States Starting to Look Beyond Baby Bells for Local Phone Service

IN the decade since the breakup of the Bell system, competition among telephone companies has ushered in an era of choice and falling prices for consumers. But at the local service level, the Baby Bell companies have retained monopolies in their respective regions.

That is starting to change - slowly.

From Washington State to New York, some utility regulators are opening the door to having more than one company provide local-exchange service. ``There is going to be competition in the dial tone,'' says Harry Grandstrom, a spokesman for US West, the Denver-based Bell company whose territory includes most of the Seattle area.

``It will be significant,'' says Peter Ellis, a telecommunications consultant with Arthur D. Little in Boston. Mr. Ellis adds that it will be several years before competitors make broad dents in the Bells' $100 billion annual business.

Many experts say boosting local competition will foster innovative services and eventually cut the prices that consumers pay. For example, if cable-television providers invest in equipment to provide two-way video service, they could profitably offer phone service as well, says Andrew Gordon, a communications expert at the University of Washington in Seattle.

The near-term view, however, is one of careful regulatory adjustments. ``The potential, in the long run, may be wonderful,'' Professor Gordon says. But ``it's dangerous territory we're in.'' A central question is how to allow competition to grow while also giving the Bells a shot at retaining their best customers.

So far, new participants in the industry are aiming their service at businesses, not at less-profitable residential customers. Electric Lightwave, based in Vancouver, Wash., has been building fiber-optic networks for business clients in Portland, Ore., and Seattle. Such networks can be used to link corporate sites together. Alternatively, such a private network could connect a business directly with long-distance phone lines, thus bypassing the Baby Bell system. (Almost one-half of a typical long-distance bill represents the ``access fee'' that long-distance carriers must pay to the regional Bell when it connects a call.)

Now, Electric Lightwave has the opportunity to offer full-fledged local service as well. The state Supreme Court ruled in March that the Washington Utilities and Transportation Commission cannot grant a monopoly for local service.

Last week, the WUTC said a second company, Teleport Communications Group of Staten Island, N.Y., may join Electric Lightwave in offering local service in the state.

The companies must now negotiate with US West and GTE (the main carrier in some parts of Washington State) on how much each firm should be paid when they ``hand off'' calls to another company's network. In order to create a level playing field, the traditional providers must charge competitors no more than their own real costs, says Michael Morris, regulatory director for Teleport's western region. ``We will know in fairly short order whether GTE and US West are serious about creating an environment where competition is possible.''

The WUTC, meanwhile, is preparing new regulations for US West and GTE. These regulations will likely shift from prices based on a guaranteed rate of return to prices based on company costs. As competition develops, price caps may be dropped in specific markets. ``We are keenly aware of the environment that the Washington commission is creating,'' Morris says. States that move more slowly will see less innovation from companies like Teleport, he argues.

Maryland, New York, Illinois, and Massachusetts are among other states that are moving to bring down barriers in the local market. In New York, Rochester Telephone Corporation recently won initial approval of a plan for opening its market to competition starting early next year. One threat will be from phone service provided by cable-TV giant Time Warner.

Challenged also by fiber-optic services such as Teleport, Rochester Telephone decided to move voluntarily toward open competition. ``We think everybody can come out a winner,'' says Catherine Duda, a company spokeswoman. Under the plan, the company will form a marketing subsidiary to compete side by side with other companies to lure business away from its own basic service, whose rates will be capped. The plan calls for all companies involved to reimburse each other, at the same per-minute rate, for handoffs of phone calls. ``To the extent that it's successful, it will serve as a model for other parts of New York and the country,'' Ms. Duda says.