The Virginian-Pilot
                            THE VIRGINIAN-PILOT  
              Copyright (c) 1996, Landmark Communications, Inc.

DATE: Tuesday, November 12, 1996            TAG: 9611120219
SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 
SERIES: The Communications Free-For-All 
SOURCE: BY DAVE MAYFIELD, STAFF WRITER 
                                            LENGTH:  143 lines

LOCAL PHONE SERVICE COULD BE TRANSFORMED IN ERA OF COMPETITION

In the industry, it's known as plain old telephone service.

POTS, for short. Comes in one flavor: vanilla. Delivered by one company: your local telephone monopoly.

For most of us in Hampton Roads, that's Bell Atlantic. For the rest: GTE.

That's all about to end.

In the new era of choices in telecommunications, it seems that everybody wants a shot at POTS.

No segment of the telephone industry stands to be more transformed by competition in the next several years than this biggest one of all: local-exchange telephone service.

In Virginia, more than a dozen challengers have been angling to get into the business. Nationwide, literally hundreds could pitch for a piece of the $90 billion industry over the next several years.

The competition couldn't come soon enough, says Bradley Stillman, telecommunications policy director of the Consumer Federation of America. The federation issued a report in September charging the nation's monopoly local-exchange providers with gouging consumers to the tune of $35 billion in excessive profits over the past decade.

``If this were a competitive market, these companies could not conduct their business this way for very long and hold onto customers,'' Stillman says.

Stillman may be stretching. But strangleholds on the ``local loop'' are widely viewed as the key barriers to a truly open phone-services market and all the benefits that go with competition - from lower prices to innovative new products.

Understandably, the local-exchange carriers aren't giving up their advantages without a fight.

In mid-October they convinced a federal appeals court in Kansas City, Mo., to suspend some federal rules intended to bring about competition in local services.

Meanwhile, Bell Atlantic notched a victory in Virginia last week. The State Corporation Commission said the Baby Bell could give far less-generous discounts to rivals that want to lease its network than the commission's own staff had recommended.

Long-distance giants such as AT&T and MCI were disappointed. They've been planning to break into local phone services in Virginia by ``rebranding'' Bell Atlantic's and GTE's services. Steep resale discounts are their best chance, they say, to amass the customers they'll need to eventually build local-exchange networks of their own in the state.

AT&T Vice President Wilma McCarey said Monday that in light of the commission's decision, her company will re-evaluate its plans to offer local service in Virginia in mid-1997.

But don't let the rhetoric throw you.

One way or another, industry experts say, AT&T and others will make a fight out of local service. It's too big a business to go unchallenged. And it's a key part of the one-stop bundle of services that all the communications supercarriers plan to deliver to consumers.

In Virginia, resellers will probably still take the first shot in local-exchange competition - sometime next year.

But Cox Communications Inc., the dominant Hampton Roads cable-TV provider, also plans to break into the business. And Cox's starting plan is different. It intends to utilize its own network of cable lines to move phone traffic.

Cox already offers some limited phone services to businesses. Barring unexpected hitches, it should offer a full range of local phone options to some Hampton Roads businesses next year, says Dana Coltrin, Cox's local phone manager. Cox plans to serve residential users as early as 1998.

One wild card in the coming competition is wireless phone networks. If companies like AT&T can't live with the resale terms they need from Bell Atlantic or GTE to compete, some analysts predict they will instead emphasize their cellular or cellular-like networks as alternatives to traditional local service.

Will we be better off with all these extra choices?

From a pricing standpoint, yes, says Bill Stake, another AT&T vice president. His company has been out of the local phone business since its 1984 breakup that created the Baby Bells.

``Competition is like a heat-seeking missile,'' Stake says. ``It looks first for areas where there's . . . high margins.'' And Stake says the profit margins in local service are extraordinarily high, particularly for custom-calling features like Caller ID, call waiting and call forwarding.

But not every customer may fare as well as the local-exchange battle unfolds.

Some consumer advocates fear that in the providers' drive to set prices of services based on the true cost to deliver them, some phone users at the lower end of the income scale or in rural areas will lose out.

Telephone companies say they now provide service to many of these customers at a loss. They only can afford to, they say, because federal regulators permit them to recoup the losses with subsidies from better-heeled customers - basically charging these other users more.

But in the competitive arena, rivals will do most anything to steal away premium customers. So the local carriers say they won't be able to continue this practice of robbing Peter to pay Paul - without some outside help.

Lawmakers and regulators hope to solve the problem by setting up funds for so-called ``universal service.'' Under the envisioned scenario, all providers would pay a portion of their revenues to help subsidize service to the bottom tier.

It may be years before the issue is ironed out, however. Among other things, federal regulators are struggling to define what features should be included in universal service. A joint federal-state board recommended last week, for instance, that cheap access to the global Internet computer network be guaranteed for libraries and schools.

That's just the beginning of thorny issues. Another likely problem: keeping local telephone networks reliable. This will be tougher to ensure in an environment where potentially hundreds of companies are vying for business.

``I cringe at the thought that somebody who has had a heart attack might have a delay on his dial tone and can't get through to 911,'' says Kathleen Cummings, a telecommunications specialist with Virginia's State Corporation Commission.

To avoid the problem, state regulators say they will require new local-exchange providers to live up to the same strict standards now imposed on the existing carriers.

But Henry J. Kofron, manager of Bell Atlantic's Eastern Virginia network operations center, says in cases where two competing local phone providers are interconnecting, ``it's going to be a lot more difficult to trouble-shoot problems.''

``The ABC company may say, `The trouble's not here.' We'll be saying, `The trouble is not here.' But somewhere along the line, obviously there's trouble,'' Kofron says.

A particular challenge for the resellers, he says, will be leasing enough capacity to keep up with demand. On busy calling days, it's already hard to get calls through using some long-distance resellers because these carriers haven't leased thick enough slices of the mother pipeline.

In Richmond, regulators such as Cummings will bear most of the responsibility for sorting through such issues. It's their job to assure that the transition to competition in the local loop goes smoothly.

The corporation commission must resolve by year's end a number of remaining differences between the local phone incumbents and their would-be challengers.

The two sides have differed over seemingly trivial questions, such as whether Bell Atlantic technicians will have to leave behind sales brochures for AT&T during service calls.

And they're at odds over weighty issues. Just one: How much should incumbent providers be reimbursed for investing in technology that will let customers keep their phone numbers even when they switch carriers?

With so many disputes to be resolved, challengers such as AT&T and Cox will do well to remain patient.

But they may need the extra time to figure out ways to convince customers like Jo Watts of Virginia Beach to even think about switching.

``If somebody's going to offer me something more for less money, that's something I would consider,'' she says.

But right now she likes her service from Bell Atlantic just fine, Watts says: relentlessly unspectacular, but reliable. ``It's something I never even have to think about.'' ILLUSTRATION: Graphic by ROBERT D. VOROS by CNB