Dial "M" for Monopoly
Solomon Trujillo, president and chief executive officer of US West Communications Group, is known for blunt talk. Trujillo, who started with the phone company in 1974 in an entry-level position, worked his way to the top through a combination of long hours and fierce dedication to the company. Those qualities were all apparent when Trujillo spoke to 300 US West managers in February, outlining the company's goals for the coming year. "The new telecommunications era is turning customers into consumers," Trujillo said. "And if we're the first company to understand and respond to that, then we'll win big in the marketplace."
Trujillo went on to vow that the notoriously poor service offered by US West in its fourteen-state area--including waits of several weeks for new telephone lines--would improve. He outlined the company's plans to become a power in the video and wireless-telephone business. Then, like any good executive, he got to the bottom line.
"Another challenge is to improve net cash flow by $1 billion by 1998," Trujillo told his audience. "I'm on a mission to generate cash. This cash is needed to jump-start new businesses. It's the engine that powers our growth. What we do in 1996 will position 1997 as our take-off year, and that's when we take US West Communications to new heights."
Trujillo has kept his word. So far this year US West, a government-regulated monopoly that's virtually guaranteed to make a profit, has filed for huge rate increases in Washington state, Iowa and Colorado. US West proposes raising residential rates in Colorado by about 20 percent, or $3 a month for each of the company's 1.5 million residential phone lines. That would be the largest dollar increase ever for residential phone rates in Colorado, and the company has made it clear it wants to institute similar rate hikes in every state it serves.
Despite the much-ballyhooed new Colorado law allowing for competition in local telephone service, the vast majority of Coloradans won't have any alternative to US West for the next several years. While a half-dozen companies have plans in the works to offer business customers a choice, competition for residential service is still a long way off. Consumer advocates believe US West wants to hike rates for residents so it can stockpile profits before it's forced to compete for local customers.
"US West has decided competition is coming, and it's coming to business first," says Chuck Malick, legislative director for the Colorado Public Interest Research Group (CoPIRG). "The only cash cow they can keep and soak is residential service. They want to get as much profit from that monopoly as they can."
Over the last decade US West has become much more than just a regional telephone company that calls Denver home. An extra billion dollars of monopoly-generated cash would come in handy for a company that's been buying cable-television systems around the world, investing in cellular phone service in places as far-flung as India and Slovakia, and publishing telephone directories from Santa Fe to Sao Paulo. Executives of the once staid telephone company now face down some of the most powerful figures in the entertainment industry in bitter courtroom confrontations that make the evening news, and US West is the subject of analysis by the London Financial Times and Japanese television shows.
It's all in a day's work for a company intent on creating a telecommunications empire with operations spanning the globe. The days of fussy old Mountain Bell--with its company picnics and operators who called customers "honey"--are gone forever, and in their place is an aggressive corporate behemoth. Like most private ventures, the investments US West is making involve risk. But unlike most companies, US West has a guaranteed source of profits to help fund its new endeavors: the monopoly phone service that provides it with more than 90 percent of its profits.
Last year US West posted $1.1 billion in profits from telephone operations in its territories, which stretch from Minnesota to the Pacific Northwest and from Montana to Arizona. Seven of the ten fastest-growing states are in US West's bailiwick, including booming cities like Denver, Phoenix and Seattle. All those new residents have boosted US West revenues, even though the company has done such a poor job of providing new telephone service that it's been fined more than $5 million by state regulators in Colorado alone.
US West insists that the $14.95 per month most Coloradans now pay for home telephone lines doesn't begin to cover its costs. The company wants to boost the price of a single residential line in Colorado by 20 percent, to $17.95 a month. US West claims that residential service is being subsidized by the higher rates business customers pay, typically $37.39 per month for one line.
"Currently our prices for some services are based on a system that requires some customers to pay artificially high prices in order to keep prices low for other customers," US West vice president for Colorado John Scully said in May, when the company asked the Colorado Public Utilities Commission (PUC) to approve the rate increase.
However, many consumer advocates and government regulators believe it costs US West as little as $4.42 per month to serve each home telephone line. And while in the past US West often got what it wanted from state regulators throughout its huge service area, the company's current push for higher rates has generated surprisingly stubborn opposition from government officials. They're now challenging the company's longstanding claim that residential service is being subsidized by business customers.
US West executives described themselves as "stunned" in April when Washington state regulators not only refused to allow the company to almost double residential rates, but ordered it to slash the price of local phone service to just $10.50 per month. "We found there was no local subsidy and business was not paying for residential rates," says Marilyn Meehan, spokeswoman for the Washington Utilities and Transportation Commission.
Just a few weeks later, the Iowa Utilities Board reached a similar conclusion about telephone service in that state. US West had filed for a 23 percent rate increase for its 700,000 residential customers in Iowa, but the board said the $12.60 per month the average Iowan pays for phone service was more than enough to cover US West's costs. "The board concluded that US West's own cost study didn't support US West's contention that local residential rates were being subsidized," says Gary Stewart, an attorney with the Iowa Office of Consumer Advocate.
For a telephone company that's busy building an international telecommunications empire, this rebellion in the provinces is a messy diversion. US West's plan to leverage more profit out of its monopoly residential service has been thrown into question--and Colorado's Public Utilities Commission is the company's next target. That agency, which approves rates for all utilities in the state, won't make a decision on US West's request for several months. But around US West's enormous territory, all eyes are on Colorado.
"We've established a very interesting precedent for the other states," says Meehan. The Washington commissioners now find themselves in a high-stakes public-relations war with US West as the company blankets that state with full-page newspaper ads insisting it won't be able to provide service at the lower rate. US West says it will have to scale back plans to spend millions on infrastructure in Washington, but Meehan scoffs at that assertion.
"US West is claiming they'll stop investing hundreds of millions of dollars in the state of Washington," she says. "We certainly see them investing hundreds of millions in cable companies and overseas operations. If they have that much money from ratepayers, they certainly have enough to invest in infrastructure in the state of Washington."
When President Bill Clinton signed the Telecommunications Act of 1996 in February, he changed the laws that govern television, telephones and computers. By removing much of the government regulation that had reined in these industries for generations, Clinton claimed consumers would ultimately benefit as new competition forced down the price of everything from long-distance service to cable television. In the days following approval of the new legislation, cable companies announced they wanted to provide telephone service, long-distance giant AT&T said it would one day compete with local telephone providers such as US West, and "Baby Bells" like US West said they would expand into both the cable television and long-distance industries.
Most of this new competition, though, is still on the drawing board. Cable companies such as Denver-based Tele-Communications Inc., the largest cable owner in the country, may be planning to one day offer phone service through their wires, but that's still years away. For the public, the days of monopoly are not over yet, and that worries consumer watchdogs. They fear government regulators may let down their guard in the name of competition, giving companies like US West--still very much a monopoly--one last opportunity to gorge at the table of helpless ratepayers.
US West describes its proposed rate increase in Colorado as "revenue neutral." That's because the company wants to drop its monthly business rate by $2 to $35.39 while at the same time hiking prices for home lines. The proposal also calls for a 30 percent decrease in the cost of in-state long distance. The price for a business line seems certain to decline, but not because of US West's beneficence. A more likely explanation for the reduction is that after decades of unchallenged monopoly status, US West will soon be faced with competition for its business customers.
Last year Colorado's state legislature enacted House Bill 1335, ending US West's decades-old monopoly on telephone service. That law established a framework for the introduction of competitive phone service in the state and limited residential rate hikes to 5 percent per year. The legislature intended to open the door to competition while protecting residential phone users, who aren't expected to have a choice in local telephone service for several more years.
Language in the law allows US West to ask for rate increases beyond the 5 percent cap if the company can prove it needs to be reimbursed for investments in equipment and infrastructure. US West insists it has spent $2.5 billion on infrastructure around the state in the last five years, an expenditure it says justifies the 20 percent increase in residential rates. But its request has angered many legislators, who thought they'd protected Coloradans from huge increases in phone rates.
"I thought we had an agreement--I thought it was something they would stick by," says state senator Ray Powers, a Republican from Colorado Springs. "I think it's really going pretty far to ask for a 20 percent rate increase. It doesn't bode well for a corporation to try to take advantage of ratepayers that way."
US West says it's simply trying to recoup money already spent. "We're asking the PUC to help us recover past investment," says Jeff Garrett, a local spokesman for US West Communications. He says it costs the company $540 million a year to provide residential service in Colorado. "Right now residential prices are priced well below cost, while business and long distance are priced above cost," he says. "It costs us around $25 to provide a residential phone line to a user. We've got to begin moving that price to more closely reflect costs."
But consumer advocates deride those figures, saying US West is trying to sock residential users with the costs of the whole system. "The $540 million includes the expenses they have to provide business service," says Ken Reif, director of the Colorado Office of Consumer Counsel. "They like to factor all their expenses to residents and not count what they provide for business and long-distance customers."
Reif's office is charged with representing consumers in hearings before the PUC, which has the final say on phone rates in the state. Reif believes that US West wants to shift the costs of maintaining its entire phone system--known as "joint and common costs" in regulatory parlance--onto residential customers, who have no alternative to the phone company. Doing so would give US West a tremendous advantage as it begins competing for business customers.
"On the eve of competition, US West wants to play the monopoly card," says Dian Callaghan, director of administration for the Office of Consumer Counsel. "They want to use their captive customers to raise revenue."
Several companies are now gearing up to provide local telephone service to businesses, targeting that market because businesses are already paying higher rates and the market is more lucrative than the residential side. Some long-distance companies such as MCI already have fiber-optic networks downtown and at the Denver Technological Center, and they want to use those networks to break into the local service market. "Business rates are a lot higher than they need to be," says Bill Levis, regional manager of regulatory affairs for MCI. "We'll offer customers a choice. It will be a lot cheaper than with one monopoly phone service."
MCI and several other companies planning to offer local service have been fighting with US West for months. To offer phone lines, they need to tap into US West's network of wires, known as the "local loop." US West will have to sell space on its network to competitors, and the PUC is responsible for setting the rates US West will charge companies like MCI. "We'd buy the service wholesale and resell it," says Levis. "The resale price is the key."
Not surprisingly, US West wants those rates to be high. The phone company asked the PUC to require its rivals to pay more per line than what US West customers already pay for service, a proposal that would have ended competition for local service before it even started. Instead, the PUC ordered US West to allow access to its system at "wholesale" rates of $13.60 a month for residential service and $31.41 a month for business lines. Callaghan praises the PUC's decision as "a fair balance," but US West claims its competitors will now have an unfair advantage.
"We think the PUC ignored the fact residential service was priced below cost," says Garrett. "The PUC tried to subsidize MCI, AT&T and the others. They can lease our lines below what it costs us to put them in the ground. We're going to appeal their decision."
Whether US West likes it or not, businesses downtown and in the Tech Center will probably have new options for local telephone service by the end of the year. Residential phone customers, however, will likely have to wait for years to enjoy the same choice. That means US West will still be the only game in town for anyone who wants a home telephone.
If US West wins its 20 percent rate hike, consumer advocates predict the phone company will soon be asking for even more money to provide residential service. "If the precedent is set to increase rates beyond the 5 percent rate cap, it's US West's intention to raise rates even more," says Callaghan. "They want to charge $25 a month for residential service."
But US West makes no apology for its drive to boost the cost of home telephone lines. "The PUC must recognize that residential rates are priced below cost," says Garrett. "That must be addressed in order to make sure there's money available for future investments in the network."
US West is already claiming it can't make enough money to cover infrastructure costs in Washington state with the new $10.50 rate for home telephone service there. But regulators in Washington are convinced the phone company collects more than enough revenue to both upgrade its network and serve new residents. "We've looked at the cash flow US West Communications has in this state and compared it to the money they spend on new investments in this state," says Glenn Blackmon, assistant director for telecommunications at the Washington Utilities and Transportation Commission. "Net cash flow from the state consistently exceeds the amount of investment in the state."
Rates for US West's 1.5 million residential customers in Washington had averaged $11.50, and the company wanted to boost that monthly fee to $22. The Washington commission rejected US West's claim that it wasn't collecting enough revenue from residents to support local service, and it blasted the phone company's assertion that business users were paying part of the costs of residential telephone delivery. "There simply is no local service subsidy," the commissioners said in their ruling. "The $10.50 rate covers the cost of local residential service and provides a substantial contribution to shared and common costs." The Washington commissioners estimate that it costs the phone company only $4.42 per month to maintain residential service. The commissioners took into account US West's need to invest in new equipment and turn a profit before cutting local rates to a dollar less per month than they had averaged before.
US West is appealing the commission's ruling in King County Superior Court. But it has backed off a similar case in Iowa. Earlier this year US West petitioned for a 23 percent hike in residential rates in Iowa, where basic local service costs $12.60 per month. Just as in Washington and Colorado, the telephone company insisted that residential service in Iowa was being supported by business customers. But after the Iowa Utilities Board concluded that there was no such subsidy, US West turned tail and withdrew its request for a rate hike.
"My impression is, US West didn't want to risk having another state agency issue a similar decision to the one in Washington," says Gary Stewart, an attorney with the Iowa Office of Consumer Advocate. "Then they might face a steamroller effect in all the states."
Meanwhile, the company is grappling with service problems in Washington that will sound familiar to Coloradans. Many people requesting new telephone lines in Washington have had to wait weeks for service. "We already have 645 complaints so far this year," says Meehan. "It's exclusively US West's problem. We have 21 other local telephone companies here providing service, and they haven't had the same problems."
Last year in Colorado, the PUC tallied 1,694 US West "held orders," or delays in starting up new telephone service and fixing problems with existing lines. The PUC has been receiving complaints on service delays for the past three years and has fined US West more than $5 million for bungled service. Irate customers have even given the company a new nickname: US Worst. A spokesman for the PUC says no information is available on held orders so far this year because US West has delayed reporting those numbers--which were due May 31--to the commission.
Just a few weeks before Washington state started raining on US West's parade, the company's executives were huddled in a Delaware courtroom, testifying in a high-stakes lawsuit involving US West's $2.5 billion stake in media giant Time Warner Entertainment. US West was trying to stop the proposed $7.5 billion merger between Time Warner and Turner Broadcasting System, claiming the deal violated a non-competition agreement US West had signed with Time Warner when it bought its 25 percent chunk of the media conglomerate. In dueling press conferences, US West chairman Richard McCormick butted heads with Time Warner chairman Gerald Levin in front of a flock of print and television reporters.
Days before the trial began, US West acquired Continental Cablevision, the country's third-largest cable-television company, for $10.8 billion. That acquisition, combined with existing US West cable holdings, made the company one of the biggest cable operators in the U.S. Combined with the 13.9 million homes wired to US West-owned systems in Great Britain, the Netherlands, Japan and other countries, US West is now one of the largest cable companies in the world.
US West took on $5.5 billion in debt to acquire Continental Cablevision, a figure that raised eyebrows on Wall Street and briefly caused the value of US West stock to drop as investors feared the company had taken on more debt than it could handle--and that profits would be siphoned off from the regulated utility to pay back the loans. Even before that deal, the company had taken on more than $2 billion in debt to fund its new media ventures, according to US West's 1995 annual report.
The company lost its lawsuit against Time Warner, but that hasn't stopped it from making a flurry of new acquisitions. US West now has a stake in a dizzying array of international ventures, from telephone directories in Great Britain to cellular services in India and Poland. Earlier this month the company moved onto the Internet, acquiring a 10 percent interest in Preview Media Inc., which is developing an on-line vacation and reservation system.
All this wheeling and dealing troubles consumer advocates, who believe US West ratepayers will be the losers as the company becomes an international player in the communications industry. "US West is thumbing their nose at residential users and saying, 'We're not going to invest in local service; we're going to invest in India and Europe and in cable TV,'" says CoPIRG's Malick.
US West insists that its new investment ventures are separate from its government-regulated telephone business. And to quell the fears of shareholders, the company last year divided its operations in two, creating the US West Communications Group, which includes all the telephone operations, and the US West Media Group, which handles investments in cable television, cellular services, telephone directories and other enterprises. In an unusual arrangement for one company, each group has its own stock traded on the New York Stock Exchange. US West says the two divisions function as separate companies, even though they're under the same ownership.
"There are firm financial lines between the two businesses," says US West spokeswoman Lois Leach. "It's still one corporation, but we have two different stocks and two different sets of shareowners. They're two completely different types of business."
But as the stock dip that occurred after the acquisition of Continental Cablevision made obvious, the market isn't completely convinced that the company won't divert profits from the government-regulated phone service to pay off Media Group debt. US West's chief financial officer, James Anderson, assured nervous investors in February that "it would only be in a very extreme circumstance that we would do that." However, all debt for the Media Group is guaranteed by US West Inc., parent of both the Communications and Media groups. That means the profits coming from the monopoly phone service are being used as collateral when US West takes on debt to acquire cable-television systems and other goodies. "We access the debt market on the basis of a consolidated balance sheet," acknowledges Leach.
And a careful reading of US West's Form 10-K, an annual report submitted to the federal Securities and Exchange Commission, shows that the links between the two groups are more substantial than the company claims. The document states that the Communications Group can loan the Media Group funds or provide a cash infusion at the discretion of US West's board of directors. Clearly, then, US West could choose to invest the profits from its monopoly phone service in the Media Group.
Leach says the board of directors hasn't yet made an equity or cash contribution from the Communications Group to the Media Group. She says the Media Group's acquisitions are being funded by shareholder investment and debt, and she defends US West's international and cable ventures as part of the new era of telecommunications. "The concept of a phone company that does nothing but provide telephone service is an anachronism," Leach says.
But for US West, some anachronisms are better than others. And even as it braces for a new era of competition, the company still enjoys the benefits from its decades of monopoly status. Trujillo's "mission to generate cash" has made US West executives a busy lot, seeking new ways to spend the money that continues to flow into corporate coffers from the millions of blue-striped envelopes that arrive every day, as dependable as the sunrise. But consumer watchdogs hope that US West ratepayers don't find themselves the hapless victims of the mad rush to deregulate telephone service.
"Once we get to full competition, I do have faith we'll get a better situation," says CoPIRG's Malick. "But this transition is very scary. We could wind up with the worst of all possible worlds: an unregulated monopoly.
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