New telephone deregulation war looms at turn of year; carriers get set to jockey for position in toll call market.

Los Angeles businesses will be among the targets of choice in a new phone war expected to begin Jan. 1.

That's when California's 21 million telephone users should be able to place local toll calls through any carrier they choose, rather than being required to place the calls through their local phone companies.

For Los Angeles companies, this latest step in the deregulation of the phone industry likely will mean lower phone bills and an onslaught of offers from companies vying to carry their local toll calls.

For local phone companies GTE and Pacific Bell, it means a battle against each other and against long distance carriers such as AT&T, Sprint and MCI for a segment of the market that up until now has been reserved for the local phone companies.

A local toll call is any call to a phone more than 12 miles away but still within a customer's local phone service area. California has 11 of these local service areas and 22 local phone companies, the largest of which are GTE and Pacific Bell. Until now, state Public Utilities Commission regulations have required that all local toll calls must be placed through the customer's local phone company. But in an announcement July 20, the PUC said it wants to open the local toll call market to competition.

Although the PUC's plan is only a proposal, it is expected to be approved either in its current form or as amended after comment from the phone industry and the public.

The PUC's plan would likely mean lower phone bills for businesses because it would immediately lower local toll rates for GTE and Pacific Bell by 40 percent.

Even if they do nothing, business customers would have the advantage of lower toll rates, said Timothy McCallion, area vice president for regulatory and governmental relations at GTE.

But businesses that are willing to shop around would be able to choose from packages offered by the local phone companies and long-distance carriers. These would be similar to the packages now offered for long-distance calling, McCallion said.

The only problem likely will be the same plethora of choices that now faces anyone choosing long-distance phone services. According to the PUC, 93 long-distance phone companies are poised to enter the local toll call market in addition to the new plans expected to be offered by GTE and Pacific Bell.

For the local phone companies and their customers, this new competition would represent a new world order in the California telecommunications market.

"We're about to introduce competition among toll calls in a major economy (California), and that's going to unleash a variety of competitive forces in much the same way that deregulation of long distance calls produced competition in the long distance market," said Charles Cicchetti, managing director of economic consulting for Arthur Andersen & Co.

Cicchetti is a former chairman of the Wisconsin Public Service Commission -- that state's counterpart to the California PUC. He said the competition for the toll call market should be fiercest in urban areas such as Los Angeles, where so many of the calls are concentrated.

"Those urban area calls will be very sought after," Cicchetti said. He said the competition ultimately will be healthy for customers, the phone industry and the state's economy.

"This kind of competition will result in a larger market for telecommunications services. The revenue collected by competitors will exceed the total from a monopoly because competition typically produces more choices and services for the customer," Cicchetti explained.

The competition will be a big adjustment, however, for companies like GTE and Pacific Bell. Operating as monopolies regulated by the PUC, the two companies have been prohibited from changing their rates without PUC approval and have kept local toll rates artificially high as a way of keeping basic service rates low.

According to Cicchetti, that's the American way: "The tradition in America has been to keep the price of plain old telephone service low so that it's universally affordable by everyone. The way the phone companies achieved that was to subsidize the basic services through the profits of toll calls and add-on services like call waiting, additional lines, call forwarding and so forth."

Lou Saviano, a spokesman for Pacific Bell, said that arrangement worked fine under a monopoly system but would put Pacific Bell and GTE at a disadvantage in a competitive market.

"The PUC's proposal is fine with us as long as we have a level playing field," Saviano said. Besides lowering local toll call rates, he explained, Pacific Bell believes it should be allowed to compete in the interstate long-distance market because the new competitors it would face in January are interstate carriers.

"The long distance carriers will be able to say, 'We can carry your calls anywhere in the country,' but we are prohibited from doing that," Saviano said. "We need to be able to be a long distance carrier sooner or later. We've been lobbying strenuously to have the regulations in that area changed."

McCallion of GTE said he avoids the term 'level playing field' because "it has been beat to death by our industry." But the local phone companies do face "some regulatory disadvantages right now," he said, so they will have to work hard to keep their local toll call customers.

"We will be doing everything we can to maintain and expand the toll call business we get from our customers," McCallion said. "It's going to be a challenge for us, but that's what we have to do. We aren't going to be able to use regulatory constraints as an excuse for not giving customers the best possible package."

According to McCallion, GTE has revamped itself over the past several years in anticipation of this change.

"We have brought in new talent to our sales organization and re-honed their skills," he said. "We also have brought in sales people who worked for competitive firms, including long distance carriers, to help change our sales culture so that we understand what our customers are looking for."

Saviano said Pacific Bell also is readying marketing plans. "We want to be able to offer a lot of optional packages that will allow customers to save even more money (than the 40 percent proposed by the PUC). Plans are still being formulated, but basically these packages would be based on volume. The more you call, the bigger your discount would be," Saviano said.

The local phone companies have accepted the premise that their world will change, Saviano added, but they're still working out the details of how the new rates will affect a host of business services such as 800 numbers and other calling plans.

One of the misconceptions about the PUC plan, according to McCallion, is that it would raise rates for everyone. He said the misconception exists because, to compensate for the lower toll rates, the PUC proposal would raise rates for basic service.

The increases for basic service would vary, depending on the customer's phone company and other factors, but generally they would range from about $1.50 to $7.50 per month. The PUC plan would still retain low rates for special calling plans such as lifeline services for the poor.

Explained McCallion: "Some customers will, in fact, pay more if all they ever use is basic service, and that has been getting a lot of publicity, but an awful lot of customers will be paying less for their overall service because the reductions in toll rates will be at least 40 percent, according to the PUC proposal. There are also going to be package offerings that will provide even greater savings to the high-volume users, and those, for the most part, are businesses."