The Baby Bells Misbehave

A skilled spin doctor can put almost anything in a good light--even a $10 million fine. When U. S. West Inc. was penalized that amount on Feb. 15 for violating the Bell System breakup consent decree, lobbyists for the Baby Bells argued that the rules were fuzzy, the infractions were minor, and that, in any case, the antitrust decree that U. S. West violated ought to be drastically curtailed. Indeed, John J. Connarn, vice-president for regulatory affairs at rival Baby Bell Ameritech, even argued that the fine could help U. S. West--by calling attention to what he sees as the pettiness of the restrictions. Said the lobbyist: "The things they're being fined for, 98% of the businesspeople in this country would be astonished they couldn't do."

That may well be. It's not easy for the average phone customer to fathom the intricacies of the antitrust consent decree that broke up American Telephone & Telegraph Co. in 1984, creating the seven Baby Bells. But the past year has brought a rash of fines, settlements, and allegations against the Baby Bells, many of them for violations that are all too easy for the general public to understand (table). Last April, for example, Bell of Pennsylvania agreed to pay $42 million to settle state charges that it used deceptive practices to sell customers more phone services than they wanted. One investigator posing as a single welfare mother was hooked up for $28.55 a month, including extras like 38-number speed dialing, even though she could have gotten basic service for as little as $6.65.

Most of the Bells' legal troubles fall into two categories: violations of the Bell System breakup decree, as in the U. S. West case, or overzealous marketing of services, as in the Bell of Pennsylvania case. Both reflect increasing aggressiveness on the part of the Bells, which believe they're being treated by regulators as staid utilities even as they lay out strategies to be 21st century, information-technology giants. Yet by pressing too hard, they risk a regulatory backlash and even more restrictions.

Indeed, New York regulators have been so swamped with allegations against Nynex Corp. that last fall, they raised the last-resort possibility of splitting it up into regulated and unregulated companies--sort of a Bell System breakup, round two. "It's very hard to argue that the federal mechanisms to control the Bells are adequate when you see conduct of the type that Nynex was engaged in," says Scott J. Rafferty, a former Nynex employee now suing for wrongful discharge. His whistle-blowing led to a criminal indictment of Nynex on antitrust charges. Rafferty's opinions don't necessarily reflect those of his new employer, the Maryland Public Service Commission. For its part, Nynex says the charges were isolated incidents that were contrary to company policy.

'A SERIOUS MATTER.' Federal officials maintain that their enforcement policies have been tough. The fine against Englewood (Colo.)-based U. S. West was the biggest antitrust penalty ever levied by the Justice Dept. against one defendant in a civil case. "The size of the fine is large enough so that people will realize that this is a serious matter," says Connie K. Robinson, who heads the Justice Dept. unit that fined U. S. West. "We plan to continue vigorously enforcing this decree."

Industry critics say the case is a textbook example of why the Baby Bells shouldn't be treated as ordinary companies. They argue that the Bells' local monopolies make it possible for them to compete unfairly by controlling access to their captive local customers. The core charge in the latest case was that U. S. West promised the federal government a discount on access to its local customers if the government would also buy switching services from it rather than from AT&T, its erstwhile parent. The violation of rules against discriminatory pricing was an honest mistake, says U. S. West Executive Vice-President Charles M. Lillis, adding: "We wish like heck we hadn't done that."

That's a common reaction. Take BellSouth Corp.'s Southern Bell unit, which has been caught in a string of violations. Last year, hundreds of its employees wrote letters to North Carolina regulators urging approval of Caller I. D.--without identifying themselves as Southern Bell workers. Several employees said they were directed or urged to write the letters. The company says it was all a misunderstanding--and that it will restrict future letter-writing campaigns. And on Feb. 19, the company agreed to pay $4.86 million in Florida to settle charges that it shortchanged thousands of businesses and government agencies on pay-telephone commissions. It's also under scrutiny for failing to pay refunds for out-of-service phones.

PLAYING ON FEARS. The Baby Bells' aggressive tactics have been aimed at some vulnerable targets. Pacific Bell, Wisconsin Bell, and Southern Bell as well as Bell of Pennsylvania have all made refunds to customers under supervision from state regulators. Affidavits from former Wisconsin Bell customer-service representatives say they were instructed on how to play on the fears of unwell elderly people to get them to sign up for three-way calling at $3 a month--just in case they had to consult family members on going to the hospital. Wisconsin Bell says that those were isolated cases and rules have been tightened.

There's nothing wrong with clever marketing, of course. And even somewhat sharper practices can be remedied by the marketplace. But as Philip McClelland, an assistant state consumer advocate in Pennsylvania, says: "If you go to a car dealer, and you feel as if they are not being honest with you, you can always go to another car dealer who treats you more appropriately." Customers of local phone companies don't have that option. As long as that remains the case, the Baby Bells will be subject to extra-heavy scrutiny--no matter what the spin doctors say.


Has agreed to pay a record $10 million fine for discriminatory pricing

and other violations of the Bell System consent decree

NYNEX A federal grand jury has indicted Nynex on a criminal contempt charge

of providing computerized information services in violation of the consent decree. And Nynex has agreed to pay $1.4 million to the U.S. Treasury to settle charges that its purchasing arm overcharged New York Telephone and New England Telephone

BELL ATLANTIC Its Bell of Pennsylvania unit agreed to pay $42 million to

settle charges that it used deceptive practices to sell customers more services than they wanted

BELLSOUTH Its Southern Bell unit admitted employees sent more than 400

letters to North Carolina regulators without mentioning their affiliation. A low-level staff memo suggested they could identify themselves as pizzeria owners, teachers, or housing-project residents. The unit was fined $4.86 million in Florida for underpaying pay-phone commissions


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