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Phone Rivalry as Simple as McDonalds vs. Burger King, SBC Head Says

Firm says it shouldn't be subsidizing competitors with low-priced lines as they enter state market.

May 26, 2003|James S. Granelli and Jube Shiver Jr. | Times Staff Writers

The future of local telephone competition in California lies in a complicated mash of arcana -- depreciation schedules, "fill factors" and interest rates -- filtered through federal regulations, state hearings and bitter rivalries.

But to Edward E. Whitacre Jr., it's as simple as two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun.

Comparing phone service to Big Macs is one way the chairman of SBC Communications Inc., the state's dominant local phone company, hopes to persuade the California Public Utilities Commission to raise the prices that SBC is allowed to charge rivals such as AT&T Corp. to rent the lines, switches and other gear required to provide a dial tone.

Those prices, which the PUC will set later this year, are at the center of a nasty fight between SBC and the companies trying to crack SBC's near-monopoly on providing local phone service.

"We're having to sell at below our costs, and that's the unfair part," Whitacre said in an interview with The Times. "It's like McDonald's cooking a hamburger and Burger King being able to buy it for a nickel and putting their name on it" -- and then reselling it for a fat profit.

SBC's competitors counter that there's no beef in Whitacre's argument.

They say low, discounted rental rates are the only way for them to gain a foothold in the lucrative California market. Once they obtain enough market share, they can financially justify installing their own equipment.

Besides, AT&T and others say, SBC makes money even when rates are discounted.

"Because of technology, the costs of providing service continue to go down -- not up," said James L. Lewis, vice president for public policy at WorldCom Inc.'s MCI unit. "That's the way it ought to be."

Thanks to the impenetrably complicated economics of telephone networks, it's nearly impossible for anyone -- even the phone companies themselves -- to figure out precisely what the fair rental rate is. Yet that doesn't stop armies of lobbyists and consultants from trying to convince the PUC that they've got the answer.

"The lobbying is as intense as anything I've ever seen," Commissioner Geoffrey F. Brown said. "It's a very tough game. These company lobbyists are take-no-prisoners types: polite but persistent. There are real big bucks involved. If these guys don't perform for their companies, they're out on their ears."

Commissioner Carl Wood agreed: "This is their livelihood, big time. According to some players, this is a life-or-death situation."

The origins of the rate fight go back to the Telecommunications Act of 1996, which was designed to give consumers more choices and lower prices for local phone service. In exchange for renting their equipment to other phone companies at regulated rates, SBC and the other Baby Bells are allowed to offer long-distance service.

In California, the fight really heated up a year ago when the PUC set interim rates for SBC, ordering the San Antonio-based company to charge an average of $14.16 a month per line for the rental of its gear. SBC says that is far too low: It wants the PUC to set rates that average more than $30 a month.

Just what steps SBC may take to try to achieve that aim isn't clear. Recently, when the company wanted Illinois to raise lease rates, it went straight to the state Legislature, short-circuiting a rate-setting hearing.

With lobbying help from its union, SBC got a bill introduced, passed and signed into law in four days. Starting next month, SBC will be allowed to charge rivals an average of $22 a month -- up from the current average of $12. AT&T and others have sued to overturn the law.

SBC President William Daley told investors in New York last week that the company would follow a similar strategy in "a couple of other states" that have low rates. He didn't identify the states, but California's rates are among the lowest in the country.

Pricing Principle

To set rates, California and other states rely on a formula that focuses on what it would cost to build and operate a brand-new network -- one that, because of new technology, would be more efficient but less expensive than existing systems.

Because the pricing formula is based on forward-looking costs, the Bells aren't supposed to include historical, or embedded, costs in their calculations. But that's exactly what the Bells say they need to do to account for the billions of dollars they have spent on the nation's phone infrastructure.

The U.S. Supreme Court upheld the forward-looking formula last year. Since then, more than two dozen states have lowered leasing prices to boost competition from AT&T and other alternative local phone service providers, which claim about 5% of the country's local phone market.

Joe Gillan, an economist working for a coalition of Bell rivals, said the focus on "forward-looking costs" isn't unique to telecommunications.

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