
look and feel of these companies, and
they'll be engines of growth, if they
succeed. Estimates from Bell Atlantic,
which has the most aggressive new-venture strategy, are that up to 50% of the
company's year-to-year earnings gain in
1987 will come from its non-telephone
The flip side, of course, is that profitability from the regulated telephone
business is on a slower growth curve. As
a result, each Bell regional is trying to
create the right combination of new ventures and regulatory flexibility to keep
competitive risks down, returns high and
the investor happy.
Barron I s , October 27, 1986 (continued)
ern plant and lower-than-average costs. Bell South-and
its holders-profited. Earnings
grew at a 13% annual clip after
divestiture, while the 35% annual return to shareowners led
the Bell family.
Unlike its siblings, which
trumpet new ventures, Bell
South stresses its more conservative approach. "We don't
even like to call it diversification. because that implies somebody's planning to build a conglomerate," says Boren, Bell-
Cont. /rum Preceding Page
South's vice president for planning. "And we don't intend to
Nonetheless, the company is
moving into national directory
sales, bought 40% of a cellular
and paging business in London
and established an in-house
real-estate unit, Sunlink, that is
"open to new projects," says
Bell South's year-to-date
showing is impressive: Profits
climbed 13.2% in the nine
months ended Sept. 30, to
$1.228 billion, or $3.94 a share.
For '86. net of about $5.25 a
share looks safe, compared wit',
$4.69 in '85. Street estimates for
next year run in the $5.25-$5.50
The service industry boom
in the Northeast, as noted,
helped drive N ynex's revenues
to unexpected heights. Meanwhile, workforce reductions and
debt-shedding helped shave expenses. The combination gave
Nynex the best operating ratio
(22.4% gross margin) of the
Bell regionals last year. even
though the company's expenses
and employee count per phone
line were the highest of the lot.
How did that happen? Nynex's
business customers, from Wall
Street to Boston's high-tech outposts, are more intensive users
of the company's network.
Regulators in New York are
Regulatory concerns in California had always hurt the company's largest unit, Pacific Telephone. Although somewhat better treatment followed the company's divestiture from AT&T,
the wmpany has fared less well
than its siblings in pushing deregulation schemes. For example, the state's regulators have
rebuffed the company's novel
plan for a freeze on residential
rates through 1990, in exchange
for flexible pricing on competitive business services. Currently, the wmpany is contesting a staff recommendation that
would roll back phone rates by
as much as $233 million annually, retroactive to last March.
The bottom line would take a
$109 million hit each year under the proposal, the company
estimates. An unrelated refund
case could also hurt current
earnings by an unspecified
traditionally tough on Nynex's
New York Telephone unit in its
war against the bypass threat.
But the wmpany did win the
right to expedited treatment on
"episodic:' pricing of competitive services. A company
spokesman says regulators are
living up to their self-imposed
10-day deadline on such requests.
Profits for the most recent
nine-month stretch gained 13%
to $921.6 million, or $4.55 a
share. Profits for the year could
top $6, vs. $5.42 a year ago.
For 1987, $6.40-36.50 has been
the estimate on the Street.
The big jump into cellular.
by its deal with Metromedia,
was the single largest new-business foray of any regional.
Southwestern Bell, however.
had good reason to look beyond
its own tcmtory. Its five-state
region -which covers Texas.
Okhhomp, Arkansas, Kansas
However. Pacific Telesis
starts from a far stronger financial position in its current regulatory clashes than ever before.
A balance-sheet restructuring
trimmed the company's debt ratio to 43%, from nearly 50% at
divestiture. Reductions in preferred
shaved the annual payout from
net income to those holders by
Pacific Telesis led the Bell
sibling in profit growth during
the first nine months of 1986,
with net income up 16.8% to
$842 million, or $3.92 a share.
Its return on shareowner equity
rose to 14.9%. vs. 13.2% in 1984.
The year's per-share net should
wind up in the $5-$5.10 range,
vs. $4.54 a year ago. For 1987,
earnings should come in at
around $5.50 a share.
An 11% jump in non-telephone revenues over the ninemonth stretch reflmed gains in
dirmory advertising and the
unregulated PacTel Cos, a colleaion of d u l a r , international
and equipment-sales subsidiaries that are not yet profitable.
Barron' &, October 27, 1986 (continued)
through hard economic times.
From being one of the nation's
fastest-paced telecommunications markets before divestiture,
the region's telephone-service
growth rate now hovers near the
Southwestern Bell's 13.1%
return on equity in this year's
first nine months was the lowest
of any Bell regional. "'We're still
underearning our authorized
rate of return," admits Michael
Kaufman, vice president for finance. "It's been a tough economic environment. But I believe we've seen the worst."
For the most recent quarter,
ended Sept. 30, revenues were
essentially f i t : $1.963 billion,
vs. S1.%6 billion in 1985 (excluding nonrecurring items connected with prior years' directory sales). But net income
gained 8.5% to $257.5 million,
or $2.58 a share, as the company kept tight control on operating expenses. For the year's
fmt nine months, profits are up
4.5% over the prior period, with
net income of $741.5 million, or
$7.44 a share, vs. $708.8 million,
or $7.12 in 1985, excluding nonrecurring items. The year's pershare net should come in at
about S10.20, vs. $10 in 1985.
For 1987. earnings should wind
up in the $10.50-$10.70 range.
For every super hero in
comic book lore, there's a way
to neutralize the hero's incredible powers. For Superman, it
was exposure to Kryptonite. For
the BelI companies, it could be
the rigors of competition. From
the evidence so far, however, it
appears that tight-operating, management, nimble forays
into new ventures and favorable
economic conditions are potent
Also faced with a diff~cult
economic climate in its 14-state
region, which stretches from
Washington state to Minnesota
and south to Arizona and New
Mexico, US West is relying on
productivity improvements to
maintain earnings growth. But
costs of an early-retirement program, which helped shrink the
workforce at its telephone units
by 5,700 employees in 1986,
have depressed this year's results. Return on equity for the
first nide months- 13.5%-is
well below the regionals' average. For the latest quarter, however, the figure jumped to 15%.
Year-to-date net income of
$7 18.4 million, or $3.78 a share,
is 4.4% above 1985's ninemonth stretch, on a per-share
basis. Analysts see profits for
the year of about S5.10-$5.20 a
share. and around $5.60 in '87.
compared with $4.84 a year ago.
To maintain its target of 8%
annual growth in earnings, US
West will ''need help*' from its
stable of diversified businesses,
a company spokesman says.
The group-which includes cellular, equipment sales, directory
publishing, real estate and financial services-isn't
profitable yet, he added.
October 27. I986
Washington Is Still Watching the Bell Regionals
is more important to the
regional Bell holding companies
than the federal government.
The federal Department of
Justice helped to create them in
the settlement of the AT&T antitrust case; a federal judge controls their performance under
the antitrust consent decree; the
Federal Communications Commission has power over their
services and prices; the Congress writes laws that affect all
If anything, the pace of
change and the power of the
government over the companies
are likely to increase in the
remainder of the 'Eighties.
Deregulation is still at the
top of many Washington
agendas. FCC Chairman Mark
Fowler recently renewed a proposal for a deregulation experiment: Some states, he said,
should try allowing telephone
companies to charge any rate
and offer any service. Even
though basic telephone service
is usually considered a natural
monopoly requiring government regulation, Fowler said
the experiment would require
"open network architecture" in
which Bell company competitors would have equal access to
the local telephone network.
Critics of deregulation say
rural areas and poor people
would lose service, but Fowler
said residential rates might fall
in the long run. He said 10
states. which he would not
name. had expressed some interest in an experiment, which
could begin as soon as 1989.
But deregulation has its foes
on Capitol Hill, and some key
lawmakers, among them Chairman John Dingell of the House
Energy and Commerce Committee, don't trust Fowler to
protect their vision of the public
interest. Thus there is great controversy over another proposal
for sweeping realignment of the
Senate Majority Leader
Robert Dole has sponsored a
bill to end Federal Judge Harold Greene's supervision of the
companies under the AT&T
consent decree, handing all the
judge's power over to the FCC.
Issues such as permission to
enter unregulated businesses
and the terms for entry would
be lodged entirely with the
FCC, where Chairman Fowler
leads a majority that would be
more sympathetic to ventures
such as equipment manufacturing, electronic publishing and
Judge Greene, who is supposed to make a formal review
of the consent decree early next
year, has said he believes the
FCC was unable to supervise
the old AT&T and that the
commission would bring back
seven little communications
monopolies to replace the old
"The regional companies
with their vast financial.powy
could crush their smaller. cojn.
petitors, which do not: have
huge rate bases from which .to
finance competitive ventures,'?
Greene explained recently. He
said the current FCC philosophy that price should be related
to cost overlooks "other values"
such as protecting companies
and consumers "who can't function that well in a purely competitive environment."
Those in businesses that the
Bell companies might enter if
restrictions were loosened oppose the Dole bill; the Bell
companies enthusiastically support it.
Even within the current regulatory structure there are new
developments likely to press
change on the Bell companies:
@ 1986 Dow Jones & Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
AT&T and the Bell companies are pressing the FCC
and state regulators for permission to earn higher rates of return, although the presumption,
in a time of falling inflation,
would be for a rein on profits.
Indeed, the FCC slightly lowered the companies' authorized
rate of return on interstate service for 1987 and 1988, from the
12.75% of 1986 to 12.2% for
AT&T and 12% for local carriers.
The US. Supreme Court
ruled last summer that the FCC
may not pre-empt the state regulators' powers to set depreciation schedules-a key item on
every phone company's expense
sheet. In an effort to keep reported profits high, and phone
rates low, many state regulators
dictated low annual depreciation charges.
The "Computer 111" decision, which sets ground rules
for telephone companies to provide "enhanced" communications using computers to store,
modify or create messages and
data, is in its early development.
Bell companies, AT&T and
their competitors are wrangling
over the types of services each
can provide, the requirements
for open access of competitors
to the network and the business
restrictions designed to prevent
Bypass, which is the effort of
major business customers to obtain direct connections to longdistance carriers without using
or paying local company service, is a growing problem for the
companies. And access charges,
the FCC attempt to keep big
customers on line by charging
many smaller customers a few
dollars a month, is a consumer
issue of increasing strength.
FCC C h a i m n Calls for Deregulating
Some Local Phone Finns in 3-Year Test
Mr. Fowler's proposal seems certain to
By BOB DAVIS
Staff Reporter O ~ T HWALL
WASHINGTON - Federal Communications Commission Chairman Mark Fowler
proposed a three-year experiment to almost completely deregulate local telephone companies in certain states.
During the experiment, telephone companies would be free to raise rates and enter new businesses without advance approval from state or federal regulators.
"It's time to step away from regulating local exchange companies," Mr. Fowler
said. "Everyone will be better off."
boost a growlng movement among state
regulators to lift restrictions on local telephone companies. So far. 15 states have
adopted deregulation plans and at least 11
others are considering such measures.
Plan Goes Further
But Mr. Fowler's plan goes further than
nearly all the state measures, which generally deregulate only a handful of services.
The FCC proposal also seems sure to
generate controversy. Under the plan, telephone companies would be free to eliminate subsidies for local residential phone
service, a move that Mr. Fowler acknow
ledged would cause rates to rise, at least
initially. "There are many states where
residential rates are way below water, and
they would have to come up over time," he
Gene Klmmelman, legislative director
of the Consumer Federation of America.
said Mr. Fowler is involved in a "zealous
pursuit of detegulatlon almost at any expense." He said full deregulation would
lead to large and "perpetual" rate increases.
Proposed In Law Review
The deregulation proposal is contained
in a law review article written by Mr.
Fowler and two other FCC officials, Albert
Halprin and James Schlichting. The FCC
released the article at a news conference.
In 1982. Mr. Fowler used a law review article to advance ideas on television deregulation that the agency later adopted.
The MX: chairman said lifting restrktions on local telephone companies would
spur competition and technological innovaUon. ~t the news conference, he mentioned
a number of services that he said COmp8nies might offer to provide over telephone
lines, such as burglar alarms and fire
alarms. if regulations were Hfted.
By expanding telephone use, deregulation ultimately could slow residential rate
increases or perhaps reduce rates, Mr.
Fowler said. "To the extent that other
services are shot d m that (phone1 line, it
provides us with some reason to believe we
can make local residential rates go backward." he said.
@ 1986 Dow Jones 8 Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
States Show Interest
So far, more than 10 states have expressed some interest in adopting the plan,
Mr. Fowler said. But the experiment faces
Mr. Malprin said the experiment
wouldn't begin until 1989 or 1990 at the earliest. At that time, telephone companies
would have to assure competitors that they
would provide the competitors with equal
access to the phone network.
In addition, federal Judge Harold
Greene currently bars the former Bell telephone companies from offering information services envisioned by Mr. Fowler.
and deregulation has become controversial
in some states.
Bmce Fein, a former FCC general
counsel, accused Mr. Fowler of trying to
avoid some political heat by aiming his
proposal at the states. "Fowler is calling
for deregulation efforts at the state level
that he refuses to make at the federal
level." Mr. Fein said. "It's chutzpah."
Many States Deregulate Telephone Rates,
Hurting Residential Users in Short Run
more than $3 billion since the 1984 breakup
American Telephone & Telegraph Co(The companies deny that.)
State telephone deregulation "is an
that will lead to
amazing sleight of
any regulators oppose deregulation.
In Idaho, a deregulation bill cleared the
Senate but died in the House. Perry
Swisher, the State's top r~gulator,says the
bill would have dismantled subsidies protecting rural communities.
In other Industries, Mr. Swisher says,
State deregulation plans vary sharply.
Washington state has a~~thorizedtwo
smaller long-distance companies to Set
their own rates-but, at least for now, it
still regulates the in-state rates of giant
AT&T. Iowa says long-distance tales
shouldn't be deregulated, but it permits
Northwestern Bell, a unit of U S West, to
set rates for private lines and a switchboard senlce called Centrex.
deregulated, but its top
she calls a" "social
Phone Deregyiation l
At least mme deregulation contract." Under the
Considering deregulation plan VeTIIlont would
State by State
deregulate all phone
rates but those for
calls. In return,
Nynex Corp.'s New
unit would accept a
formula for residential rate increases.
charge that this type
of plan actually
builds inflation Into
residential . rates.
thus shelved a social
by Pacific Telesis
"deregulation has hurt us already: We Group's Pacific Bell unit and instead redon't have airline access in small cornmu- duced telephone rates.
Nebraska has adopted perhaps the most
nities; we don't have railroad service." He
vows, "We don't intend to let this happen sweeping deregulation plan. Over the o b
jection of state regulators, the legislature
Jack MacAllister. the chairman of U S deregulated long-distance rates and freed
West Inc.. a regional phone company, dis- Northwestern Bell to set rates for local
misses the critics as "regulators who don't Service. Regulators can step in only if local
rate increases are more than 10% a year
want to walk away from their job."
In any case, the push to deregulate or if 2% of Nebraska phone customers petiseems to be too strong to derail for long. tion for an investigation.
Gov. Robert Kerrey says the law will
AT&T and the regional phone companies
have dispatched dozens of lobbyists to encourage telecommunications companies
state capitals to push deregulation. Local to operate in Nebraska and will lead to an
residential rates have risen roughly 25% to explosion of communications services. But
35% since the AT&T breakup (in part to Harold Simpson, a Nebraska regulator,
offset deregulated interstate rates, which predicts disaster. "How do you force good
have dropped about 20%). Some states fear service If you don't have a handle on
even steeper increases in local mtes. That rates?" he asks. The Public Service Comprovides fertile ground for lobbyists who mission is suing to have the law declared
claim state deregulation would hold down unconstitutional.
Meanwhile, some federal and state regrate increases in the long run.
say decontrol in most states seems
"We have been hyper&olved." says ulators
inevitable. To deflate arguments that the
Gerald Lowrie, AT&T's chief lobbyist. "In poor
would be hurt by higher local rates.
Illinois we had one person who, I think, ihe Federal
didn't even return home weekends when has
a "lifeline" teleohone subthe legislature was in session." Persis- sidy.established
states and the ~ i s i r i c of
t Cotence paid: AT&Tnow can charge any rate lumbiaSeven
have adopted the program, which
for non-local intrastate calls in Illinois. gives a $4-a-month
price cut to low-income
It says it has such authority in 15 residents. Other states,
nia, have established similar programs.
S t a f f R e D o r t e r o f T n ~WALL STREET
Telephone deregulation is sweeping the
states, promising consumers new technology while threatening to drive up rates.
Fifteen states have adopted deregulation plans and at least 11 more are considering such measures. The laws generally
allow telephone companies to charge what
they want for certain services.
The big winner in deregulation is big
business; the loser, at least in the short
tern, is the residential customer. States
and the federal government say they are
eliminating rate subsidies for local res!dentlal calls and rural phone systems.
Telephone companies are using the additional revenue to cut the rates they charge
businesses for long-distance and other
Deregulation "can't work unless residential prices go up," says Fred Konrad,
an official at the Illinois Bell unit of Ameritech. "That might seem harsh, but freemarket pricing means you can't have subsidles."
Advocates maintain that competition
will limit rate increases in the long run
and spur innovation. But critics charge
that decontrol is a smokescreen obscuring
huge rate rises.
Phonccompany IobPyists press two
main arguments for deregulation. They
say the companies' monopoly power-the
original rationale for regulation-is waning
because of increased competition. And the
lobbyists promote a trickle-down theory of
Phone companies must be free to reduce commercial rates, this theory goes,
or else big businesses will bypass local
telephone networks and build their own. A
study by the General Accounting Office,
Congress's research arm, says bypassing
"could significantly revise local telephone
Phone companies say that if they lose
business revenue, other customers must
make up the difference. In other words:
Deregulation helps everyone by helping
the companies keep business customers.
Some state regulators agree with the
companies' thinking. "Imperfect competition is better than impedect regulation,"
says Cale Case, a telecommunications analyst for the Illinois Commerce Commission. "Every market will seem like the
height of imperfection. but it will work better than regulation."
But some people see more harm than
good in deregulation. Gene Kimmelman,
the legislative director of the Consumer
Federation of America, says rate increases
aren't justified, because the regional Bell
companies are hugely profitable. The coalition of consumer groups claims those
companies have overcharged consumers
WALL STREET J O U R N A L
$Em. 19,W 6
Dow Jones & Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Calling Long Distance: User Vote
ShowsStrong Support for AT&T...
Stoff Rrportrr of T H FW A L LSTREETJ 0 1 R N A L
When Paul C. Seltz was asked to plck a
long-distance phone company last year,
the 36-year-old accountant from Wilmington, Del., spent "all of about a minute"
pondermg his options. Then he chose
American Telephone & Telegraph Co.. the
carrler he had always used. W ~ t hAT&T.
he explains. "I knew what I had. The other
companies were question marks."
Mllllons of Americans have made the
same call. In the big wave of balloting that
started two years ago and ends Sept. I,
roughly 75'; of the voters so far have chosen AT&T to provide long-distance service
to their home or business. And a recent
Wall Street Journal/NBC News poll indicates that feelings like Mr. Seitz's are
largely responsible for the outcome: Half
of the 1.565 respondents who expressed a
preference for one of the phone firms cited
f a m ~ l ~ a rwith
~ t y AT&T as the most influent ~ a lelement in their choice.
For the most part, the tallies suggest an
impresswe victory for AT&T. But there 1s
also evidence that some of its rivals, which
now number about 500, are making inroads
in certain areas. MCI Communications
Corp. and US Sprint Communications Co.the second- and third-place finishers, respectively -claim to be winners too, and
with some justification. Although they r e
main relatively small, both were able to
double their market shares as a result of
the vote. MCI now has 8 5 ; US Sprint.
which was created last month by the
merger of the long-distance units of GTE
Corp. and United Telecommunications
Inc.. has about 4';.
"We gained an awful lot of customers."
says Charles Skibo. US Sprint's president.
AT&T's success in the balloting, which
by Sept. 1 will have involved roughly 70%
of phone users, runs contrary to some p
ple's expectations that the company would
suffer a severe drubbing. At the start of
the process, an outgrowth of the 1984
breakup of AT&T's Bell System, some analysts predicted that the company's market
share might drop to as low as 6070 from
about 90% just before the breakup. The
theory was that people would desert AT&T
In droves once federally mandated "equal
access" enabled them to enjoy cheaper
service without havlng to dial extra
But the results indicate that customers
didn't vote their pocketbooks in anywhere
near the numbers that some observers
thought they m ~ g h t AT&T
still holds an es.
t~mated805 of the market. "People will
pay an extra buck or two a month for a
known commod~ty." concludes Wlll~am
Walbert, a research analyst at the Gartner
Group In Stamford, Conn.
Another reason for AT&T's strong showing, accordmg to W~lliamG. McGowan.
charman of MCI, 1s that most of AT&T's
competitors failed to make the capital in.
vestments necessary to wrest large chunks
of business away from AT&T. (He contends, however, that MCI is meetmg its
target of winning 10% to 15% of the votes,
doing best among small and medium-size
But AT&T didn't succeed solely because
of the weakness of its competitors. To the
amazement of naysayers, it transformed
itself into a marketing powerhouse, joining
MCI and, to a lesser extent, Sprint, in a
broad marketing blitz. Together, the three
companies spent an estimated $300 m~llion
on advertising alone.
AT&TVsefforts, however, were clearly
the most extensive. It went after heavy us-
I&~rs in the Choice
W h i c h of the following is t h e
most important factor for you
in choosing a long-distance
senior analyst at Yankee Group, likes to
thmk of them as "people who hate the corporate pant" or "people who drive foreign
AT&T's competrtors also attract more
customers under 50 years of age than those
who are older, according to the Journal/
NBC News poll. And they are winning
more customers with annual household incomes that exceed $50.000 than those with
lower incomes. the poll ind~cates.Not surprisingly, both of these groups tend to be
heavy users of long-d~stanceservice.
Indeed, of the customers that AT&T3s
rivals are attracting, a hlgher percentage
are the most-valued residential customers:
those who spend hours at home calling faraway friends and relatives. AT&T, for example, says that only 16% of its homephone customers run up long-d~stancebllls
of more than $25 a month; MCI says almost 40% of its residential users are in
In some parts of the country, meanwhile, regional loyalties have created
Quality of service
static for both AT&T and its two major ri~_.1
vals. Teleconnect Co. of Cedar Rapids.
Iowa, for example, is one of several small
Cost of service
phone services that have shown surprising
: j 25%
strength. Teleconnect claims to have come
in second in some of the cities it serves,
grabbing the votes of as many as 401 of
customers. Says Dekkers Davidson, a teleSize of company
communications-policy analyst at the U.S.
Commerce Department in Washington:
"There isn't a monolithic marketplace."
Who then are AT&T's customers? Ac5%
cording to the company. they cut across all
age groups and market segments, making
it difficult to describe a typical customer.
Ms. Francis of Yankee Group calls them
people who are "risk averse" or "tradiers with special pricing packages and such
tionalists" or "those who dnve American
incentives as discounts on restaurant
meals and exercise classes. It took to the
Many figure they don't spend enough on
airwaves with a series of TV commercials long-distance
service to justify switching.
featuring the actor Cliff Robertson, who
John O'Shaughnessy, a 52stressed AT&TVsquality and reliability and
suggested that its competitors weren't up year-old executive at a brokerage in Tucsays one of AT&T's competitors
to snuff. AT&T even went so far as to pre- son. Ariz..
have to offer "very substantial"
pare special materials to appeal to such di- woula
savings-say. 50% off hls family's typical
verse markets as military personnel, pew
long-distance bill of W-for him
ple in the process of moving and various to sit up and
take notice. (While discounts
of that magnitude were once possible, the
"They presented a very powerful, pro- price advantage for most of AT&TVscomfessional message." says Howard Ander- petitors has narrowed in recent years to
son, president of Yankee Group, a Boston- the 10% range.)
based market research firm.
Still. AT&T did win some talkative cusStill, some people didn't buy AT&T's tomers who could probably save by switchmessage. Maurice Tannenbaum, a 41-year- ing. Mary Johnston, a 27-year-old telecomold hair salon owner in Philadelphia, says munications consultant in Boston whose
he picked MCI without even considering monthly long-d~stancebills average $50 to
AT&T. "I don't like AT&T," he explains. $100, admits she voted for AT&T "primar"1 think it's a monopoly-and I've been
ily out of laziness" and "not wanting to
treated rudely in the past."
deal with the potentla1 for problems." She
says she stopped using a rival service a
AT&T describes such defectors as "In.
novators." In other words. the company few years ago after b m g billed for calls
says. they tend to be the f ~ r s ton t h e ~ r that weren't completed, addmg: "1 don't
block to try new products. Amy Franc~s,a fly People Express anymore e~ther."
(continued ) :
...But Phone-MarketingWar C.ontinues,
With Emphasis NOW on Quality, Service
By JAN^ GUYON
S t a j j R e p o r t e r O ~ T HWALL
One battle may be just about over, but
the war rages on.
As Sept. 1 approaches-the date by
which some 50 million telephone customers
will have chosen their long-distance company-rival carriers are gearing up for a
second onslaught, trying yet again to win a
larger share of a market still dominated
by American Telephone & Telegraph Co.
But in contrast to the past two years.
during which customers have been asked
to choose on the basis of cost, the players
will be touting everything but their rates.
Instead, they will be focusing on service,
special features and quality of transmission, as well as paying more attention to
"Now that this industry is settling out.
it's being faced with marketing," says
Harry Thompson, executive vice president,
marketing and sales, for Argo Communications Corp., a small New Rochelle, N.Y .based long-distance carrier. "The guys
who can listen to customers more clearly
and package products accordingly, and do
it with some swiftness;" will probably be
more successful, he says.
The main reason for the shift is a simple one. Because of changes imposed by
the Federal Communications Commission
3n the industry's cost structure, AT&T's
:ompetitors can no lower undercut its
prices by 50% or more. On average the
price differential has shrunk to 12%; in
some cases, it's less than 5%. Undentandably, such companies as MCI Communications Corp. and US Sprint Communications
Co., the biggest challengers to giant AT&T.
are changing tactics.
For instance. US Sprint's latest televi;ion ads urge viewers to try the "fiber o p
.ic sound quality of US Sprint. . . where
?very fiber optic call sounds like you're
right next door." Three out of five callers.
.he ads say, can tell the difference and
>refer the clarity of US Sprint to AT&T.
AT&T, however, uses fiber optics too.
4nd currently only about 15% of US
Sprint's calls actually travel from beginling to end along fiber-optic lines. which
mable voice and computer signals to be
ransmitted as pulses of light. The rest of
he calls go over a hybrid microwave, ca~ l and
e satellite transmission system. (As
I result of protests by AT&T, Sprint has
hopped its reference to the company as a
)rovider of scratchy-sounding longdisance calls.)
Indeed, some of the advertised differ.
mces aren't all that great. "A lot of i t
s marketing hype." says Duane Heidel.
vice president, telecommunications, for
Marriott Corp., the hotel chain. "But they
have got to sell service some way. They
can't sell off cost, so they have to sell off
Attributes other than price tend to be
more important to businesses than to residential customers, so companies are also
courting big and medium-size companies.
Overall, business customers account for
most of long-distance revenue.
Like the shift away from promoting low
rates, the emphasis on business marks a
sharp change from the past two years,
when the companies vied for residential
customers. At the time, the publicity surrounding equal access-which would enable many customers to use I-plus-areacode dialing with whichever long-distance
service they preferred-gave the carriers
HEY have got to sell
T s e r v i c e some way:
says a telecornmunic,ations
executive. 'They can't sell
off cost, so they have to sell
a unique opportunity to sign up residential
With business as the main target.
AT&T's rivals promise a variety of marketing programs to garner customers after
Sept. 1. US Sprint, for example, is holding
a s a l c Businesses and residents who Sign
up with the company through Sept. 30 will
get a 10% discount on service for the first
year. The move provoked a protest fr0m
MCI;which complained to the FCC that US
Sprint was selling below cost and that its
sale discriminated against current users.
but the complaint was dismissed. MCI now
says it may borrow the idea and give discounts to its new customers.
In addition, the companies are likely to
start advertising for the first time that it
really doesn't matter which company is
chosen initially; customers can still use
any company they want by dialing the carrier's special five-digit code.
In California. US Sprint is testing a
campaign advertising its five-digit code for
customers who want to try its service to
the Far East. Based on test results, "we
are considering a wider program." says a
US Sprint executive. Some of the companies also say they may pick up the $5
charge that customers normally would
have to pay to switch carriers.
"I thtnk you're about to see in the tele-
phone industry all kinds of ways of doing
things" says Charles Skibo, the newly appointed president of US Sprint and a former MCI executive. He sees his company's
seven-month, $70 million fiber-optic campaign as the telephone industry's answer to
the Pepsi-vs.-Coke ads.
But marketing the quality of phone
service is trickier than selling the taste of
soft drinks. And selling to businesses is often further complicated by the committee
method of making decisions. "It's damn
hard to climb into someone's head and find
out what they think they are talking about
when they talk about quality and value."
says Howard Crane, MCI's senior vice
president, corporate affairs. "It's damn
harder when the decision maker isn't just
an individual but a chain of individuals."
For their part, big corporations say
that, with less price competition, they will
judge carriers on how attentive their salesmen are, on how often lines go down, on
any special pricing arrangements and on
new products, such as high-capacity lines
that can send voice and computer communications on one wire.
Weighing Various Needs
Of course, individual needs will remain
a factor. "If I (were) an investment
banker, I (would) want topquality circuits, and today, most of those companies
lean toward AT&T," which is thought to
have the most reliable service, says David
Rappaport, the Arthur Andersen & Co.
partner in charge of telecommunications
consulting. "But if I'm a manufacturing
company, or ~ome%,.~dof retailer where
the traffic is mostly internal, I might put
up with a few more busy (signals) and
Despite its lead in the customer balloting, AT&T isn't standing still either. Employing many of the strategies it has successfully used to retain its long-distance
customers, the company plans after Sept. 1
to start selling long-distance service packaged with telephone and computer equip
"There is absolutely no player in the
marketplace that can make that kind of offer today." says John Wood, a division
manager in AT&T's Business Markets
Meanwhile, residential customers may
get a new type of bill that more clearly
shows what calls they made and allows
them to pay on credit. AT&T also promises
more strategies aimed at demographic
groups; for instance, "the technocratic
elite." tend to be impressed by ad pitches
emphasizing AT&T's Bell Laboratories
O 1986 Dow Jones & Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Bell Finns Say Ruling Lets Them Buy
Phone Concerns Outside Their Regions
StaJJReporferof T H EW A L L STREET
The seven reglonal Bell telephone com.
panles. In the wake of a federal appeals
court rullng, say the way is now clear for
them to acquire independent telephone
companies in each other's territories.
One of the regional concerns, Bell Atlantic Corp., Philadelphia, said it has studied such acqulsitions "and will continue to
look for attractive opportunities" in other
regions. But it didn't identify any specific
candidates among local telephone companies that aren't owned by other Bell com.
The six other Bell companies said that.
while the door has opened, they currently
don't plan to enter other regons to acquire
local telephone companies. Already, the
regional companies offer mobile cellulartelephone and Yellow Pages services and
sell telephone equipment outside their own
But some securities analysts believe
that the Bell concerns are playing their
cards close to the vest. In the long term,
the analysts said, the Bell companies will
find it attractive to acquire smaller independents outside their regions. They believe the Bell companies will focus first on
concerns with service areas contiguous to
their own territories.
"It isn't real political for the Bells to
say, one week after the ruling, that they
are going to go out and buy every mom
and pop telephone company overnight."
said Jack Grubman, an analyst with
In a unanimous decision last Friday, a
three-judge panel ruled that the Bell concerns didn't need the permission of federal Judge Harold Greene to offer certain
local communications services outside of
their operating territories. The decree under which the Bell system was broken up
in 19M doesn't include any "explicit or implicit geographic restriction" on the companies' efforts to offer such services, the
The ruling came after Bell Atlantic, San
Franciscclbased Pacific Telesis Group and
Denver-based U S West Inc. challenged
Judge Harold Greene's interpretation of
the breakup decree. Judge Greene, who
oversees compliance with the decree, had
ordered several Bell concerns to halt certain cellular and pagmg operations outside
their territories because they failed to get
the court's permission.
Initially, industry officials and analysts
believed the ruling would make it easier
for the Bell concerns mainly to expand into
mobile-telephone and p a a n g operations,
'directions in which they have been going.
"I don't think the implications of the decislon have been thought through." said
John Sodolski. president of the United
States Telephone Association. the trade
group for the Bell concerns and some l,M
Nonetheless. Mr. Wolski added, several of the trade group's officials now believe last week's ruling also allows the
Bells to acquire independent concerns.
Mms Big and Small
Independent telephone companies,
which range from mom-and-pop operations
to GTE Corp., the largest independent.
provide more than 20? of the nation's local
telephone service, the trade association
said. The 22 local phone companies owned
by the Bell regionals provide the rest.
For now, the Bells say they intend to
keep it that way. "We wouldn't want to
rule out" telephone company acqulsitions.
"but you don't see us at the racetrack
ready to take off on that particular strategy." said Richard Callahan, vice president of U S West's nonregulated businesses, including mobile telephones.
"My interpretation would be, yes, we
could go in and buy other telephone companies," said a spokesman for Atlantabased BellSouth Corp., adding. "We don't
have any intention of doing it."
Any such move by the regonal phone
companies would still need federal and
state regulatory approval.
Chicagvbased Ameritech also said it
doesn't plan any telephone-company aCqUisition, despite the freedom granted in the
ruling. Anthony P a m , shareholder-relations director for New York-based Nynex
Corp., suggested that the company is more
interested in diversifying than in expanding its basic local telephone business. Paul
Henson, chairman of United Telecommuni-
cations Inc., the natlon's second-largest independent telephone company, adds: "AII
seven don't seem to be trymg to concentrate" in the local telephone business.
Question of Costs
Edward Greenberg, an analyst with
Morgan Stanley & Co.. said a phone-corn.
pany acquisition would be extremely costly
because the independent companies, like
the r e ~ o n a l s generally
have been highly
profitable. And some independent concerns
are engaged in other busmesses that
clearly are out of bounds for the regional
firms, such as information services.
While agreeing that such acquisitions
would command high premiums, a Bell Atlantic spokesman said the company is on
the prowl. The most attractive candidate
must be "well capitalized and profitable."
PaineWebber's Mr. Grubman said that
acquiring independent phone companies
"is going to be where the opportunities are
for the regionals." Big corporations, which
are the Bell regional companies' best customers, are moving away from cities and
building offices farther out in areas where
independents traditionally have operated.
Also, small phone companies can't afford
the investments to upgrade their networks
with the latest technology. "It makes
sense," Mr. Grubman said. "They (the
Bells) know this business cold. They don't
need anyone to tell them what to do."
Robert Morris 111, an analyst with PNdential-Bache Securities Inc.. said the
court ruling could c a w the companies
eventually to redefine what local commu.
nications services are. For example, he
said, one regional concern may be able to
enter another's territory and simply provide a group of large companies with direct access to long-distance companies, bypassing the local Bell telephone company.
"In certain markets, the outsider may be
able to come in and provide such a service, charge less for it than the local phone
company and make more money." Mr.
Morris said. "To me, that is where the o p
THE WALL STREET JOURNAL
O 1986 Dow J o n e s & Company, Inc. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Phone Rate Increases Found
Below Dire Predictions of '84
New re ,enue mcroases requested
each year by phone companies, to
accrue from increases in local and
tntrestate rates, compared wrth the
actual increases $ranted by the
stdtas, In billlorn of dollar*
By ANDREW POLLACK
w Tbn Ner Yo* T i m
and chairman of the communications (
Contlaued on Page M,Cblumr, 1
of Regulatory Utility Commissioners.
Gene mmmelman, legislative direo
tor for the Consumer Federation of
America, said the rise in rates had not
been minimal, however. "It's been sigificantly above inflation," he said, but
conceded that people had not dropped
telephone service, as his group had p m
jected would happen. "To be honest, we
painted the worst-case scenario and it
hasn't been that bad."
Since the American Telephone and
Telegraph Company spun off its seven
THE N E W YORK TIMES,MONDAY, J U N E 16,
1986 The New York Times. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
New York Times, June 16, 1986
Continued From Page 1
basic phone service with income from
Some consumer groups, however,
say that the threat of steep rate increases is not over. One disturbing factor, they say, is the push for further
deregulation of rates. Nebraska. recently decontrolled local rates, and
pany other states are considering
doing so. Deregulation, consumer
groups say, would permit phone companies to raise rates at will.
For the short term, however, the
worst of the rate rises seem to have
passed. As of last March 31, $755 million in requested increases were
pending before state commissions,
according to the Federal Communications Commission, down substantially from $3.8 billion in March 1985
and $7 billion a t the time of the Bell
. A Supreme Court decision last
month, which upheld the authority of
state regulators to control the way
phone companies depreciate their
equipment, could also help hold down
rates, officials say. States can have
phone companies recover their costs
uipment over a longer
period t h a n x e Federal Government
had wanted, thereby lessening the
nt?ed for rate increases.
B r ~ a & rDeregulation
The dire predictions that preceded
were actually tied not only
to the breakup but also to the broader
deregulation of the telephone industry thai was changing the traditional
rate srrwture of the Bell System.
Although sorne consumer adv*
cates disputed it, phone companies,
as well as niany regulators, had long
said that local phone rates were subsidized by revenues from longdistance calls to assure that almost
everyone could afford a telephone; a
&ncept known as "universal service."
But with the A.T.&T. divestiture
and increasing competition in the
longhstance business, both the
phone companies and reguiiiurs said
that such subsidies would have ti, end.
If they ended in full, Iwal rates would
have to double or triple, according to
statements made at the time of the
breakup by telephone industry officials, utility regulators and consumer
Several factors, however, have p r s
vented t h ~ sfrom happenmg. A key
one has been political opposition,
which has forced the F.C.C. to delay
and scale back 11s plans for so-called
access charges. 7 Iiese charges a l e intended to h i f t Inure of the cost of
local service to the local user.
The commission initially proposed
a $2 monthly fee in 1984, with an increase to $6 in a few years. But the fee
reached $2 only this month arid will
not rise without additional study.
State commissions also have not
granted all the requests sought by the
phone companies. And in a t least one
case, the California Public Utilities
Commission recently ordered Pacific
Bell to cut rates.
Another factor preventing large
rate increases is the slowing of inflation and the decline in idterest rates.
Moreover, the local phone companies
have performed much k t e r financially than expected and have cut
costs substantially. Some companies
have been able tu get extra revenue
from special services, such a s callwaiting, which allows a person to
temporarily interrupt a call to answer another one on the same line.
The Consumer Federation of America estimates that, a s of early this
year, rates for unlimited residential
service had increased by 35 percent
since the A.T.&T. breakup. With the
additional $1 access fee that took effect on June 1, the total iricrease
would be closer to 45 percent.
This rise comes on top of similarly
large increases in the early l W s ,
when deregulation was already bringing about extensive rate cha~lges.
New York's Increases
InNew York City, the basic rate for
untimed message service, which does
not include charges for the calls
themselves, has risen 47 percent, to
$Q.25 a month, from $6.29 at the time
of the divestiture. The increase includes the $2 access tee.
In California, where nust people
have a flat rate for ualirnitd I d
calling, the rate rose from $6 in 1980 to
$7 in 1983, and now is $10.25, including
the access fee, an increase of 70 percent since 1980 and 46 percent since
In some states, particularly those
that are more rural, increases have
been greater. Vermont's flat rate, for
example, has risen froin $10.55 in 1980
to $13.70 in 1983, and now is at $20.15,
including the $2 accttss charge.
The authorities say that, despite
these increases, few people have
dropped phone service because it is
simply too valuable and because the
.total cost is still relatively small.
More Ho;ls~hldoLbvr Service
Data from the Bureau ot the Census
show that the perwxage of households with telephone servlce has actually increased a bit, to 92.2 percent,
from 91.4 percent in November 1983,
just betore the divestiture.
Some consumer groups .say that, although people have not dropped
phone service, they have been hurt by
the rate increases. Surveys commissioned by the American Association
of Retired Persons show that 24 percent of people over 55 have had to cut
back on phone usage.
Evidence about phone cancellations b j low-income groups is less
conclusive than that for the population at large. Figures tor households
with less than $5,000in annual income
show the percentage of households
with phone service dropping from 71.7
percent in November 1983 to 71.1 percent last March. But Terry Monroe,a
policy analyst for the Commerce Department's National Telecommuni-
New York Times, June 16, 1986
(continued from previous page)
cations and Information Administration, said the drop was not statlstlcally siynificant.
Part of the reason why low-income
groups have not canceled phone service is that some states have adopted
"Lifeline" plans that provide basic
service for these groups for a low
Gwen the political resistance to
raising local rates, some phone companies are beginning to shift their
strategies and to pull back from thelr
insistence that rates rise to a v e r
costs. Instead, they are offering to
keep basic residential rates from increasing rapidly in'exchange for cok
cessiolls from regulators.
"lt's better to eliminate all the
c a w af p o U t i d concern over rates
if in return they can be freed of restrictions to get into new businesses,"
said Samuel A. Simon. a Washington
consumer attorney who has also been
a consultant to phone companies.
Paclflc Bell's Proposal
Pacific Bell, which serves California, rec8ntly proposed to essentially
freeze basic residential rates through
198B. In exchange, the company
wants a more streamlined ratesetting process, the ability to set prices
more flexibly on phone services other
than the basic service, and more freedom to go into new businesses.
Michael A. Revelle, executive director of state regulatory matters for
Pacific Bell, said the company
needed to be able to react more
quickly in a competitive market.
"The ability to have long and protracted rate hearings to adjust to
conditions that are changing daily is
just not going to cut it in the long
term," he said.
Mr. Revelle added that the company believed that, if it was given a
freer hand, it could generate enough
extra income to continue subsidizing
local rates. Indeed, Pacific Bell's p m
posal indicates that basic rates for
unlimited service would stay at the
current $10.25 for most customers
through 1989 and only reach $12.25 by
,New York State Plan
The New York State Public Service
Commission recently approved a
similar arrangement, in which the
New York Telephone Company promised to limit the increase in the basic
local rate to $1for two years in r e t u n
for more streamlined regulatory
Some consumer groups, however,
are suspicious of the plans, especially
after hearing phone companies say
for years that local rates would have
to rise to cover costs. Consumer advocates fear that phone companies a r e
offering temporary assurances about
local rates to achieve deregulation,
after which they will be free to
change rates at will.
"I think these rate agreements are
similar to a wolf in sheep's clothing,"
said Richard Kessel, executive director of the New York State Consumer
Protection Board, which is seeking to
overturn the New York plan. Mr. Kessel added that the plan "shortcircuits
the regulatory process" and allows
New York Telephone to raise rates
witbout having to face the public
scrutiny and unfavorable publicity
that accompanies a formal rate pr+
Officials say that telephone rates
are likely to remain a volatile issue
for years. "We have not seen the end
of the fallout of deregulation and
divestiture," said John Marks, chairman of the Florida Public Service
Tomorrow: Obtaining service and
repairs continues to be among the
main telephone problems.
Continued on PylcD5, Column 1
main and that certain aspects of serv- phones from still another company,
ice may never be as good as before the leaving it up to the individual to deterThe nation's telephone service is breakup.
mine whom to call for repairs when
gradually recovering from the confuthere is a breakdown.
The main problems continue to be obsion that followed the breakup. of the
( Several Companies Involved
Bell System two and half years ago, ac- taining new service and having repairs
Businesses generally find that it
cording to industry and government officials and consumer groups. But a deal with separate companies for their takes longer to have such services a s
number of experts say that some incon- local and longdistance service and prlvate lines and WATS lines installed,
veniences and customer confusion re- they may have purchased their t e l a I becauseseveral phone companies mus '
now be involved in filling such orders!
~ n while
installation has improved
~ U N E I986 A1,D5
since the months immediately after thd
breakup of the Bell System on Jan. l j
1B84, it-ISstill not a s fast a s It was by
fore then, according to business users
and the American Telephone and Telegraph Company.
@ 1906 The New York Times. Reproduced by the Library of Congress,
The physical quality of telephone
Congressional Research Service with permission of copyright claimant.
transmissions, by contrast, does not
seem to have been affected. Some customers suspect they are now more
likely to have a call blocked because all
circuits are busy or to experience static
on the Hne, but available data indicate
that the quality of transmission remains as high as it was before and. in
some cases, higher.
Government officials who monltor
phone service say that over all, they
Installation and Repairs Top Phone Problems
Continued From P a g e 1, Section 1
have seen no signs that the phone system has deteriorated. "We've seen
nothing to suggest the industry isn't
doing its job in giving good quality of
service," said Susan O'Connell, legal
assistant to the chief of the common
carrier bureau of the Federal Communications Commission.
In New York State. "telephone
service has never been better," said
Neil Swift, head of the communica,tions division of the Public Service
Commission, which only a few years
ago was critical of the New York
,Telephone Company's sewice.
Indeed, a t least some phone users
and industry experts contend that the
competition fostered by the Bell
breakup has proved beneficial in several ways.
In the wake of the divestiture and
other industry deregulation, they
note, there has been increased
competition in longdistance service,
forcipg rates ,&wn. and in pro*
customer eqlupment. Even local telephone service has seen the beginnings
of competition from technology that
allows big customers to bypass the
local phone system. Accordingly,
some customers maintain, a number
of telephone companies have become
more attentive to their needs.
"You could wait days for repairs of
lines and now it's a matter of hours,"
said the telecommunications vice
president of a California retailer. "If
you're the only game in town, there
'Isn't the necessity to be so respon'sive."
In fact, state regulatory commissions have generally not found an increase in the number of complaints
about phone service.
New York Times, June 1 7 , 1986 (continued from previous page)
Y n s u m e r Perception Cited
But many consumer groups feel
that in general, it is now more cumbersome to obtain new service and repairs. "I think if you look at a technical definition of quality of service, it
hasn't gone down," said Samuel A.
Simon, a consumer lawyer active in
telephone industry affairs."But from
a consumer's point of view, there's no
question they perceive it has gone
"In general, people feel the system
is much more confusing and much
more frustrating," said Patricia
Clark, a spokesman for the Illinois
Citizens Utility Board, a consumer
Consumers once merely had to get
in touch with the local phone company, which would install whatever
lines were needed and repair sny
problem. Now, the phone is rented or
purchased from A.T.&T. or another
phone manufacturer. If the local
phone company is called in to make
repairs and determines that the probSecond of two articles on telephone changes since deregulation.
lem is in the phone, and not in the line,
the customer will be charged for the
and the phone will not be
"The biggest complaint we've gotten on service is repairing equip
ment," said Richard Kessel. executive director of the New York State
Consumer Protection Board.
Need to Choose and Adjust
Consumers also find it difficult to
choose long-distance services and to
adjust to the new system, according
to consumer groups. They a r e being
asked to designate a long-distance
company as their primary carrier. If
they do not choose, they are assigned
a c a m e r by the local phone company.
Large corporations, which have
more complex telecommunications
needs, experienced the most notice
able problems immediately after the
breakup. There were long delays in
the installation of services used by
businesses, particularly private lines
that tie two locations together dire&
ly, bulk discount WATS service, tollfree 800 service and digital circuits
for computer communications.
Such delays occurred because
A.T.&T. and the local phone companies that it spun off were having trouble coordinating the provision of
those services. In some cases orders
were lost or misplaced in the confusion. Moreover, a huge order buildup
occurred, both because of a 1983
strike and because customers rushed
toget their orders in before the breakUP.
F.C.C. Halted Monitoring
As time passed and coordination
improved, such problems subsided
enough so that the F C C . has stopped
monitoring the situation. But because
several phone companies are involved in providing these special
services, installation speed has not
returned fully to pre-divestiture
levels and some phone users think it
Before the breakup, for instance,
A.T.&T.'s target was to have a private line installed in 28 working days,
according to a spokesman for the
company. After the breakup, the goal
became 48 working days, and a t first,
the company usually could not even
meet that target. Now, he said, the
target has been reduced to 39 days
and the company meets the goal most
of the time.
The same is true for installation of
WATS, which stands for Wide Area
Telecommunications Service. The
goal before divestiture was 7 to 12
working days for installation, and
that rose to 22 working days after the
breakup. Now the goal is back down
to 15 working days, still not as fast as
beforr the breakup. But installation
delays might increase again because
of the current strike against A.T.&T.
Disagreements on ills
Although corporations have seen
many more services become available because of competition sparked
by divestiture and deregulation, they
have also had to take a more active
role in planning, running and repairh g their telephone operations.
"You've got to be your own telephone
company," said Robert Bennis. manager of communications systems for
the Westinghouse Electric Corporation.
Mr. Bennis said that it had become
.New York Times, June 1 7 , 1986 (continued)
Installing a Line: How Long It Takes
Goals set by A.T.BT., rn termsol maximum number of working days
needed to install a Ime.
W I T S Line*
Jan 1 , 1984, date A T 6 T spun of122 Bell operallng telephone cornpanlea.
* W ~ d eArea TelecommunccattonsServlce, a hlgh-volume servlce tor business
Source Amerrcan Telephone and Telegraph C O ~ ~ W
harder for companies to keep track of
their bills because of constant
changes in service, and that Westinghouse had had disagreements with
the phone companies over bills.
"There's a margin of error greater
than we can live with," he said.
Both A.T.&T. and the local Bell
companies say the physical quality of
phone transmission does not seem to
have deteriorated. In a survey of the
staffsof state utility commissions. 14
commissions said they did not perceive that the quality of longdistance
service had declined, while only four
said they thought it had declined and
11 said they could not tell, accordmg
to Rowland Curry, acting director of
engineering of the Texas Public Utility Commission, who conducted the
Some say that transmission quality
has actually improved because of
Phone companies, for instance, are
gradually shifting to transmitting information as digital pulses of light
through optical fibers, rather than
using analog, or wave-like, signals
traveling by copper wire or microwave. Such digital light-wave transmissions are not subject to the same
static and interference that sometimes affects conventional transmissions. A.T.&T.. for its part, is switching to a new, more flexible way of
providing alternative routes for calls
when the main circuit is occupied.
Still, even if A.T.&T. and the Bell
companies say quality is high, they no
longer control the entire system. Consumers are starting to buy inexpensive phones or using inexpensive
longdistance services that provide
lowerquality service than the Bell
companies' system. To the extent
that happens, the average level of
quality goes down. .
Long-Term Concerns on Quality
Experts say long-term concerns
about the quality of the phone system
remain. One concern is that, with
many different vendors providing
service and equipment, it becomes
much more difficult to set standards,
to make sure all equipment can interWMeCt.
Yet another question is whether the
various phone companies will continue the investments necessary for
highquality service. Some may be diverted by more lucrative businesses.
Others may lack the financial means.
Some officials sav one worrisome
development in this regard is a recent
Supreme Court decision that restores
to the states authority that had been
assumed by the F.C.C. to regulate
how phone companies depreciate
their equipment. States can order
slower depreciat~onto keep telephone
rates from rising.
But this could also deny phone companies the money necessary to modernize and maintain their facilities,
allowlng the phone system to deteris
rate in the way many a mass transit
system has. One result, some experts
say, is that there may be sharper regional differences in phone quality
than there have been in the past.
- - - -- -
In High Court
By STUART TAYLOR Jr.
tn Rr New Y a t TI-
WASHINGTON, May 27 The SUpreme Court today rejected an effort
by the Federal Communications
Commission that would have led to
more rapid rate increases for intrastate telephone service in many
The F.C.C. wanted telephone companies to shift to shorter-term d e
preciation for computing intrastate
rates. The commission uses that
method to compute interstate rates.
The Mo-2 decision, which will affect virtually every phone company
in the nation, was a victory for phone
regulators in 23 states. It was a defeat
for many phone companies as well as
a setback for the deregulatory policies of the commission, which had
sought to preempt state depreciation
rules for phone plant and equlpment.
Unreabtlc Rules Seen
The commission had argued that
many state regulators. seeking to
hold down intrastate rates in the short
run, had refused to allow phone companies to use realistic rules for d e
predating plant and equipment in
computing the costs on which their
rates were based.
This was hindering modernization
of the phone industry, would lead to
higher costs and rates in the long run
and was contrary to Federal policy,
the commission asserted.
But the Court, without passing
judgment on these policy concerns.
ruled that Congress had authorized
the commission only to prescribe depreciation rules with respect to rates
charged for interstate service. not to
preempt state depreciation rules
used in setting intrastate rates.
@ 1986 The New York Times. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Differences on Depreciatlon
Justice William J. Brennan J r . 3
majority opinion held that, even
though both interstate and intrastate
calls went through the same plant and
equipment, the states could prescribe
depreciation rules for intrastate service different from those set by the
commission for interstate service.
Reversing a Federal appellate
decision, the Court held that the commission had exceeded its authority
under the Communications Act of
1934 when it ordered phone companies in 1983to disregard state depreciation rules and to use the same depreciation methods in settlng intrastate rates that it had adopted in 1W
and 1981 for interstate service.
The commission's new rules were
designed to make depreciation periods shorter, in line with the rapid obsolescence of much phone plant and
equipment, and to encourage companies to buy new equipment to keep
abreast of rapid improvements in
Mark S. Fowler, the commission's
chairman, said today that the decision was "unfortunate" because
"state-of-the-art depreciation is the
key to an information age telephone
network." But he added that the a m mission was still free to "stay its proContinued on Page D5
Cmtlnued From First Blrsiwss Page* F.C.C., Nos. 84-871,84880,84-1054 and
competition course" on interstate 84-1069, started as an appeal by public
matters, and that the effect of today's service commisstons in Louisiana,
decision would be limited by the fact Callfomla, Florida and Ohio from the
that several states are now "leading ' F.C.C. to the United States Court of
on the roed to deregulation" in tan- Appeals for the Fourth Circult. That
court upheld the commission, but t*
dem with the commission.
Deprec!ation rules have an impor- day the Supreme Court reversed its
tant effect an phone rates because ah.
Chief Justice Warren E. Burger
they determine laow rapidly companies in the capital-intensive phone and Justice Harry A. Blackmun disbusiness can m o v e r the costs of sented, without stating their reasons.
plant and equipment by including Justices Lewis F. Powell Jr. and Santhose costs in their rate base.
dra Day O'Connor did not participate.
In other business-related cases, the
The Communications Act created
what Justice Brennan called "a sys- Court also took the following actions:
tem of dual state and Federal regulation w e r telephone service." It authorized the cbmmission to regulate
interstate and international phone
rates, including depreciation - d e s .
But, as Justice Bmman stressed, it
also specified that the agency had no
jurisdiction over "intrastate cornmunicatlon service," even though the
same equipment was used by the
same carriers for both interstate and
He also said Congress had given the
commission no power to impose on
the states its view that the depreciation rules used by many states would
frustrate "vital nationa
k i e s , including timely recovery of capital invested in telephone equipment," with
a severe impact on the interstate
The four consolidated cases, Lwisiana Public Service Commission v.
New Phme Company Twist
Taking Part in
A business connects
two or more of its
own buildings in the
same city and
bypasses the local
By ERIC N. BERG
Not long ago, the Langley Air Force
Base outside Norfolk, Va., resolved to
cut its long-distance phone bill. So
telecommunications experts at the
base began planning to have a m i c m
wave radio system installed to link
the base directly to its long-distance
carrier, the American Telephone and
That was bad news lor the Chesapeake and Potomac Telephone Company of Virginia. For years. Chesapeake and Potomac had provided the
base with local phone sewice, including access to long distance. Now, the
military was roposing to bypass
! Potomac, depriving
the phone company of nearly $1 million a year in longdistance connection charges.
m e result was surprising. Rather
than lose Langley's business entirely
to a bypass company, Chesapeake
and Potomac decided to enter the bypass business itself. It won a contract
to build the link to A.T.&T. that the
Air Force desired. The Air Force now
lease. that link from Chesapeake and
"Our dilemma was losing wery
nickel of the business or losing
some," recalled William M. Newport,
an executive vice president of the Bell
Atlantic Corporation, the regional
holding company that owns Chesapeake and Potomac. "We came back
with a proposal to build a fiberaptic
link, and the customer stayed with
LONaDISTANCE ACCESS BYPASS
Big customers us% thetr own facrlittesto fink
mar teleohones to long-dlstence comparues'
facilities. These users bypassthe
Acompeny connects tts butldtngs in different cities through e
satellite network, bypassing both tocat %ndlong-distanw trnes.
That, moreover, was not the first
time that Bell Atlantic decided to bypass its own network rather than lose
a giant customer. In fact, thro-t
the United States, almost all of the
seven regional phone a m
formed from last year's b d $ z
the Bell System are finding that in the
increasingly competitive communications world they, too, must resort to
uncollventional practices to retain
business even if it means bypass
ing their own networks.
"We're no longer on the allor-110thing approach," said Robert A. Morrow, a spokesman for the Southern
Bell Telephone and Telegraph Company, the Atlanta-based subsidham of
ihe BellSouth Corporation, one d i h e
other regional companies. "If there is
the possibility foi some revenue,
we're going to pursue it."
@ 1985 The New York Times. Reproduced by the Library of Congress,
Congressional Research Service with permission of copyright claimant.
Jack B. Grubman, a telecommrmications analyst at Paine Webber Inc.,
the Wall Street concern. said: "The
Bell companies know that life can't
go on as it has."
In a survey of 100 of the New York
Telephone Company's largest NItomers conducted last year by
Touche, Ross 8 Company, the accounting firm, a third of the 316 customers respading said they were already bypassing the local utility and
an additional 17 percent eaid they
plaMed t9 by the ad of this year.
A spokesman for Touek, Roea said
this translated into a pbom compmy
New York Times,
Cantinued From First Business Page
revenue loss of $34 million in 1984;
with a projected loss of $67 million
this year and $110 million in 1986.
Between 1980 and 1984. Touche.
Ross said, 88 bypass systems were installed in the state. brinrring
- - the total
In California, an estimated onethird of the Pacific Telesis Group's
top 275 corporate customers are engagmg in some form of bypass.
Under the current pricing system,
long-distance companies such as
A.T.&T., the MCI Communications
Corporation. GTE Sprint and Allnet
Communications Services Inc. pay
fees, known as access charges, to connect to local customers. As things
stand, however, those charges are
held artificially high to subsidize
local service. The high access
charges, in turn. translate into high
costs of long distance for customers,
particularly for corporations, whch
use long distance heavily.
Not surprisingly, then, many corporations are deciding to cut their longdistance costs by bypassing the local
network and hooking directly into
long-distance carriers. By doing this,
they avoid paylng the subsidy, and instead pay only the actual cost of the
Big Savings Seen
Gerald L. Mayfield, a vice president of the DMW Group Inc., a telecommunications consultant, estimates that a large corporation bypassing the local network can shave
11 cents a minute off the average cost
of a long-distance call of 32 cents a
minute. With monthly phone bills of
large companies often above one million minutes, Mr. Mayfield said, the
monthly savin s through bypass can
easily e x c d
For the Bell companies' management, a big challenge over the last
few months has been how to respond
to this threat. Some, such as Pacific
Telesis, which provides local phone
service in California and Nevada,
have long argued that bypass undermines the Bell comparues' financial
well-being. It says it has therefore
refused to get into the bypass business. Others have chosen to play
down bypass, saying that to discuss it
would only hasten an exodus from the
conventional phone system.
One Bell executive, who requested
anonymity, said, "It's jwt not in my
competitive interest to discuss it."
Another said. "The more awareness 1
create of this practice, the more
awareness there is of the pricing disparities that.exist."
Indeed, in New York, the Nynex
Corporation recently proposed revamping New York Telephone's rates
to slow bypass, particularly in Manhattan. But the primary thrust by the
Bell companies has been to provide
bypass services th'emselves rather
than fight the trend.
Last year, for example, the Internatipnal Business Machines Corpwa'tion wanted more rapid communications betwebn two of its North C a m
lina offices, Ordinarily, Southern Bell
would have linked the offices with a
private line tied into a phone com-'
pany switching center.
When I.B.M. indicated it waked a
direct link and would go anywhere to
get it, Southern Bell installed a fiberoptic cable that bypasses Southern
Bell switching centers entirely.
Similarly, when the Harris Corpcb
ration wanted to connect two Florida
offices, Southern Bell again acted
solely zts a construction contractor,
laying communications cable outside
the regular Southern Bell system.
"It was either getting some revenue throueh ~ u t t i n nin that cable or
getting n&e ' w h a k e r . " said M.:
Morrow, the Southern Bell spokesman.
Private Wire Service
Some Bell companies say that, in a
sense, they have always been in the
bypass business.The Mountain States
Telephone and Telegraph Company,
for instance, has always rovided private wire service for its tusiness customers.
It considers that a form of bypass
since private wires, while going
through a local office, do not involve
the switching that most calls do. Increasingly, Mountain Bell's private
wires have not been *re at all but
c w i a l cable and microwave, both of
which circumvent Mountain Bell's
"We provide the transmission
media, and the corporations put their
switches - on either end," said
James B. Grisenti, a spokesman for
Mountain Bell, the Denver-based s u b
sidiary of the U S West Corporation.
"Our view is that half a loaf is better
Wall Street takes a similar view. In
general, analysts say that as long as
the current pricing system remains
intact, the Bell companies would be
foolish to sit idly and watch business
inevitably drift away.
"If the local company does not offer
the most economic communications
solution, someone else will." said
Laura Peck, a communications analyst at E.F. Rothschild, Unterberg,
Towbin. "If it means bypassing their
own network, they must do it."
But even supporters of bypass by
the Bell corhpanies agree that bypass
is not nearlyas profiiable as the Bell
companies' traditional busmess of
connecting customers to long distance through a switching center.
Robert J. Hudzik, a spokesman for
the Illinois Bell Telephone Company,
a subsidiary of Ameritech, estimates
that revenue drops by 40 percent
when a longdistance c o ~ e c t i o nis
made through bypass rather than in
the normal way. Mr. Mayfield of
DMW says the revenue drop can be
But the real solution for phone companies, telecommunications experts
say, is to bring longdistance prices
more in line with costs, therefore
removing the incentive to bypass.
Slowly that is happening. Beginning
this June, for instance, consumers
will pay a $1-a-month extra charge on
their local phone bills so that the access fees paid by long-distance companies can fall $1 and long-distance
rates can fall too.
In the meantime, said Mr. G r u b
man of Paine Webber, the phone companies "have figured out a way to
make the best out of a bad situat~on."