Deregulation hearings probe at mountainous AT&T

In 1934, when Congress passed the Communications Act to regulate telephone service, atomic power was but a theory. Many air forces still flew biplanes, and only one in three American homes had their own phone.

Today executives can hold business meetings by teleconference. A telephone can provide instant access to computerized data libraries. Technology has made the black hand-cranked phone a thing of the past -- but the Communications Act has remained unaltered.

Critics say the antiquated act is hobbling the industry by stifling innovation and competition. After five years of putting the issue on hold, Congress began hearings this month on a bill that would deregulate much of the telecommunications field and allow the mammoth American Telephone & Telegraph Company (AT&T) to enter areas it can't currently compete in.

The bill could affect everyone's phone bills, and ultimately influence how we gather and disseminate information.

"The new information age can only come about through communication," says Leroy Carlson, president of Telephone & Data Systems.

Back in the 1930s, a monopoly, with its ability to invest vast sums of capital, was considered the key to creating a reliable, nationwide system of telecommunications. That monopoly is AT&T, the largest corporation in the world , so big that its few competitors, like the MCI Corporation, seem like a parking garage sitting in the shadow of the Empire State Building.

"Telecommunications is the least competitive major growth market in this country. AT&T's share continues at upward of 90 percent," said Steve Mihaylo, president of Inter-Tel. Inc., before the Senate Commerce Committee.

AT&T says its monopoly allows it to keep local service costs low by subsidizing them with extra cash from more expensive long- distance calls. Critics snipe that the huge company could afford to move slowly in introducing new products and services.

But in 1956 smaller companies began nipping at the giant's heels. Government and court decisions allowed independents to begin operating in such fields as car phones and equipment manufacturing, and opened the door to specialized firms like MCI, which provides long-distance service connected to AT&T's local lines.

AT&T holds that nonstandard, inferior equipment might damage America's vital communications network. Its small competitors report that AT&T is still trying to stamp out their small market share.

"A large elephant can step on a lot of people," said William McGowan, MCI's chairman of the board, "but the fast mice will get away."

Congress is now wrestling with the question of who should be allowed to do what. Senate bill 898, now perched in the Senate Commerce, Science, and Transportation Committee, would continue government over sight of basic phone service, until the Federal Communications Commission (FCC) decides its watchdog role is no longer needed. The FCC would also acquire power over long-distance calls, now regulated by states. Most other forms of telecommunications would be deregulated.

AT&T would also be let out of its cage -- on a leash. It would be allowed to compete in areas not regulated by the government, such as data processing and electronic information services. But such products would have to be provided by a separate subsidiary, prohibited from receiving cash subsidiaries from the parent firm. That way, AT&T could not use cash reserves built up by its monopoly to bury companies in more competitive fields.

Critics say any subsidiary would be separate in name only, and that large amounts of money would inevitably drift over from the parent to the child.

"The relationship can't be adequately policed," said C. Gus Grant, vice-president of Southern Pacific Communications Company.

Newspapers fear that an AT&T subsidiary could offer an electronic Yellow Pages, quickly changeable and competitive with newspaper advertising. The American Newspaper Publishers Association objects that, under the bill, the FCC would be able to determine what is news -- raising crucial constitutional questions related to the First Amendment.

And buried in the bill's complex language, some say, are provisions that could greatly increase the cost of local telephone service.

"The issue is the big volume user vs. the small volume user," says a Washington lawyer who has followed the bill's progress. "Who's going to pay for the system, the big guy or litle guy?"

Put simply, the bill could change the way costs are divided between long-distance callers and local dialing. Without the bill, estimates the lawyer , the flat fee we pay for local dialing will average $18 by 1991. If it passes, he says, "there is a real danger" the cost could average $48.

It is difficult to sort out sides on the bill.

After one postponement and much political guerrilla warfare, Commerce Secretary Malcolm Baldrige testified last week that the administration supports the legislation. The Justice Department had asked that Baldrige remain silent pending the outcome of the government's antitrust suit against At&T.

Smaller companies, which might be expected to cheer for deregulation, don't care for the bill's language.

The bill is not an answer, but "a death sentence," said Steven Mihaylo, president of Inter-Tel.

Claiming that deregulation ought not to occur until customers have a real choice in the marketplace, William McGowan, head of MCI, said, "No structural reform short of divestiture will stop Bell's conduct."

Even the senators are stymied. During a particularly long and technical session Sen. Ernest Hollings (D) of South Carolina complained that the issue required the wisdom of King Solomon to adjudicate.

"It's so complicated people who have dealt with it on a daily basis have a hard time grasping what it's about," says a Washington lawyer.