WisBusiness: SBC’s rate increase request sparks ad war

By Brian E. Clark

MADISON – Phone rates in the Badger State will surely go up, competition will decrease and service will diminish – especially to small companies, say critics of a proposal by SBC Communications Inc. to nearly double the wholesale price it charges competitors to lease its lines.

Moreover, these opponents say, the request is unjustified because the cost of operating the so-called “last mile” of phone wire to homes and businesses is going down.

Not so, say representatives of SBC – one of the nation’s four regional phone companies – who argue that their company is being forced to subsidize the competition. They contend that already keen phone competition from wireless, cable and Internet providers will hold down charges – even if the wholesale rates are increased.

The controversy has heated up the airways in recent weeks, with both sides buying numerous ads – at costs running into the hundreds of thousands of dollars – to take their case to the public. In addition, the editorial pages of the state’s newspapers and web sites have been filled with opinion pieces backing or opposing SBC’s request.

TDS said it is being outspent three-to-one on adds.

“We went up on September 6th and they went up the 7th with TV, radio, website and print,” said spokesman Drew Petersen.

“We only did two TV stations and AM radio, they did the entire market. We did no print, they did print in both papers 4 days out of every week.”

But SBC officials disupted those figures and blamed TDS for starting the ad campaigns.

“TDS Metrocom is the company that introduced political-style attack ads for the first time ever in a quasi-judicial regulatory telecom proceeding in Wisconsin — a new low,” said SBC spokesman Jeff Bentoff.

“TDS Metrocom ran more TV ads then SBC Wisconsin and started running TV ads before SBC Wisconsin. The TDS estimates are totally unreliable and unbelievable.

“What’s most telling is the negative tone of the TDS ads — the ads are a battle of TDS negative ads vs. SBC public policy, and of TDS paid actors vs. SBC union workers. TDS should stick to selling phone service or go into the political ad business — combining the two doesn’t serve Wisconsin consumers well.”

Wisconsin’s three-person Public Service Commission will take up this often-confusing pricing question at 10:30 a.m. Thursday morning in its Madison headquarters at 610 N. Whitney Way. The panel is expected to indicate its leanings, but the exact rates may not be known until Oct. 13. That’s when state law requires it to publish a final decision on what SBC may charge to lease wires that lead to homes and businesses.

Until 2004, delays caused the PSC to sometimes take years to reach decisions. But regulatory reform passed by the state Legislature this past session limited to six months the time the commission and its staff now has to review thousands of pages of submissions and testimony by expert witnesses.

Utility commissions in Illinois, Michigan, Indiana and California all recently granted SBC requests to raise wholesale rates. In response, some companies increased their prices or said they would stop seeking new customers.

Federal law enacted in 1996 required SBC and other Baby Bells – the offspring of the old AT&T monopoly – to release control over local phone markets in exchange for selling long-distance service.

In the past few years, competing phone companies have grabbed nearly a third of all customers in the state. Those rivals say the low wholesale rates are an important part of the reason they have gained market share.

Petersen, the TDS spokesman, said the wholesale rate competitors pay now – roughly $10 – is fair and should be left as it is. He said SBC asked for the rate increase – which would boost the average charge to about $19 – to price competitors out of the market.

Petersen said TDS has about 250,000 customers in Wisconsin, split evenly between businesses and homes. By contrast, SBC has about 3 million customers in the state.

He said his company has built its business model on the current rate and over the past six years invested more than $400 million in infrastructure.

“We are still not making any money because of our investments,” he said. “If SBC gets what it’s asking, we would not become profitable until 2009 instead of 2005. And who knows what price increases SBC would ask for between now and then.

“We are hoping that the PSC will have the courage to hold the line, not buy into SBC’s arguments and keep competition alive for Wisconsin’s phone service. If it doesn’t, we may well leave residential phone service.”

Petersen also said the argument that wireless, cable or Internet phone services are reasonable alternatives for small businesses is flawed.

“Wireless is not reliable,” he said. “What business do you know that would give up its land lines for wireless? What three-phone insurance agency has cable? And voice over Internet is just too new for most people.”

Petersen also said that SBC would have little incentive to invest in infrastructure if it gets a significant rate increase.

“If the competition is gone, why would they want to bulk up staff and make investments?” he asked. “They wouldn’t have to.”

Bentoff, SBC’s spokesman, called Petersen’s forecasts of higher prices and less competition “scare tactics” designed to pressure the PSC.

“What this comes down to is ending government-mandated subsidies,” he said. “Wholesale rates have been set below SBC Wisconsin’s rates and it’s only fair to change them to what it costs to operate these lines.”

When rates SBC can charge for building and maintaining its system are kept down, he said competitors have no incentive to invest put in their own “last mile” of lines to new subdivisions because they know they can use SBC’s lines at “below-cost rates.”

Bentoff said Wisconsin’s wholesale phone rates are now one of the five lowest in the country. He estimated that SBC is losing $7 to $9 for each line it leases to a competitor.

“Just look at what’s going on in 45 other states,” he said.

“Competitive prices are good for consumers. Around the country, it’s been shown that the retail rates companies charge are unrelated to the wholesale cost. It’s competition that matters. Consumers will have choices no matter what TDS threatens to do.”

Steven Titch, a Chicago-based telecommunications industry expert, said he believes the SBC request is justified.

But Titch, who works Chicago’s Heartland Institute, said he did not think the PSC would grant the entire increase.

The free-market advocate said he too believes there would be more incentive for companies to build new networks if rates are raised to more realistic levels.

“Really, this whole battle is about price controls that give a break for a subsector of the phone industry in order to create resale competition,” he said.

“These are nothing more than resold SBC lines,” he said. “Rates now are so low that it keeps regional phone companies from investing in their own networks.

“And I just don’t believe that it will eliminate competition, though TDS may have to make some changes in its business model if it is based on artificially low, non-market rates.”

And while retail prices for some phone service increased after other states’ increased wholesale rate increases earlier this year, he said that did not spark overall price hikes.

But Curt Pawlisch, a Madison lawyer with Wisconsin CALLS, a group of consumer groups and rival phone companies, said he is convinced competitors will raise rates or even leave the market if wholesale rates are raised.

Wisconsin CALLS includes AARP, the Wisconsin Merchants Association, TDS, AT&T, Wisconsin Apartment Owners Association and the Citizens Utility Board, among others.

“The PSC should reject SBC’s petition,” he said. “The commission just a year ago set SBC’s rates. What SBC is really trying to do is squeeze competitors out of the market. That would not be good for consumers.”