Telephone Industry Issues

C' 0 ?. -, Congressional Research Service The Library of Congress A Washington, D.C. 20540 TELEPHONE INDUSTRY ISSLTES IP25 7T 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 . Increasing 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. Congressional Reference Uivision NORTHERN KENTUCKY UNlVEHSiTt LIBRARY GPIIEKNMENT DOCUMENTS CSY+C7IeN FCC Orders AT&T to Cut Rates Further LongDistance Reductions Will Take Effect on New Year's Day By Bill McCloskey A%wcaled Press 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 from home. 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 states. 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 ago. 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 months earlier. 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 television studios. 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. Q Congressional Research Service with permission of copyright c l a i v n t . 5 1982 1981 I 1983 1984 o l Arner~ca I I 1985 AT81 BREAKUP ON JAN. 1.1984 1 From December to December of each year I I BEFORE BREAKUP IN PERCENT I THE WKSHINGTON POSl 'Through October 1986* I AFTER BREAKUP 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," he said. 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 - 1-" 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 in 1984. 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 were separated. "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 1988." "It was a blockbuster announcement," said James McCabe of Donaldson Lufkin & Jenrette, who is cutting his earnings forecast for the company. 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 earnings. 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 companies. 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 Zucker said. 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. ihopping Spree 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 By JOHNNIE L. RORERTS 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 spurning it. "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. Still Looking "We are actively seeking acquisitions." says Sam Ginn, Pacific Telesis Group's vice chairman. 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 officer. 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. analyst. 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 services. 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 QEC. 10,1986 pp.\,24 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. 5 24 THE WALL STREET JOURNAL WEDNESDAY, DECEMBER 10, 1986 Shopping Spree: Baby Bells Move Into Many Non-Telephone Areas I 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 firm. 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 fabncator. 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 diversifration efforts." 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 says. Lingering Questions 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 price. 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 say. 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 Initial figure. 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." Contention Denied 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 . " AT&T COMPANY 7800 E. Orchard Rd.. Suite 200 Englewood. CO 801 11 Telephone: 303-793-6500 US WEST INC. 1010 Pine St. St. Louis, MO 63101 Telephone: 3 14-247-9800 Nevada Bell Pacific Telephone Southwestern Bell \ Southern Bell South Central Bell December 1986 New Jersey Bell Bell of Pennsylvania D~amondState Tele~hone Chesapeake 8 ~ o t o m a c Telephone Companies (4) New England Telephone New York Tele~hone NYNEX Bell South Ohio Bell Indiana Bell Michigan Bell Illinois Bell Wisconsin Telephone Mountain Bell Northwestern Bell Pacific Northwestern Bell Pacific Telesis Ameritech US WEST 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 NYNEX CORPORATION 675 W. Peachtree St.. N.E. Atlanta. GA 30375 Telephone: 404-420-8600 BELLSOUTH CORPORATION 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 AMERITECH CORPORATION 550 Madison Ave. New York, NY 10022 Telephone. 212-605-5500 F.C.C. Drops a Restriction A.gainstBell Concerns ------ -- -- 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 equipment. 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 new service. The decision, which could save the Bell companies millions of dollars in N.Y. TIME5 NOV. 26,1906 D2 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 phone companies. 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 services. 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 Slaj/Rrporler OJTHF: WALLSTREET JOURNAL 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 said. 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 1984. 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 then. 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 page document. 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 that market. 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 these customers. 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 networks-apparently 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 businesses. 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 p.7 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 -PY about 60% of the leased space, but the unit is prospecting in some of the redon's overbuilt markets for new deals. generating accounting "We've 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. in the 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 e - ASS& Cemsa W+laRttura Pwsbrr A q , SbmW -----4 Ma,7hrr sqbt. E8skgs Ammd Rsccst c-W=aY : Tot.1 Bend 5.5% 5.7 34.5% 34.1 5.4 35.1 5.6 35.4 5.9 32.0 6.1 29.9 5.7 34 2 1/1/84, annualized. VMI 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 AMERITECH 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. %ih MQmm Rrrc~~lcs NHIPaSkuc Mrid.nd Rk+ Amen tech AIT $18,566.1 $7,611.4 15.1% $79.09 96.2 $6,986.7 $861.0 58.90 $7.08 128% Bell Atlantict BEL 20,298.5 8,227.8 14.2 41.24 199.5 7,318.1 895.2 4.48 3.60 63% Bell South2 BLS 25,6453 11,055.7 15.3 34.94 3 15.7 8,624. I 1,227.7 3.94 3.04 56% Nynexl NYN 21,499.9 8,750.4 14.3 43.17 202.6 8,385.5 921.6 4.55 3.48 61% Pacific Telesis' ' PAC ,20,027.1 7,681.1 14.9 . 35.70 , 215.2 6,789.9 842.0 , 3.92. 3.04 51% SW Bell ' . SBC 19.702.7 7,660.4 13.1 ' 76.90, 99.6 5.887.7 741.5 7.44 6.40 105 US Wezt' . USW lR,393.3 7,197.8 13.5 37.94 189.8 6,233.9 718.4 3.78 3.04 53% 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 !%mw 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 37). 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 units. 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 Muscle Page 36 South's vice president for planning. "And we don't intend to do that." 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 Boren. 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 range. 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 NWEX BARRON'S 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 amount. PACIFIC TELESIS 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 and Missouri-has suffered SOUTHWESTERN BELL 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 shares outstanding shaved the annual payout from net income to those holders by almost two-thirds. 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 national average. 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 anfidotcs. 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. US WEST p. 37 BAHRON'S October 27. I986 Washington Is Still Watching the Bell Regionals ASHINGTON- Nothing W 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 the others. 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 regulatory powers. 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 information services. 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 big one. "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. '7 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 unfair competition. 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. -Thomas G: Donlan 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 E STREET JOURNAL 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 said. 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. i8 States Show Interest So far, more than 10 states have expressed some interest in adopting the plan, Mr. Fowler said. But the experiment faces many obstacles. 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 By BOBDAVIS 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 more Mr. Kimmelman adds. 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 V. McCarren*urges what 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 local residential calls. In return, Nynex Corp.'s New England Telephone unit would accept a formula for residential rate increases. But critics charge that this type of plan actually builds inflation Into residential . rates. Californiaregulators thus shelved a social contract proposed i 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 with telecommunications." 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 ~ommunicationsomm mission 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, including Califorstates. nia, have established similar programs. of S t a f f R e D o r t e r o f T n ~WALL STREET JOURNAL 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 services. 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 telephone economics. 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 company revenues." 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 p.25 1986 Dow Jones & Company, Inc. Reproduced by the Library of Congress, Congressional Research Service with permission of copyright claimant. 19 Calling Long Distance: User Vote ShowsStrong Support for AT&T... By FRANCINE SCHH'ADEL 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. Disproving Skeptics 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 digits. 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 businesses. l 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 company?' senior analyst at Yankee Group, likes to thmk of them as "people who hate the corporate pant" or "people who drive foreign cars." 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 that category. Regional Loyalties 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 47% vals. Teleconnect Co. of Cedar Rapids. Iowa, for example, is one of several small Cost of service phone services that have shown surprising L. : j 25% strength. Teleconnect claims to have come in second in some of the cities it serves, Convenience grabbing the votes of as many as 401 of 7 --[ 19% customers. Says Dekkers Davidson, a teleSize of company communications-policy analyst at the U.S. Commerce Department in Washington: 4% "There isn't a monolithic marketplace." Not sure 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 cars." 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 For example. 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 monthly long-distance bill of W-for him ple in the process of moving and various to sit up and take notice. (While discounts ethnic groups. 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." a (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 E STREET JOURNAL 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 business customers. "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. New Rules 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 quality." 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 off quality.' f a unique opportunity to sign up residential customers. 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 hissing." 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 ment. "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 Group. 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 heritage. O 1986 Dow Jones & Company, Inc. Reproduced by the Library of Congress, Congressional Research Service with permission of copyright claimant. ' 671 Bell Finns Say Ruling Lets Them Buy Phone Concerns Outside Their Regions By JOHNNIE L. ROBERTS StaJJReporferof T H EW A L L STREET JOCRNAL 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. panles. 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 territories. 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 PaineWebber Inc. 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 panel ruled. Interpretation Challenged 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 non-Bell companres. 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." he added. 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 portunities are." 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 Sp4.l Revenue Increases: Amounts Granted Vs. Requested w Tbn Ner Yo* T i m $8- 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 A\,D~ 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 special services. 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 breakup. . 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 of capital 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 divestit~ 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 groups. 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 divestiture. 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 rate. 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 1995. ,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 procedures. 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+ ceedink. 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 Commission. Tomorrow: Obtaining service and repairs continues to be among the main telephone problems. \7, 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 performed. Consumers now have to 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 d 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 down." "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 group. 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 visit fixed. "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 never will. - 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* a 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 survey. Some say that transmission quality has actually improved because of technological innovations. 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 ~ Y 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. - - - -- - Phone Role Of States Is Upheld FCC,Loses In High Court By STUART TAYLOR Jr. Spdd 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 states. 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 communications technology. 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 intrastate calls. 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 communications network. The four consolidated cases, Lwisiana Public Service Commission v. New Phme Company Twist Taking Part in Bypass Trend LOCAL BYPASS A business connects two or more of its own buildings in the same city and bypasses the local teiephone company. 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 Telegraph Company. 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 w ! Potomac, depriving Chesapeake a 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 Potomac. "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 US." I LONaDISTANCE ACCESS BYPASS Big customers us% thetr own facrlittesto fink mar teleohones to long-dlstence comparues' facilities. These users bypassthe local phonecampany. TOTAL BYPASS 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, - March 11, 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 to 119. 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 connection. 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. I~o).(xx). 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 existing plant. "We provide the transmission media, and the corporations put their electronics telephones and 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 than none." 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 even greater. 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."