New Federal Communications Commission rules are causing some of the biggest changes in bank telephone contracts in years.

To spur greater competition, phone companies are being required to adopt a new system for handling toll-free calls. But this system may also initially result in service outages, higher prices, and longer times for calls to get through, observers said.

Other pending rules could lead several banks to renegotiate contracts that are worth tens, and in some cases hundreds, of millions of dollars.

Big Part of Budget

Industry research indicates that the country's largest banks incur more than 4% of their expenses from telecommunications services.

"Its a time of great opportunity and major risk," said James S. Blaszak, partner and telecom specialist in the Washington office of the law firm Gardner, Carton & Douglas, Chicago.

The new system for 800 numbers, scheduled to take effect on March 4, is meant to enhance competition in the toll-free calling market by making it possible for customers to keep their existing 800 numbers when they change phone companies.

Previously, the FCC allotted blocks of 800 numbers to each telephone company, thus limiting competition if a bank wanted a certain vanity number.

A Lock on Numbers

American Telephone and Telegraph Co. was first to the market with 800 service in 1967, and did not get any real competition until 1987. As a result, it controls most of the vanity numbers preferred by businesses, and 80% of the country's tollfree calling.

By letting customers move 800 numbers from one phone company to another, the Federal Communications Commission hopes to make it easier for competitors to cut into AT&T'S market share.

One of the first companies to say it will take advantage of this change is National Westminster Bancorp, New York, which plans to move its 1-800 NATWEST line from AT&T to MCI Communications Corp. as soon as the portability system is up and running.

Crucial Piece of Business

To make portability work, phone companies are installing a sophisticated new call routing and data base system, a change that makes industry watchers uneasy.

"We're talking about a nationwide [transition] to a brand new technology, for a service that accounts for 40% of AT&T's traffic," said Henry D. Levine, partner and telecom specialist in the Washington office of Morrison & Foerster, San Francisco. "We're nervous that it won't work and that it will crash."

Mr. Levine acknowledged that the risk of a large-scale failure is small. But the consequences, in terms of lost business for banks and other companies, could be massive.

Mr. Levine said he has asked the FCC, on behalf of banking clients including Visa USA, Mastercard International and the New York Clearing House, to delay the transition to 800 portability by a few months just to make sure the system works.

At a minimum, the new 800 portability system is likely to almost double the the time it takes phone companies to set up many, if not most, 800 calls. This is because the calls must travel through more computers before being connected.

Possible Surge in Price

And some bank telecom managers said the new system could almost double the cost of 800 service, because telephone companies would have to make a big investment in new software and communications lines.

To help clear the way for freer competition, the FCC has also mandated that large companies will have 90 days from the start of 800 portability to renegotiate, without penalty, multiservice contracts with AT&T that include 800 services.

More than 100 corporations have this type of contract, called Tariff 12, which typically lasts five years and cost tens to hundreds of millions of dollars.

Among them is Chase Manhattan Bank, which spends spends between $10 million and $20 million a year on its Tariff 12 deal with AT&T, said Vincent Tomasulo, the bank's division executive for corporate telecommunications.

Deals Viewed as Likely

Mr. Tomasulo said it was "more probable than not" that the institution would renegotiate its contract during the so-called fresh-look period to see if it can leverage a better deal.

Other banks with Tariff 12 contracts that could be restructured include Bank of New York, Chemical Bank, Marine, Midland, NationsBank, and Security Pacific Bank, according to MCI.

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