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Fortnightly Magazine - November 15 1995

competitive industries, risks are assumed by investors, and CEOs who make too many bad investment decisions wind up without a job.

It isn't only energy utilities that pay lip service to the advantages of competition and free enterprise.

Thanks to advances in technology, the telecommunications industry has experienced significant declines in recent years in the cost of providing local phone service. Primarily as a result of computerization, tens of thousands of telephone industry workers have lost their jobs in recent years, significantly reducing operating costs. Yet Pacific Bell (PacBell) sought, and California's regulators approved, a 35-percent increase in its basic service rate, in conjunction with the introduction of competition into the intraLATA toll market. For all but the largest users of local toll services, the increased cost of local phone service wiped out any potential savings from the reduction in intraLATA toll rates. Furthermore, regulators declined to even consider the issue of equal access for long-distance telephone companies, thereby assuring PacBell a competitive advantage in the intraLATA toll market.

California regulators also allowed Pacific Telesis (PacTel), PacBell's parent company, to spin off its wireless operations (subsequently renamed Airtouch) without compensating ratepayers for the millions that PacTel had collected from customers and spent in the 1980s to develop the cellular business. The result was that shareholders reaped the rewards of a risk-free investment that ratepayers had been forced to finance through higher rates.

Now PacBell is attempting to invest risk-free in competitive markets for interactive video and wireless communications. PacBell hopes to force captive customers to finance its venture into the world of video dialtone by claiming that most of the project's $16-billion price tag is needed to improve local phone service. While relatively few of PacBell's customers are likely to use the video services the company hopes to sell, all consumers may eventually be burdened with most of the estimated $1,000-per-household cost associated with the utility's entry into competition with the cable industry. In a competitive industry, these investments would be made by shareholders.

Adding insult to injury, service quality has declined significantly at PacBell for all but the biggest customers. This might be expected in a monopoly environment, but in competitive industries, quality service is just as important as competitive pricing.

To some extent, utility companies can't be faulted for wanting to have their cake and eat it, too. It's not easy to reverse 50-plus years of monopoly mindset, particularly for managers who never had to deal with competition. California regulators are another matter, however. In recent years, virtually all of the appointees to the CPUC have promoted the free market as the best way to lower utility costs and improve customer service. These individuals speak in glowing terms of the benefits to California's economy of a more competitive utility industry. But talking about the benefits of competition and establishing policies that promote competition are too different things. California's regulators (em like the utilities they oversee (em are far better at "talking the talk." And talk alone won't bring about true competition. Until regulators and utilities cast off their monopoly mindset,