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New Rules Will Let Pay Phone Rates Climb


WASHINGTON — Pay telephone companies, beginning next fall, will be free to charge whatever rates they choose and will no longer have to maintain pay telephones in unprofitable locations as a result of controversial federal rules that took effect Friday.

Many consumer groups, long-distance companies and state regulators are furious about the new rules, contending that they will make pay telephones in California and around the country more expensive and harder to find in certain neighborhoods.

But the Federal Communications Commission, which says competition will be sufficient to keep rates down, rejected last-minute protests Friday and allowed the rules to proceed.

The decision was a huge victory for the $4-billion pay telephone industry, which has frequently been the target of consumer complaints about poor service and price gouging on the nation's 1.85 million pay telephones.

The sweeping new rules will not only affect pay telephone users but will require businesses to pay millions of dollars to compensate pay telephone owners for toll-free and credit-card calls placed from pay phones.

"We are very pleased that the FCC left intact the notion that the pay phone industry should be deregulated," said Vincent Sanduski, president of the American Public Communications Council, a trade group representing independent pay telephone companies. "There may be indeed some increase in the local call rates but they will be more than offset by decreases in long-distance rates. Consumers are not being hung out to dry here."

Consumer advocates and long-distance carriers disagreed, saying most consumers across the country can expect to pay double and triple the average 25-cent charge nationally to place a local phone call. They also said the poor and those without cellular telephones will be among the hardest hit.


"The average consumer who doesn't have a cellular phone is going to be stuck paying at least 50 cents and maybe more for a pay phone call," said Janee Briesemeister, a senior policy analyst for the Southwest Regional Office of Consumers Union, publisher of Consumer Reports magazine. "The FCC says that because there are all of these pay phone operators out here there is a lot of competition. But the competition is not for my business or your business. The competition is to secure the best [pay phone] location."

The push toward deregulating the pay telephone industry was fueled by deregulation of pay telephone service in North Dakota, South Dakota, Iowa, Wyoming and Michigan--where pay telephone rates average 35 cents a call. Telephone executives and officials of the Federal Communications Commission argued that the experience of the five states proved that the industry is sufficiently competitive to keep pay telephone rates low.

In addition, although the FCC barred states from directly subsidizing phone companies to provide pay phone service in unprofitable areas, it left the door open for states to set up special funds for so-called "public interest" in unprofitable areas, although the agency did not lay out a plan for the states to set up such financial mechanisms.

The FCC pay telephone ruling is the latest bombshell stemming from the massive Telecommunications Reform Act, which Congress passed this year to deregulate the telephone, cable television and broadcasting industries.

The legislation required the FCC to pass rules to deregulate the pay telephone industry, a mandate that gives the FCC power to usurp state regulatory authority and remove most controls over pay telephone pricing and financial subsidies.

Besides deregulating prices and ending direct subsidies of pay telephone operators, the FCC ordered that pay telephone operators be compensated 35 cents by long-distance carriers for all pay phone calls--primarily toll-free and credit-card calls--for which they currently receive no revenue.

"We think the FCC went too far," said Robert Castellano, AT&T Corp.'s director of federal regulatory affairs. "We expect the new rule will result in a 7%-to-15% increase in our costs, which we will pass along to our customers."

But the American Public Communications Council says pay phone operators are currently only compensated for about 80% of the average 700 calls made from a typical pay telephone each month. And they say long-distance companies should pay their fair share.

The California Public Utilities Commission in 1990 capped pay telephone rates on pay phones in so-called "captive" locations with few competing pay phones, and tightened regulations on pay phone service after numerous consumer complaints about price gouging and malfunctioning phones that gobbled change without completing calls, said Robert Weissman, a spokesman for the California PUC.

Robert Deward, a spokesman for Pacific Bell said Friday the company had no plans to change rates at its 144,000 pay phones next fall. But some experts said consumers should brace for big increases.

"The FCC's decision appears to be excessively generous to pay telephone operators," said Ronald Binz, president of the Competition Policy Institute, a Washington-based group that does research on consumer telecommunications policy issues. "The pay telephone industry is difficult to make competitive because rarely do you have, side-by-side pay telephones competing with one another. The consumer really has no choice but to pay up or go out of his way to find another phone that may or may not be cheaper."

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