By DON SEVENER

Telecommunications: the search for perfect connections

It's hard to imagine an American home without a telephone. This technologic gadget connects us with friends and relatives down the street or half a world away, streamlines our businesses, summons lifesaving help. The current revolution in telecommunications, though, is dramatically altering the telephone as we know it today. Housewives will be able to do their banking at the kitchen table; students will be able to do research in their dorm rooms; executives will be able to conduct business meetings without leaving their offices. Such advances, however, are not without a pricetag. . . .

WE STAND at an historical threshold, about to cross into a telecommunications future almost beyond imagination. Behind us lies the Model T of telephone service: a paternalistic phone company there at our bidding to answer our needs or complaints, that familiar mainstay of millions of households — the black, rotary-dial telephone — and cheap, unlimited local calling.

Ahead is the space shuttle of telecommunications: fancy gadgetry that can connect us with any place on the globe at the touch of a single button, a phone company that charges for house calls and around-town telephone rates about to head into orbit. It promises to be a future both exciting and perplexing, rewarding for some and costly for others, offering a welcome universe of options or a confusing array of choices. Above all, it promises relentless and rapid changes.

Charles Stalon, an Illinois Commerce Commissioner, is following the revolution closely. He sees a future that many of us may find hard to imagine, attached as we are to what we now have. Take rates, for example.

"Under our present long-distance rate structure," says Stalon, "the farther you are from where you're calling, the higher the price. In a world of satellites, that's absurd. The whole system built around the use of wires is outdated. If you're beaming calls off a satellite 25,000 miles in the sky, it doesn't cost any more for a call from Chicago to London than it costs for a call from north Chicago to south Chicago."

Advances in technology are responsible, of course. But those were hastened and abetted by changes in the regulations that govern the industry, and consumers are now faced with an awesome number of choices and options in their searches for perfect connections. Things, of course, have not always been this way.

The modern telephone system — a product of private innovation, congressional fiat, regulatory directive and court rulings — began to take shape after World War I when the burgeoning Bell System assumed the lead in coordinating new technologies and systematic planning to integrate a scattered industry into a national network.

As the scope of the system became increasingly national, the need for federal intervention and oversight became increasingly apparent. This necessity fostered the Communications Act of 1934, which established federal regulatory authority over interstate communications and, equally important, moved the nation toward the guiding goal of national policy: universal service. Everyone, Congress strongly urged, should have a telephone.

That principle shaped communications development for decades, including the 1941 watershed decision of the Federal Communications Commission (FCC) dictating uniform rates for long-distance toll calls. This action mandated that the cost of service would not be a factor in the pricing of service. Rural, remote customers who were more costly to serve would pay no more for long-distance service than city dwellers.

To implement that policy, the FCC created a complex formula — known as separations and settlements process — for determining who would pay for what. Basically, the process insured that revenues from some services — mostly toll calls and terminal equipment — would subsidize the cost of the local telephone exchange, thereby keeping the cost of being connected to the network affordable for a universe of users. This was efficient, in its way, but it left consumers with few choices and kept unregulated competitors to the Bell System out of the action.

They were out, that is, until Thomas Carter, a Texas entrepreneur, challenged the system. Because of restrictions against hooking "foreign attachments," that is, equipment not produced by phone companies, to the publicly protected telecommunications network, Carter could not market his automatic telephone answering devices. Carter pushed the matter, and in the 1968 Carterfone decision, the FCC ruled that phone company tariffs barring use of nonphone company equipment were illegal.

Saying customers should be free to choose the equipment they wanted to connect to the telephone network, the FCC planted the first seeds of competition, and a number of new companies entered the field. Carrying its deregulation fervor a step further, the FCC voted 4-3 a year later to approve the application of Microwave Communications Inc. (MCI), to establish a system of microwave towers between St. Louis and Chicago for high-volume, specialized long-distance service, and the real revolution began.

The consumers' choice

In 1974, the U.S. Justice Department joined the fray with an antitrust suit charging American Telephone & Telegraph Co. (AT&T) and its Western Electric and Bell Laboratories subsidiaries with monopolization and conspiracy to monopolize telecommunications service and equipment. The end of the monopoly was certain when the Justice Department and AT&T on January 8, 1982, settled the eight-year-old litigation with an agreement calling for the telecommunications giant to give up its 22 operating companies — Illinois Bell Telephone Co. among them — while retaining Bell Labs, Western Electric and the Long Lines Department that furnishes interstate toll services.

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As in most revolutions, the impact on noncombatants will be mixed. "As a result of the coming changes, some telecommunications customers will gain and some customers will lose," says Stalon. "I believe the gains will far outweigh the losses."

Competition, new technology and, with the AT&T divestiture, increasing deregulation will combine to bring new freedom of choice to consumers of an

As technology has brought down the costs of providing long- distance service, competition and deregulation promise to force down the prices phone companies charge for it

industry that for decades has been a tightly regulated, end-to-end monopoly. Equipment, for example, has come a long way since Carterfone, and telephones are available in a dazzling collection of shapes, sizes and styles, which offer a wide range of options and services: telephones that dial an entire phone number, area code and all, at the touch of a single button, or interrupt your conversation to signal another incoming call, or track you down when you're away from home. All have become commonplace.

The technology, in fact, may be outpacing regulators' ability to cope with it.

Stalon notes the state commerce commission has been "pushing hard" for communities to install 911 systems allowing quick connection with police, fire or medical aid. "Technology may have made that unnecessary. It may be cheaper for a city simply to mandate all citizens have phones with pre-dialed emergency numbers instead of expensive 911 systems," he says.

New technologies will also bring vast new services into homes and businesses over phone lines. "We will be the gateway to the information age," boasts John A. Koten, vice president of corporate communications for Illinois Bell. "When you consider the average phone line is used only 30 minutes a day, the possibilities for increased usage are really dramatic." Country doctors can tap into medical research centers for remote diagnoses, students can obtain information from the public library without leaving their television sets, parents can bank, shop and even "visit" the office from their home computers. "The possibilities are so unlimited, you can't even imagine all the uses," Koten says.

But the most immediate impact on the greatest number of people will be on what they pay for what they get. Here's where "right now" will soon become the "good old days."

By far the biggest gainers will be the big users of long-distance service. One reason is that a rising number of upstart companies have followed MCI in challenging the grip of AT&T , General Telephone Co. (GTE) and other independent firms for shares of the longdistance market. This free-for-all environment and new satellite uses and capacities can be expected to reduce prices and expand services to bring about the situation Stalon anticipates: intercontinental calls becoming as cheap as interurban ones. In Chicago, for instance, AT&T has half a dozen competitors underselling it by the minute to major cities in every part of the country. Satellites and microwave systems, already in use, offer potential for efficiency and economy undreamed of even a few years ago.

The consumers' charged

As technology has brought down the costs of providing long-distance service, competition and deregulation promise to force down the prices phone companies charge for it. For the Bell System, divestiture will free AT&T and other presently regulated long-distance carriers from most of the regulatory chains that have bound them to a system of subsidizing local service with revenues — about $7 billion — from toll calls. For customers of Ma Bell and 50 other telephone utilities in Illinois, long-distance rates will fall, although rates for local calls may be less stable than they are now. All this is the result of the demise of the system of separations and settlements, that process devised 40 years ago to promote the goal of a phone in every home, an objective largely achieved today.

"This anachronism," as Stalon calls it, "whose existence requires the nation to overprice many, probably most, toll services. . .has now, like an aging Eskimo, been put on an icecake and sent to sea. Its foundation will slowly dissolve."

Good riddance, says Joe Gillan, senior economist for the Illinois Commerce Commission. The whole thing reminds him of the Golden Gate Bridge. The telephone pricing system in place for decades, Gillan says, has been "like charging for crossing the bridge by the distance you were going to drive. If you were going to Oregon, you paid more than if you were just going to the other side. That's completely irrational."

Now the system is being turned upside down, and the blessings will be mixed indeed. By next January, the FCC decreed recently, everyone is going to start paying for having access to Oregon whether they use the bridge or not because the federal regulators ruled consumers will have to pay a monthly surcharge on their phone bills for the privilege of being plugged into the long-distance toll networks. Best estimates place the cost to consumers at about $2 or $3 a month next year, an amount expected to gradually rise to nearly $9 by 1991.

Obviously some will gain from increased competition and deregulation, and others clearly will not. "The eggs have been scrambled," Stalon says. "The subsidies are dying." And laid to rest with them will be cheap local phone service.

"If there are to be losers in this whole process," Stalon suggests, "they will probably be in the [rural, sparsely populated] southern part of the state — people whose long-distance bill reductions will not be great enough to offset increases in their local bills. There seems to be no way to avoid substantial increases in local exchange rates. The only thing we can hope to do is moderate those increases with sensitive pricing."

The Illinois Commerce Commission recently took a major stride down that path when it granted the request of GTE to implement a system of time-and-distance pricing to replace flat rates for local service in certain exchanges. Such an approach represents a dramatic departure for customers long accustomed to paying a set monthly fee for unlimited local calling. Under the GTE plan, customers are charged a monthly access fee (about half the existing charge) and then pay by the call, the time and the distance.

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Predictably, the early draftees to the pricing revolution in most of the affected GTE communities were, at best, wary and, at worst, aghast. Willy Holton of Southern Counties Action Movement, a Herrin-based consumer organization, thought the proposal was like "having an arcade game in your living room with Space Invaders creeping toward your wallet or Pac Man eating up your pennies."

Charles Stalon, member, Illinois Commerce Commission

But both the utility and the commerce commission staff argued the new rate structure — called usage sensitive service (USS) by GTE and known as local measured service by others — was the fairest way to charge customers, the only way to protect the principle of universal service and the best way for most to get cheaper phone bills. "Today's flat rates force low-use callers to subsidize heavy telephone users," GTE contends. "Only 20 percent of customers make 45 percent of all local calls and 50 percent make 80 percent of the [local] calls."

GTE found some of its customers use the telephone as little as 30 minutes a month while others talk for three hours a day. It's only fair, the company reasons, "that those who make the most calls pay more and those who make the fewest calls pay less."

In support of this new arrangement, GTE cited for the commission an independent study of experimental usage pricing in three exchanges as evidence most would pay less. Sixty percent of customers in Tuscola, Clinton and Jacksonville enjoyed lower bills under measured pricing, the Opinion Research Corp. study found.

The study also suggested elderly and low-income users did not demonstrate calling habits different from the general populace and therefore would be as likely to experience savings as anyone.

Just as important, Illinois Commerce Commission economists claim, is that measured pricing may be the best means to help ensure continued access to the telephone network at reasonable rates in light of enormous increases in flat rates over the next few years as deregulation takes hold. Lowered charges for access to the network, says commission economist O.D. Fulp Jr., "will enhance, if not guarantee, the ability of all customers to reach the local exchange. In my opinion, USS will definitely not harm the goal of universal service, and in all likelihood, expand this goal if usage is priced properly."

Nevertheless, customers in the guinea pig communities were apprehensive when the experiment began six years ago. Opinion Research's initial survey of consumers in the test exchanges — taken in advance of measured pricing — found 76 percent favoring flat rates over charges that would fluctuate with use. Three years later — after a dual-billing period comparing charges under each pricing method, several months of actual usage pricing and even a rate increase — opinions had shifted dramatically. Those preferring flat rates were outnumbered by the 50 percent favoring measured pricing, and the number calling the new system fairer was even greater than those who preferred it. "Initially, people hated it," says Michael Hasten, former Illinois Commerce Commission chairman and now

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Michael Hasten, former chairman, Illinois Commerce Commission

a telecommunications consultant to Gov. James R. Thompson. "Now," he adds, "you couldn't take it away from them."

Convinced that consumers in the nine exchanges GTE proposed to add to the new pricing scheme would become equally fond of it, the commission told GTE to go ahead with its measured pricing plan, although it told the company to go slow. Recognizing many consumers were genuinely fearful of the unknown billing scheme and that customer acceptance was critical to heading off possible legislative bans on measured pricing, the commission opted for a measured approach to implementing it. It clamped a ceiling on monthly bills and gave consumers a year's reprieve — 12 months of dual billing beginning March 1983 for customers to adjust calling patterns before the new rate design takes effect. That take-it-easy approach did not reflect doubts by the commission about the wisdom of its course, but rather a concern about a fundamental issue in any peaceful revolution: when do you go full speed ahead and when do you apply the brakes?

Although the pace of the telecommunications upheaval is largely beyond the control of any single state regulatory agency, the Illinois Commerce Commission — at least under Hasten — generally chose to ease consumers into the new environment. Hasten was emphatic on the need to move slowly toward USS pricing: "This is a change, and a significant one, and customer acceptance and understanding must precede all else." And Hasten voiced similar caution about increasing charges for installation of wiring: "I have no problem with turning that over to the marketplace. The problem is if there is no marketplace for it. People are not used to assuming that responsibility. Consumers, on balance, are discriminating individuals. But we need to help educate them."

The consumers' acceptance

Stalon, an advocate of swifter action, poses the dilemma: "One rule of American politics is: 'If it ain't broke, don't fix it.' A second rule of politics all too often is: 'It ain't broke unless the public thinks it's broke.' My impression today is that those who understand the system is 'broken' and that it must be 'fixed' constitute a very small minority. My experience supports the assertion that this small minority must expect hostility as they 'fix' a system which is not widely seen as broken."

The fix will not likely be easy for regulators nor necessarily easy on consumers. "The federal government has put a revolution in motion in telecommunications, and it is now telling state regulators they must find the optimal stopping point," Stalon says. "There is no obvious place to stop it. Every line drawn may, sooner or later, be subverted by competition. I am reminded of an event that occurred in the early 1970s when a philosophy student at the university I was in at that time made a speech about the need for a political revolution in the United States. After he stormed for awhile, an elderly faculty member asked him, 'At what point do you want to stop the revolution?' The student's answer was, 'I don't know. I expect cooler heads to tell me when that time comes.' "

Where do regulators draw the line? "This regulator," says Stalon, "for one, is not sure. But the revolution must be guided."□

Don Sevener, a reporter in the Lee Enterprises Springfield bureau, frequently covers telecommunications and other utility issues.

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