Phone Fracas Legislative Fights Expected As States Enact Telecommunications Deregulation

While Washington’s next Legislature debates welfare reform, education funding and the fate of Seattle’s sports franchises, the phone will ring.

And ring.

The telecommunications industry, which by one estimate accounts for 15 percent of all economic activity in Washington, will demand a hearing.

Consumers as well as legislators will want to listen.

Residential customers paying rates among the lowest in the United States face the long-range prospect of bills double or triple the amount they pay now.

Many businesses, on the other hand, would enjoy cheaper service with more features.

Telephone industry officials say decades of tight regulation have shaped a system rife with subsidies. Although stripping away those supports will be painful for some, they say, the result will be a telecommunications system better able to serve important high-tech industry.

Competitors and consumer advocates say any adjustments should be minor. So far, regulators have been on their side.

The debate in Olympia, and another in Boise, will echo one concluded in Washington, D.C., last February with enactment of the Telecommunications Act, the first comprehensive overhaul of federal legislation regulating the industry since 1934.

The bill opened local telephone markets to long-distance carriers shut out since the breakup of AT&T a decade ago. Local carriers like US West Communications and GTE were, in turn, allowed to expand their service into the long-distance market.

With competition in both segments of the industry vastly expanded, the need for regulation of rates and other aspects of the industry was to shrink.

And talk about speed-dialing. The bill also set very specific time frames for accomplishing each step of the transition to deregulated service.

Ideally, the process could be completed within 270 days.

That hasn’t happened. Several local telephone companies, including GTE and US West, sued the Federal Communications Commission.

They claim new agency rules trample on the authority of state regulators and violate Congress’ intent in passing the law.

A week ago, GTE filed another complaint in U.S. District Court against the Washington Utilities and Transportation Commission.

An arbitrator appointed by the state commission, the lawsuit says, issued findings that would allow AT&T Corp. to lease GTE equipment at less than cost.

If allowed to stand, the ruling would give AT&T more than enough margin to undersell the local carrier and still make a profit, the complaint says.

Other litigation may follow.

Meanwhile, Washington and Idaho legislators will weigh measures that would go a long way toward deregulating telephone service.

Local telephone companies, led by US West and GTE, have drafted proposals that would overhaul telecommunications laws in the two states.

GTE Idaho spokeswoman Carol Rutgers said a second bill is likely from a coalition of competitors working with the Idaho Public Service Commission.

The measures will probably differ on the pace of deregulation, and ways of balancing the cost of serving urban Boise and rural areas.

“We think things need to be changed today,” she said.

In Washington, the Utilities and Transportation Commission has also prepared a bill.

Glenn Blackmon, the commission’s assistant director for telecommunications, said the legislation would shorten the process for declaring a segment of the telecommunications market sufficiently competitive for regulators to back off.

The goal, he said, is a review that can be completed in 30 days instead of months.

Blackmon said the only other change in state law that might be necessary touches on a federal provision for creation of a universal service fund to subsidize telephone service to rural areas

Existing federal and state funds channel about $31 million from long-distance access fees to small telephone companies that maintain networks with widely scattered customers who might otherwise be too expensive to serve.

The US West bill, which has circulated for a month, would require all providers of telecommunications services in Washington to pay into a new universal service fund.

The money would be distributed to telephone companies operating in census blocks where the cost of service exceeds a still undetermined percent of median family income.

Some sort of new fund appears likely, although there may be some disagreement over who will contribute, and how much.

Other sections of the US West bill will be less widely embraced.

Judith Krebs, spokeswoman for Washington Citizen Action, said the formula US West proposes for charging competitors who want to lease its lines and switches are suspect, especially in light of action the commission took on earlier rate requests.

Other observers are more cautious, saying only that the industry and market may not be ready for such a sweeping proposal.

“It’s premature to totally deregulate the telephone industry when the majority of consumers don’t have access to alternative providers,” said Robert Manifold, an assistant attorney general who frequently represents consumers before the utilities commission.

But US West and GTE spokesmen say time costs them money.

“The regulatory system is broken and it needs to be fixed,” said US West spokesman Tom Walker.

While US West and GTE rates remain subject to commission control, he said, competitors like Nextlink and GST Telecommunications are picking off prime business customers in Spokane.

But at least those two companies built their own networks, he said.

Walker said the local carriers will be at an even greater disadvantage if arbitrator rulings in cases brought by AT&T against GTE and US West are allowed to stand.

As long as competitors can use existing facilities instead of building their own, none of the state-of-the-art telecommunications infrastructure that Congress envisioned will be created, he said.

Walker said US West spends $350 million a year in Washington to improve its system. That won’t continue without a better return on its investment, he said.

The utilities commission has rejected US West efforts to restructure rates in a way that would have hiked basic residential service to about $25 per month. Instead, a rate of $10.50 was imposed statewide.

That is the second-lowest in the nation, said Walker, who estimated the average is $18. The true cost of residential service is significantly more, he said.

Rosemary Williamson, GTE government affairs manager in Washington, said the bill proposed by the local carriers is a fair one that will give them the flexibility they need to react to changes in the market.

“We merely want to compete on a fair basis,” she said.

If the companies do not receive the revenues they need to upgrade their networks, Williamson said, quality will slip and consumers will go elsewhere.

“In this new environment, customers don’t have to choose you,” she said.

But, noted others, choice is largely restricted to the downtown areas around Puget Sound and to Spokane. Regulators should have a tight hand wherever a local company maintains a monopoly.

AT&T Vice President Chuck Ward said the US West bill would allow local carriers to charge wholesale rates too high to enable new providers to compete for customers.

“It doesn’t seem to be a viable discount level,” he said.

An arbitrator appointed by the utilities commission earlier this month sided with AT&T and against US West in a ruling on wholesale rates.

The Washington Independent Telephone Association, which represents companies like PTI Communications and St. John Telephone Co., helped worked with US West on its bill, but Executive Vice President Terry Vann said the organization may push for modifications.

Vann spoke before US West notified legislative leaders it would drop a provision calling for complete deregulation of rates and phone company return on investment.

Walker said discussions of the draft bill with various groups indicated many will not be comfortable with total deregulation until they have more experience with the competition and how it affects prices and service.

“The marketplace is where this should be played out,” Vann said.

As the law stands now, he said, rate proceedings are too adversarial and take too long.

“I would like to see the marketplace shape the options,” agreed a key legislator.

Spokane Republican Larry Crouse chairs the House Energy and Utilities Committee, where any deregulation measures will be heard.

He said the Telecommunications Act gave the states considerable power to shape their own regulatory frameworks.

The US West bill, Crouse said, might have been too ambitious a starting point as first proposed. Although some changes in existing state law will be necessary, “less legislation might be the best legislation,” he said.

US West’s Walker warned that less will mean less, not more, for telecommunications services in a state that prides itself on high-tech industry.

“It’s going to take more than a tweaking of the screw,” he said. “We are lagging.”

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MEMO: This sidebar appeared with the story: Utilities draft deregulation bill Debate in the Washington Legislature over changes in state regulation of the telecommunications industry will likely focus on a measure drafted in large part by US West Communications, with help from GTE and the Washington Independent Telephone Association. The bill includes sections that would: Deregulate consumer rates, and telephone company earnings. Foes say the Washington Utilities and Transportation Commission should continue to control rates where US West, GTE or other local telephone company has no competition. Create a universal service fund that would underwrite the cost of serving rural areas. Debate here likely to focus on who pays, and how much. Define basic service. Designate a carrier of last resort who would provide service if no one else will. Establish a formula for setting a cost of service, the benchmark that would be used in the allocation of universal service funds, and in fixing the rates telephone companies could charge each other. If set too high, alternative carriers like AT&T may not be able to make a profit on local service. If too low, investment in new networks may dry up. Transfer responsibility for consumer complaints to the attorney generals office. -Bert Caldwell