Chicago corporations dial themselves out of Illinois Bell system

For years, Chicago has been a boon to Illinois Bell. Four of every five customers are in the metropolitan area. The top 200 customers generate a third of the company's billed revenues. It is cheaper to build and maintain equipment here than in the sparsely populated Illinois prairie. But now, officials at Illinois Bell are worried.

The potential problems are already evident in other cities:

Private companies and the Port Authority of New York and New Jersey are building an office park, expected to cost about $225 million, equipped with its own satellite dishes and fiber-optic network. Citycorp maintains its own telephone network under the streets of New York City.

In Pittsburgh, Westinghouse Electric Corporation boasts a microwave transmission system; in Las Vegas, Nev., a private network connects large hotels with long-distance companies.

Why is this a problem? Because of a simple but troubling concept called bypass. It takes many forms, but it really boils down to competition. Some big businesses are finding it cheaper to circumvent the local telephone company with their own equipment. And the local companies are worried they'll lose profits and have to hike rates to small-business and residential customers.

The competition, though limited, is growing.

In 1980, only 2 percent of American organizations used bypass; by 1990, 11 percent will be involved, according to a recent study by Arthur Andersen & Co., a Chicago-based accounting and consulting firm. Conservatively, that would mean a drain of more than $9 billion from local telephone companies, says John M. Kohlmeier, a partner in the firm.

In Illinois and the four other Midwestern states served by Ameritech, one out of five of the region's largest business customers now bypasses the network, says William L. Weiss, chairman and chief executive officer of Ameritech. If the trend continues, he predicts 45 percent of those customers will be bypassing within three years.

Why is this important to residential customers?

Telephone officials worry that unregulated competitors will skim off the most lucrative business customers, who pay more than what it costs to provide their service. That would leave a smaller pool of mostly small-business and residential customers - who do not pay the total cost of their service - on a local phone system that would have to raise rates substantially to stay profitable.

Illinois Bell is still profitable, says Fred K. Konrad, a company assistant vice-president, but it will probably face competition on two fronts.

The first is local. Northwestern University is installing a $12 million fiber-optic system to link its downtown and suburban campuses and its hospital. More bypass could occur if the Illinois Commerce Commission further deregulates local service, which it has signaled it will do, Mr. Konrad says.

The other competition is in long-distance connections. Instead of using local phone-company lines to reach a long-distance station, some organizations are thinking of hooking directly into it. Here, the Sears, Roebuck & Co. headquarters is currently testing satellite circuits that would avoid the local exchange. The biggest potential bypasser is AT&T, which last month threatened to bypass New York Telephone Company unless the local phone company modified certain proposed charges.

For his part, Michael J. Friduss, general manager of distribution services for Illinois Bell, doesn't shy away from competition: ''We are very much for local loop competition as long as we are able to compete. . . . The big issue is (whether) we will be allowed to do that.''

Regulations, which once supported Bell's system of subsidizing certain services by overcharging for others, have now grown cumbersome, Bell officials say.

They were heartened last December when Illinois Bell was first allowed to charge customers different monthly rates, depending on their location. Beginning in June, downtown businesses will be charged $3 a month per line; the downstate rate will be $14 - a move that will help align rates with actual costs, officials add.

Illinois Bell is also moving against competition technologically. This is its first big year to replace copper cable with more advanced fiber-optic cable. Expecting increased demand, it is even installing fiber-optic lines to connect ''just about every major building'' in downtown Chicago, even though the copper network adequately handles 95 percent of the demand, Mr. Friduss says.

Bell officials contend residential customers eventually will have to accept controversial access charges to offset the costs of providing service. But some observers are skeptical. ''They can come up with any figures they want,'' says one Chicago business customer, who threatened to bypass if Illinois Bell didn't reduce its rates to connect with Bell facilities. Rates came down 36 percent.

Certainly not all the bypass revenue will be lost to the local phone companies. Many, having decided they can't beat bypass, are rushing to compete for business - in effect, installing lines and equipment that bypass their own local exchanges.