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Local
Telephone Competition Still on Hold
Monopoly Phone Companies and High Cost Pre-Paid Service Dominate Residential
Market Five Years After Launch of Competition
Southwest
Regional Office
January 2001
Prepaid Service
Since FTA was passed in 1996, a number of companies have expanded the local
residential market by providing service to customers previously not served by
Southwestern Bell. These new customers include individuals whose phone service
has been disconnected due to payment problems, customers with bad credit, and
those without social security numbers or who do not want to provide their social
security number.
Consumers Union found that more than three quarters of the companies actually
providing residential service in six large Texas metropolitan areas provide
services to customers in this segment only. By accepting customers rejected
from the monopoly phone company, these companies are not actually competing
with SWBT and Verizon (GTE) basic services.
Although this new market enables these customers to get phone service, access
to such phone service is not cheap. Companies in this segment charge, on average,
$40 per month for basic service, a rate that is more than double SWBT rates.
Additional fees for phone set-up can be as high as $59.
Companies that serve this market claim that high rates compensate for the high
risks they take by serving a population that has a history of payment default.
However, every one of these companies surveyed by CU offer pre-paid services
only. Customers pay for monthly service up front. Thus, there is no risk involved.
If customers do not pay, they do not get service. Since customers in this segment
have few choices, they are forced to pay these higher rates if they want any
telephone service at all.
Furthermore, pre-paid customers often endure obstacles getting phone service.
For example, customers who want service from Express Telephone Service must
go to a designated convenience store to make a "money gram payment"
which includes one month of basic phone service and an installation fee for
a total of $78.44. The customer will be connected approximately 5 days later.
To continue service, customers must go back to the convenience store each month
and make another money gram payment of $46.28. If a customer discontinues service
for one month, he or she must pay the initial $32.16 start-up fee again.
Competing for the High End Customer
Since local telephone service deregulation, some companies have chosen to target
only high revenue residential customers who use many different telecommunications
services.
Two companies provide service to specific real-estate developments or apartment
complexes. For example, in Austin and San Antonio, Time Warner Connect provides
local telephone service to customers in a handful of designated apartment properties.
Service is only available to residents, thus granting collective buying power
to force low basic rates. However, companies are betting on these more affluent
customers to purchase a whole package of more expensive, bundled services including
optional telephone features, cable television and long distance.
En-Touch Systems of Houston has entered local market through exclusive contracts
with new residential housing developments. Each housing community has its own
provider, such as Sienna Technologies (which serves Sienna Plantations), but
all are owned by En-Touch Systems. The "captive" customers of these
more affluent new communities (homes ranging from $140,000 to $440,000)
(9) are also likely to purchase expensive premium services.
Companies also target services toward premium package buyers by bundling services.
Although most offer basic service at competitive rates, they tend to market
higher-end package deals. For example, Sienna Technologies' packaged deals range
from the "basic value" package that includes long distance, basic
cable, a fire and burglar alarm, and call waiting for $55.62 per month to a
"Maximum Value" package that includes 13 optional calling features,
long distance, premium cable, and a fire and burglar alarm for $114.81 per month.(10)
Conclusion
By deregulating the telephone market and allowing competition, the Texas Legislature
and Congress hoped to allow market forces to decrease prices, increase the number
of new providers, and speed the deployment of new telecommunications services.
But the opposite has happened. Competitors offering residential service are
pulling out of the market. Without any competitive check and balance, Southwestern
Bell has used the 1999 law to raise prices for commonly used optional services.
For example, a call to 1-411 Directory Assistance cost $.30 per use in 1999
but now costs $.75. To use Directory Assistance and then have the call connected
once cost $.60, and now costs $.80. Three way calling and call forwarding increased
from $2.10 to $3.00. Rates also increased for auto redial, caller ID, call blocking,
and call return (*69).(11) New or increased fees
and surcharges have been added to the bottom line of phone bills in order to
reduce prices for high volume long distance customers.
To date, only customers who live in selected developments or apartment complexes,
particularly higher income customers interested in bundled services, might see
lower rates.
A recent Consumers Union/Consumer Federation of America national study shows
that almost half of all residential phone customers nationwide are not these
"bundled", high-end users. Instead they have only one phone line,
few enhancements (call waiting, caller ID, voicemail etc.), no Internet account
and do not own a cell phone.(12) Local telephone
competition in Texas has brought very few alternatives for these customers.
Instead, they are subject to rate increases as the monopoly phone and cable
companies add fees and reshuffle services.
While the PUC's report had similar findings, several of its recommendations
favor competitors over consumers. Of most concern is the PUC's suggestion to
lift the current price cap and raise local phone rates. Prices were "capped"
to protect consumers during a transition to competition. It can't be denied
that the higher the price the more likely it is that another company will want
to serve residential customers. The question is whether it is good public policy
to increase prices in order to help new market entrants earn more money. We
think that's a bad public policy.
Recommendations
Notes:
9 Accessed via Internet at http://www.siennaplantation.com/homes.
10 Accessed via Internet at http://www.siennaplantation.com/technologies.
11 Texas Senate Bill 560 provided incumbent local exchange companies (ILECs)
with pricing flexibility. SWBT raised prices on all but a few of its calling
options. Prices were reduced for priority call (a distinctive ring for calls
from designated numbers), personalized ring for second number on a single line,
and call trace. Public Utility Commission of Texas, 2001 Report on Scope of
Competition in Telecommunications Markets of Texas, Table 21, SWBT Price Changes
Made Under SB 560, p. 64.
12 Cooper, Mark. The Digital Divide Confronts the Telecommunications Act of
1996. Consumers Union/Consumer Federation of America. February 1999.
For
the study charts click here (pdf
format only)
