Local phone service through your cable company provided by you long-distance company. Sound confusing? Not really, at least according to the latest whispers out of corporate America. Last week, a story in the Wall Street Journal reported that not-so-secret discussions were going on between Time Warner Inc. and AT&T over a deal for local phone service through Time Warner's vast cable networks. Subscribers could then get phone service, both local and long-distance, via their cable lines at a presumably cheaper rate than they get through their traditional phone company. If this doesn't sound like particularly hot news, then you're right. San Diego is one of the few markets that is already seeing this happen. Cox Communications, which serves the bulk of the San Diego metropolitan area as well as East County and South Bay, formally launched such a service two months ago. Dubbed as Cox Digital Phone, the service is steadily picking up customers in the East County launch area, according to Cox representatives. So why the fuss? Well, for one thing, a Time Warner/AT&T deal would give this program a national footprint almost overnight. Time Warner is one of the nation's largest cable carriers with more than 12 million subscribers in markets all over the country (the company serves the northern part of San Diego via Southwestern Cable). Therefore, such an arrangement automatically would catapult AT&T into a leading competitor for local phone service, a market still heavily dominated by the regional Bell operators. But there's more. AT&T is also trying to put the finishing touches on a merger with Denver-based TCI (Tele-Communications Inc.) that, with a value of $31.8 billion, would be one of the largest corporate mergers in history. TCI counts about 33 million cable subscribers through its own networks and affiliates in which it holds an ownership interest. Although that deal is still not cast in stone, it does signal a massive consolidation in a business that Congress took great pains to open up to more competitors. Ironically, it is the now-infamous Telecommunications Act of 1996 that plays a big part in the merger mania sweeping the industry. The law, spurred by President Clinton, was designed to open up local phone and cable markets, which long have been dominated by quasi-monopolies, to competition from outside providers. The idea was to give consumers a choice in everything from cable television, phone, long-distance and Internet services and ensure that competition would keep prices down. Little of that actually has materialized, in part because lawmakers don't always understand the finer points of running wires between everyone's home. Phone companies talked of entering the cable market, a plan they quickly scrapped after they realized that it would take years to attain the economies of scale that cable operators already enjoyed. Pacific Bell reported last year that it was canceling plans to offer cable service in California and still is trying to sell partially built networks in San Diego and elsewhere. Even worse is the market for local phone service, although the blame there is not easy to assign. Long-distance companies like AT&T, MCI and Sprint targeted local markets heavy after the bill was passed, but have since pulled out, claiming that Pac Bell was dragging its feet on making the necessary switches on its networks and leaving new customers without phone service for weeks. Pac Bell says the long-distance firms eventually realized that providing local phone service alone is a money-loser and would rather keep their lucrative long-distance business from being diluted by the Baby Bells. That's why cable firms are the favorite targets for phone companies now. They already have the expensive part done with lines running into just about everyone's home. With a variety of services to sell, they can underbid even phone companies like Pac Bell. Cox, for instance, charges $9.99 a month compared to Pac Bell's $11.25-a-month charge for basic service. With new offerings like high-speed cable modem services, cable companies are fast becoming the communications provider of choice for techno-savvy consumers. In the long run, this may help the market. Phone companies like Pac Bell are shaking off the cobwebs by offering zippy data services and extra features like caller ID and voice mail. They should worry, however, since they face strong competition in markets like San Diego and Orange County. Cox reports that it has signed up "tens of thousands" of phone customers in four markets in the last few months, a fact that may help the Baby Bells persuade regulators to permit them to enter the long-distance market.