Letting Loose Some Monsters

By John S. DeMott

The breakup of the phone system has so far produced mainly problems

When the Bell System was broken up on New Year's Day, no one expected immediate technological or managerial miracles. In that sense, no one has been disappointed. Nearly four months after Bell was turned into a new American Telephone & Telegraph and seven regional holding companies responsible for local phone service, the rewards of divestiture remain chiefly a promise, while the problems are as complex and acute as ever.

Many Americans seem to feel dismay over the whole breakup and are irritated by changes that are mainly small but still inconvenient. Says retired Salesman Jack Reiss, 83, of Harrisburg, Pa.: "I don't know why they broke up Ma Bell, but I wish they would put it back together." Concurs Larry Mixon, district manager for Southern Bell in Florida: "Human beings don't like change. They have a problem adjusting."

AT&T shareholders will get a chance to voice their opinions on divestiture in Milwaukee this week at the company's first annual meeting since the breakup. Stockholders are expected to confront Chairman Charles Brown with a sorry list of woes. Those will include declining service, the company's rapidly shrinking share of the $44 billion longdistance market (in the face of gains by competitors such as MCI Communications and GTE Sprint), weakened revenue and earnings projections for 1984, and the performance of the new company's stock since November, down 20% to a near low of 15 7/8 last week.

The most immediate effect consumers are seeing after divestiture is new phone bills. Gone is the fairly simple bill of a couple of pages. Arrived is a complicated statement that can run to twelve pages and seems to require advice of counsel.

Phone-company officials report that an odd psychology appears to have devel oped among users of America's 183 million telephones. If anything goes wrong now, they blame it on divestiture. Says Illinois Bell's Patricia Montgomery: "A woman called to complain about some problems, which were caused by water seeping into the system. No amount of explaining could convince her that it was because of a wet cable, not divestiture." Another Illinois customer groused that the phone company was "driving up the cost of service," when in fact his most recent local-service bill was $21.93, only 58-c- more than last September's.

The complaining seems to have crested in some areas. Calls have fallen off sharply to many of the local operating companies' "let's talk" lines, which were begun last year to explain the twists and turns of the breakup. Nonetheless, since the first of the year the Federal Communications Commission has received 14,000 letters of complaint about phone service, 400% more than usual. Biggest gripe: slowness in installing new lines. The central message in most of the mail has less to do with actual shortcomings than with a changing attitude toward the phone company. Says an FCC staffer: "People feel the phone company is less friendly. If the new companies squander the service image that AT&T gave them, it will be very expensive to rebuild."

Service problems are showing up in urban areas, most intensely in New York City, particularly for business customers. Officials of both AT&T and NYNEX, the holding company for phone operations in New York and most of New England, acknowledged to the FCC in March that service to New York City's corporate customers has declined, but said they intend to bring it back to normal levels by July. With a backlog of 20,000 orders, there is now a wait of up to six weeks for high-volume discount wide-area telecommunications service (WATS) lines and 800 numbers, vs. five to 15 days last year.

True to predictions by many experts, telephone rates have gone up, by an average of 37%, since divestiture, says the FCC. Price increases by Bell Atlantic, the holding company for telephone operations in six Eastern states and the District of Columbia, are typical. Its flat-rate charge for phone service jumped nearly 30% in Pennsylvania, the lowest monthly rate rising from $9.60 to $12.28. It has begun installing message-unit service in some areas, basing tolls on time and distance of calls. The company increased pay-phone charges from a nickel to 15-c- in the District of Columbia, and from a dime to 25-c- in Delaware and Virginia. It increased directory-assistance charges throughout its area, ranging up to 35-c- in Pennsylvania and Delaware.

Not all the rate changes were increases. Significantly, Bell Atlantic has lowered some charges for urban users while raising them in suburban and rural areas, where the costs of providing service are higher. That is an example of de-averaging, a new way of pricing within a diverse geographic area. Urban users traditionally paid more for their service than it actually cost the phone company to provide it. This was to keep prices down for people in outlying areas. The goal now is to make users pay more of the true costs of the service they use. Robert Valentini, Bell Atlantic's assistant vice president for regulatory affairs, calls it a "usage-sensitive pricing policy." Says he: "We can no longer afford prices to be driven by social engineering while ignoring true costs."

Further price hikes for phone services are probably on the way. New York Telephone has asked for a $775 million rate increase, including a rise for pay-phone calls from 10-c- to 30-c-. Fees for all sorts of services usually taken for granted, or not thought of at all by ordinary users, may go up sharply. A house visit to install a phone would go from $10 to $12. The connection to the central office would jump from $25 to $50. Inside-wire hookup would go from $28.50 to $36, and phone-jack installation from $9 to $14. In addition, the company wants 1 1/2%-a-month interest on bills not paid within 30 days.

State regulators are caught between a public that wants rates to stay down and telephone companies that insist they need price increases. Raising telephone rates for any reason, however rational, is an act with potential political consequences. Moreover, determining "true cost" is difficult, since the phone companies and the regulators disagree on the elements that go into it. Regulators cannot lightly reject requests for more money, because the phone companies must now earn a competitive rate of return on capital to attract investors. Says John Arcate, NYNEX's director of regulatory matters: "Regulators are more important to us than they ever were because we need regulators to recognize that we must recover capital faster. This is the political tightrope."

Richard Kessel, executive director of the New York State consumer-protection board, scoffs at that. Says he: "Most of New York Tel's costs are due to the divestiture, and it is unfair to try to stick consumers with the costs. We did not ask for the breakup." Says Sylvia Siegel, the director of the San Francisco-based group TURN (Toward Utility Rate Normalization): "It's a mess. In fact, it's a holy mess. The telephone companies are using divestiture as an excuse to get all the price increases they ever wanted."

This week's AT&T annual meeting is expected to take a look at the company's future outside the phone business. Under the divestiture agreement, A T & T is able to go into such new fields as computers and data processing. On display will be the six new minicomputers that AT&T introduced last month. There is a growing conviction among industry watchers, however, that the company will not soon be able to compete successfully. In computers, for example, Wall Street experts generally believe that AT&T will be outstripped by the superior salesmanship of IBM and Digital Equipment. Says Jennifer Proga, an analyst at Shearson/American Express: "A T & T's sales force does not leave one inspired."

AT&T profits in the next few years will depend more on its old phone business than its new computers. Critical to the company are off-delayed flat fees for longdistance service, called access charges, that were to go into effect in January but have been stalled by the Government until next year. Says Analyst Mark Luftig of Salomon Bros.: "A T & T's most immediate problem is two words: access charges." Those fees, ranging from $2 for individuals to $6 for small-business users with only one line, would have given $3.5 billion to local phone companies to offset the loss of subsidies from long-distance tolls that they had received from AT&T before the breakup.

The plan seems to its proponents to be a reasonable way of making up for at least part of the loss to local companies of the long-distance subsidies. In an attempt to get the access charges approved, the company has offered to cut long-distance rates by more than 10%, but congressional opposition is strong. Access charges even to larger businesses, scheduled for June, may also be delayed.

While AT&T is expected to announce this week that earnings in 1984 will be down from last year's level, the new operating companies are doing nicely. Ameritech, which wires the industrial Midwest, and Southwestern Bell both announced their first set of first-quarter earnings last week: $257.6 million for Ameritech and $205 million for Southwestern--about on target with projections made before the breakup. Their chief executives were encouraged. Said Chairman William Weiss: "Ameritech is off to a fine start as a new enterprise." Unfortunately, the same thing cannot be said for the U.S. telephone system.

--By John S. DeMott. Reported by Thomas McCarroll/New York and Don Winbush/Chicago

With reporting by Thomas McCarroll/New York and Don Winbush/Chicago