Local Toll Calls: Bracing For A Free For All

Regulators in 35 states allow long-distance carriers, such as AT&T, MCI, and Sprint, to compete for the lucrative toll traffic of local phone companies. The result? In most places, not much. Local carriers still handle the vast majority of medium-distance toll calls, such as those between San Francisco and San Jose. It added up to $13.3 billion in revenues and big profits for local phone companies last year.

But look out. One big reason the Baby Bells and other local phone companies have kept most of the medium-distance toll market is that callers must dial a five-digit code to route the call via a different carrier. Most people don't bother. In two or three years, however, new technology, known as Signaling System 7, will allow customers to choose an alternate medium-distance carrier as easily as they now choose long-distance carriers. Godlman, Sachs & Co. analyst Robert Morris figures that could slice what might have been 10% annual traffic-volume growth for the Bells down to single digits. And of course, competition should cut prices.

PREVIEW. How bad will it be? San Francisco-based Pacific Telesis Group's Pacific Bell subsidiary may soon provide an answer, because California regulators are expected to open it to competition by next summer. Pac Bell customers will still have to dial an access code each time they want to use an alternate carrier. But competition is expected to be cutthroat in the massive California market - a preview of what could happen across the nation. Analysts figure that in two or three years, consumers everywhere may be given the option of designating alternate carriers for medium distance, just as they do for long distance.

Pacific Telesis could suffer disproportionate damage from such competition because toll calls account for 21% of its revenue, vs. under 14% at most other local phone companies. Moreover, the California Public Utilities Commission has made it easy for new competitors by setting Pac Bell's toll-call rates artificially high to subsidize some of the lowest rates for basic monthly service in the nation. A five-minute, full price daytime call from San Francisco to New York City costs $1.25 via AT&T, while Pac Bell charges $1.34 to call San Jose - 45 miles away.

Already, such pricing has big customers hanging up on Pac Bell. It handled $2.2 billion worth of toll calls last year but claims that AT&T, MCI, and other carriers grabbed $300 million worth, mainly by letting customers piggyback some voice calls onto leased lines.

READY TO BOLT. More will surely follow once toll competition spreads: California Medical Review Inc., a nonprofit medicare-service monitor in San Francisco, spends 55% of its monthly phone bill on toll calls. Office-services manager Tem E. Mills says that he is eager to shop for a low-price alternative.

To give itself a fighting chance, Pac Bell wants to cut toll rates 30% while asking to raise monthly residential fees and business rates by 60% and 30%, respectively. California regulators seem unlikely to go that far.

So Pac Bell could end up in a fix, says analyst Ronald Altman of Furman Selz Inc. He figures that if it gets only a 15% toll-rate decrease, its toll revenues could be flat for the next decade instead of growing 3% a year. That, warnes Telesis Chairman Sam L. Ginn, "could injure us financially."

Pacific Telesis isn't taking the threat lying down. It's asking for interim toll-rate reductions, which could be approved within two weeks since they're not coupled with politically unpalatable increases in local rates. The company has also improved service, reducing by two-thirds, to 0 days, the time it takes to install a high-volume circuit for business. Finally, it's spending $30 million on ads to convince customers that Pac Bell offers better service.

"Whether Pac Bell succeeds or fails is in their own hands," says PUC staff supervisor C. John Chan. "That's what competition is all about." The other Baby Bells will be watching.