December 30, 1997


by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—The deregulation wave spreading through modern economies has supposedly struck local telephone industries—if one listens to Congress’s claims regarding the Telecommunications Act of 1996—but most of us have yet to see any alternative to our local Baby Bell for phone service. A paper released by the Utility Consumers’ Action Network, a watchdog group in San Diego, California, suggests an intriguing reason why competition is lagging: potential competitors to the Bells may not be really interested in trying to win away the business.

Your city probably has several companies (competing local exchange carriers) offering phone service. But they don’t market their services to individual households. Instead, they pick off large corporate customers, particularly Internet service providers. Several experts in the ISP field say that telephone companies and ISPs will merge over the next few years, because the main business of the new telephone companies lies in carrying Internet service, and because an ISP gets a much better deal on telephone equipment and connections to the telephone network by becoming its own phone company.

Still, this leaves most of us dealing with a single incumbent carrier. High prices are not the only drawback of the monopoly situation. A long list of new services ranging from intelligent call routing to high-speed Internet access are awaiting implementation by the phone companies, and probably would be widespread by now were there real competition.

One of the few places where the average person sees and hears of competing phone companies is San Diego, where three long-distance companies (AT&T, MCI, and Sprint) have been targeting the residential market. Many a householder has received the familiar telemarketing call offering a welter of options and rates. One would think the competition quite fierce—but an investigation into these offers by UCAN turns up a very different story.

The following observations come from individual incidents that were reported to UCAN by phone company subscribers, or experienced by their own staff in testing the service of various companies. As UCAN is the first to admit, the sample is not statistically significant and the conclusions are not meant to possess scientific validity. The organization is calling for more research by the California Public Utilities Commission, as well as new public services to help consumers figure out what the different companies offer.

First, it’s nearly impossible to figure out what rates the different phone companies are charging. The answer to every subscriber’s central question—“What is the best deal for me, given my calling patterns?” is assiduously hidden by confusing and frequently incorrect quotes for different zones, bands, and regions. The headache produced by comparing the different rates of different companies is similar to those experienced by many of us in trying to choose a long-distance carrier (or another service, like life insurance or a health plan).

Part of the reason rates are so hard to determine springs from oddities of regulation. For instance, the width of a billing zone could be anywhere from 13 to 32 miles. Different area codes could be treated the same for billing purposes. Consumers aren’t the only ones confused—if you ask one of the salespeople for the telephone companies about zones and rates, you could well get the wrong answer. Some service reps have overtly given up the struggle to understand rates, and have just told customers to wait for their phone bill!

Choosing a new company is not the end of your woes. Pacific Bell, the incumbent phone company, can be a sore loser. It has been known to delay a switch in service, cut off service altogether before the competitor is ready to hook up the subscriber, and allow mistakes such as dropping a subscriber from the telephone book.

Given the risks, is it worthwhile to switch? What do the new companies offer to attract users? UCAN has found that the competitors’ customer service is no faster or more helpful than that offered by Pacific Bell. Subscribers calling for help get put on hold for long periods, followed by wrong answers or claims that no information is available.

The clear impression given by UCAN’s report is that the competitors don’t really care. They’re not exerting the basic effort that any new business knows it must make in order to develop a good reputation and overcome the potential customers’ natural inertia.

While the UCAN report offers no further speculations as to why competition is so poor, I can volunteer some possible reasons. First, it’s hard to market a service to millions of users. Second, a new phone company has limited room for differentiating its service from the incumbent, and correspondingly small profit margins. The reason is that competitors have little of their own hardware to offer: their business is essentially reselling the service they lease from the incumbent.

The Telecommunications Act made a stab at offering a better alternative to leasing and resale. The law tried to require incumbent local companies to interconnect their network to facilities offered by competitors. And in August 1996, the FCC issued a 700-page order specifying how interconnection should take place and how fair rates should be set. But key parts of the order were successfully challenged in court by a group of states and local telephone companies.

At this point, interconnection is being left up to individual agreements between incumbents and competitors—where the incumbent, of course, has a tremendous negotiating advantage as well as an incentive to stall an agreement. Disagreements are taken to each state’s regulatory commission, whose response usually allows the process to drag out even longer.

Local phone service is not the only failure of the Telecommunications Act. Congress is also mad about the lack of cable TV competition and rising cable rates. While they turn their anger on the FCC, the blame is probably better laid at their own door. The Telecommunications Act was widely criticized even before passage for encouraging mergers over competition and leaving loopholes that incumbent companies use to evade the need to share their business with others.

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