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Call Forward or Call Waiting? Politicians can move ahead or put the debate on hold

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More than a decade after Illinois regulators led the nation in efforts to open local phone service to competition, the future of the $3.6 billion market is back in the hands of state legislators charged with rewriting Illinois' telecommunications act before it expires this June.

The deceivingly arcane details of a reshaped law would have bottom-line impact on the cost of local phone service, as well as on the profits of dozens of phone companies.

With that in mind, Ameritech, the dominant local provider, says it needs fewer regulatory restrictions if it is to continue making investments in the state. Meanwhile, rivals led by such long distance companies as AT&T Corp. say they may not be able to afford to do business here for much longer without more regulations and tougher fines on Ameritech's alleged anticompetitive behavior.

Experts say the outcome of this debate could determine whether Illinois regains the edge in moving from a monopoly-based to a market-driven local phone industry. "It could be very pace-setting," says Charlotte TerKeurst, a former manager of the Illinois Commerce Commission's telecommunications division. "If we have good legislation, it could allow us to come in and do some creative things that would be very beneficial to the nation."

Of course, the definition of a beneficial groundbreaking move depends largely on who's doing the talking. TerKeurst, who now works as a consultant for some of Ameritech's competitors, says she envisions legislation that would give Internet service providers faster resolution of problems they encounter in getting access to the local phone network. If this occurs, it would be easier for some companies to offer consumers more technologically advanced choices, she says.

By contrast, Ameritech would like to see Illinois set a precedent by requiring cable companies to give local phone companies access to their networks, says company spokesman Michael King. Under this scenario, King says, consumers would gain by having more opportunity to consolidate their telecommunication services - from phones to television and computer lines - with one company.

If legislators rewrite the regulations this year, it won't be the first time Illinois stepped ahead of other states. Even before the 1996 federal telecommunications act swung open the doors of local and long distance markets to all competitors, Illinois already was exploring ways to bring a market influence into local telephone service. In fact, Illinois regulators were so experienced in opening up markets that the Federal Communications Commission borrowed Illinois Commerce Commission staff to help develop its rules.

As far back as 1989, the state commission allowed a non-monopoly phone company to provide direct local business service in the Chicago area. In 1994, the commission also moved to take some of the controls off Ameritech. It changed the method of setting phone rates from one known as "rate of return," which capped the company's profits, to a formula based on inflation known as alternative regulation. The new system was designed to encourage technology investments.

While the history of the state's moves toward competition has been lengthy, its effectiveness is in dispute. Ameritech, bought in 1999 by Texas-based SBC Communications Inc., contends rivals serve about 19 percent of the 7 million lines in its Illinois territory, which is concentrated in the Chicago metropolitan area. Ameritech says the company also is losing thousands of business customers monthly to competitors not saddled with cumbersome regulatory restrictions. For their part, competitors contend they control less, or about 3 percent of Illinois' local phone market. The discrepancy stems from the difficulty in estimating how many lines can be tapped into any given system.

Still, no matter how the lines are counted, many say true competition has been slow in arriving nationwide, though it has been five years since the federal telecommunications act invited competition. The aim was lofty: to usher in the Information Age by encouraging market competition in the local and long distance phone markets. Deregulation was designed to bring lower prices and more technology to consumers. At the same time, the federal act left the states to grapple with many of the thorny details on how to guide competition locally in an industry dominated for decades by one player. "A lot of issues that have to be decided before you can have competition were left unresolved by the act," says Sam Peltzman, an economics professor at the University of Chicago's Graduate School of Business.

The federal act essentially set up a carrot and stick approach to the markets. Local phone companies were required to prove they had opened their grids to competitors before they could gain access to the long distance market.

Incumbent carriers, who inherited the local regional networks in the aftermath of the breakup of American Telephone & Telegraph Co. in 1984, must comply with a 14-point federal checklist to win access to the long distance market. For example, they must prove they have the necessary databases, personnel and technology to provide competitors timely and adequate links into their systems.

To date, the federal commission has declared only four states - New York, Texas, Oklahoma and Kansas - competitive enough to permit local carriers into the long distance market, says Mike Balmoris, a federal commission spokesman. 

In Illinois, Ameritech withdrew its application to the state commission, which also must give its blessing, after the company's affiliate in Michigan was denied access by federal regulators. In 1997, the federal commission acknowledged that Ameritech had made progress in opening its network in Michigan but still needed to work on developing its operating support system, which switches lines over to competitors.

Though Ameritech hasn't yet met the tough definitions for a competitive market in Illinois, the company says it has been working to improve its systems. In a February letter to the commission, it outlined plans to reapply for approval to get into the long distance market. This move - not more regulation - is the key to more competition from Ameritech's perspective. Ameritech's parent company, SBC Communications, has already seen prices drop in New York and Texas after the feds allowed it to offer long distance services. King says, because competitors reduced rates to compete with Ameritech.

But another obstacle to a free market is the physical setup of the local network. Existing local carriers control that network and the mechanical facilities that connect into homes and businesses. Most competitors entering the market need to use Ameritech's existing lines because it's so expensive to lay new wires. The terms by which dominant phone companies lease their lines to competitors is a controversial issue that the U.S. Supreme Court is set to take up later this year.

But some question whether even the court can break the logjam that now exists between incumbent carriers and rivals. Advances in wireless technology that will offer true competition to the local carriers may hold the most promise for opening up the industry, says economics professor Peltzman.

Other experts, including Robert Rosenberg, president of Insight Research Corp, a New Jersey-based telecommunications consultant, say it's difficult to write regulations with enough teeth to essentially telling an organization to go out and feed its competitors," Rosenberg says.

Such attitudes haven't stopped competitors from seeking to advance their cases through new legislation here in Illinois.

Ameritech's competitors, an expansive group that includes tiny upstarts, cable companies and the formidable AT&T, are not always united in their views. But most have put their support behind legislation co-sponsored by state Sen. Kirk Dillard, a Hinsdale Republican, Sen. Wendell Jones, a Palatine Republican, and Sen. Patrick Welch, a Peru Democrat.

That proposal calls for strengthening the power of the Illinois commission to combat bad service and anticompetitive behavior by incumbent phone carriers. It does this by giving commissioners the power to levy penalties of as much as $1 million a day. A separate bill, sponsored by Sen. Carol Ronen, a Chicago Democrat, proposes to give the commission authority to split the company into a wholesale unit that leases the equipment and a retail unit that provides local phone service.

Many competitors hope a rewrite will help them gain access to the phone grid on their terms. Although the commerce commission has already issued various orders regarding how Ameritech is to allow other companies to use its network, competitors say that company has often dragged its feet in responding to them.

For example, from 1995 through 1999, Ameritech did not file tariffs containing terms and conditions that complied with a commission order stating that access charges should go to competitors that are leasing the local phone line, says Beth Bosch, a commission spokeswoman. The charges are an important source of revenue paid by long distance phone companies to the local phone company for the privilege of connecting calls into the homes and businesses that make and receive them. 

Ameritech has since been allowed to credit the competitors for the charges while it works to develop technology that will enable competitors to directly receive the money, the commission says. Still, Ameritech's rivals want the General Assembly to give the commission more power to enforce decisions it makes to help open the market.

"Delays are devastating to the existence of these [competitors]," says Michael Ward, vice president of governmental affairs at Data Net Systems, a Buffalo-Grove-based company seeking to enter the local phone market.

Ameritech has a different vision of a new telecom law. Central to its proposal, outlined in a bill co-sponsored by Sen. Steve Rauschenberger, an Elgin Republican, and Denny Jacobs, a Democrat from East Moline, is Ameritech's desire to be freed from regulation that its competitors don't face.

"In today's environment, all providers face intensive competition in the Chicago area," says Jim Shelley, president of external affairs for Ameritech's five-state region that includes Illinois. "All providers without exception should operate with the same requirement as any other operator, including Ameritech."

The company would like the rewrite to remove the commission's ability to regulate the lucrative local phone service to businesses, a service that Ameritech says is now competitive. The company acknowledges there is not wide-spread competition in local residential service and proposes to establish a two-year rate freeze on basic residential service while removing regulation from so-called optional services, such as call waiting.

If the commission's level of oversight is not lessened, Shelley warns, there would be dire consequences on the level of investment Ameritech is willing to make in the state.

Shelley told a Senate subcommittee in March that, for example, over-regulation prompted the company to put on hold an initiative designed to increase the number of customers that can access high-speed data services in Illinois. That decision was made after a commission ruling required Ameritech to allow competitors access to its new system, part of what the company calls Project Pronto. "It's this kind of advanced telecom structure that will not be deployed here," Shelley said.

While legislators consider the rewrite this spring, regulators at the commission will grapple with whether to continue the controversial system of alternative regulation under which Ameritech now operates. The system removed the cap on the company's earnings while requiring Ameritech to reduce residential phone prices and invest in its network. But the system's success has been questioned over the past year as the company has come under fire for its poor service quality.

These issues are under discussion in separate arenas, but they are intrinsically interconnected. Indeed, the state's telecom act expires one month before the alternative regulation system expires and that question would become moot if Ameritech's proposal to free itself from commission oversight becomes law. 

That possibility is of great concern to consumer advocates, including those at the Citizens Utility Board, who say Ameritech's legislative proposal would amount to an end-run around the current alternative regulation rate-making proceeding before the commission. That group has called for a $1 billion reduction in Ameritech's rates after experts it hired showed that current rates were too high, says Jonathan Goldman, director of public policy and government affairs at CUB. The proposed freeze of rates that are already too high is a "disingenuous" offer, Goldman says.

The rewrite effort comes a year after Ameritech was called on the carpet and fined $34 million for delays in service repairs and new installations. In addition, since September, the company has paid a total of $10.6 million for failure to provide adequate wholesale services to its competitors, the commerce commission says. Though the company maintains it has hired more than 1,000 technicians and is making improvements, some regulators suggest that fines need to be raised because it's currently less expensive for Ameritech to pay the fines than it is to fix entrenched problems.

"There's something wrong when the bureau of the budget calls the commission every month to see how much Ameritech is going to pay in fines," says Edward Hurley, one of the commission's five members. Higher fines might encourage Ameritech to comply with service standards and open its network, Hurley says. However, he says, the commission is developing a formal proposal to the legislature outlining its wishes for the telecom act's rewrite.

With so much at stake, it's not surprising the issue has spawned more than a dozen bills and drawn more lobbyists than any issue since electric deregulation. Because it's so contentious, some suggest politicians may simply extend the existing law. With elections set for next year, this would effectively shelve the matter until 2003.

A recent move by commission staff to recommend that Ameritech continue under the current alternative regulation gives credence to the idea that the status quo may simply be maintained for now, says Dan Miller, a former commission chairman who is now the business editor of the Chicago Sun-Times. By making changes, legislators will risk angering either side and endangering campaign contributions. Miller says.

"The leadership down there is going to look at this as a no-win right now."

Still, there's at least one fact that all sides seem to agree on: The need for -action on the law this spring is crucial from a business standpoint. Ameritech says no action on the bill will mean an Ameritech that will essentially be downsized by the CUB proposal to cut its rates. Meanwhile, AT&T has "bled money" trying to get into the market, and it won't continue to do so if the rewrite doesn't provide some help, says Greg Busch, a lobbyist for that company.

If there is no action, it's not for lack of preparation. Legislators have been boning up at committee hearings for the past year and a half. And state Sen. Dave Sullivan, a Park Ridge Republican and chairman of the Senate subcommittee focusing on the rewrite, believes legislators are well aware of the lessons learned by their counterparts in Michigan in 1995.

That's when Michigan legislators loosened the reins of regulation before enough competitors had gained a foothold in the market, says Ronan Patterson, assistant to the chairman of the Michigan Public Service Commission. Last year, disillusioned lawmakers tightened controls again by raising fines and that state has already seen more competitors enter the market, Patterson says.

Sullivan hopes Illinois' legislators are ready to act this year to move the state ahead - once again. "If you're a leader in public policy, you'll have better access to technology and better options for consumers," he says. "Two years is a lifetime in this industry. We don't want the telecommunications act to hold us back." 

Maura Webber is a Chicago-based free-lance writer. She previously covered energy companies and electric deregulation issues for Bloomberg News.

 

IN MEMORY OF MIKE HUDSON

Michael H. Hudson was vice president of public affairs at Illinois Tool Works Inc. and chairman of the Illinois Issues Board at the time of his death in 1992.

In his memory, fellow board members established an annual feature to examine a significant economic trend in Illinois and its relationship to public policy. 

This assessment of the state's move toward telecommunications deregulation, and our examination of the politics of state policy-makers' efforts to rewrite Illinois' telecommunications law (see April, page 17), are part of that series.

Both features were funded by a donor who asked to remain anonymous.

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