Part of that settlement involved the imposition of the line-of-business restrictions on the divested Bell Companies. Those restrictions were conceived and agreed to by the Justice Department and the Bell Companies after years of discovery and 11 months of trial.

Why do I raise the events of 15 and even 30 years ago? Because, despite what the Bell Companies argue, the facts that came to light in these investigations are highly relevant to the question of whether it would be wise to remove the Modification of Final Judgment's (MFJ) core business restrictions. In sum, these facts led to the conclusion, equally valid today, that line-of-business restrictions are the only effective means of preventing anticompetitive behavior by the Bell telephone companies.

The investigations disclosed matters that are now ignored or called irrelevant, have been forgotten, or have become so commonplace that they have lost their ability to impress. But they remain important and they should be recalled in aid of long-run consumer welfare, the principal legitimate goal of public policy activities.

The explanation for the protracted history of competitive problems in telephony is entirely independent of personality. It simply recognizes the combination of

-

or in

the words of Dr. Peter Huber, the Justice Department's former consultant, the "poisonous synergy" between regulation to which the Bell Companies are subject and their

the type of

continuing monopoly over the means of local electronic

distribution.

This combination provides the Bell Companies

with both an ineluctable economic incentive and the ability to

disadvantage competitors.

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Rate base regulation gives the Bell Companies the incentive to misallocate costs and discriminate in the provision of service to others. It is very important to understand how this works. Regulation prevents the Bell Companies from fully exploiting the economic value of their monopolies by limiting the profits that these companies earn. The very nature of traditional public utility regulation prevents them from earning their monopoly profits in the market local distribution where they have power. As a result, their rational economic incentive to evade these constraints, to fully recognize the value of their monopolies, leads to efforts to exploit them in other markets. Regulatory evasion creates a constant and systematic bias toward diversification into adjacent markets and a constant danger of unfair competition in these markets. Put simply, the Bell Companies have every incentive to leverage their governmentally sanctioned monopolies monopolies which they've strenuously sought to protect through legal barriers into competitive

markets. Competitors who depend upon telephone monopoly facilities and services in order to provide their own services

are most especially vulnerable to this leveraging. Electronic

publishers, and cable operators specifically, are classic

examples of firms which are dependent upon Bell Company "essential facilities."

The evidence of the trial corroborated this theory. It confirmed that cost-of-service regulation induces the regulated monopolist to maximize its profits in an unusual way. The monopoly local exchange provider has an increased incentive to integrate into unregulated markets through which it can launder otherwise impermissible profits. The monopolist can maximize its overall profits by misallocating joint costs to the regulated services and thus increasing the rate base, by manipulating intracorporate transfer prices, and by discriminating against its competitors, thereby raising their costs or foreclosing them altogether. As Judge Greene found in 1981, the evidence indicated that the "Bell System .

violated the antitrust laws in a number of ways over a lengthy period of time."2

The line-of-business restrictions were imposed specifically to ensure that the Bell Companies would not once again act on their ineluctable incentives and abilities to exploit and extend their monopolies in competitive markets. For electronic publishing, and cable television specifically, the line-of-business restriction is the necessary ingredient to promoting consumer welfare.

2 United States v. AT&T, 524 F. Supp. 1336, 1381 (D.D.C.

The Bell Companies and their governmental allies are fond of reciting the "fact" that the 1974 case produced no evidence of Bell System misconduct in information services. This observation is largely irrelevant, since the 1956 Consent Decree prohibited Bell System entry into these businesses. But the observation is also false, as NCTA's members can quite competently testify. I can still recall quite vividly the Bell System internal documents which forewarned of the advent of the cable "monster."3 The reference and its underlying

motivation

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were all too clear: the cable industry has

always been viewed by the Bell Companies as the principal threat to their service monopoly by being a second, competitive wire strung to the home. Whether the service to the home is voice, data or video, the Bell Companies want to be the exclusive distributor to whom all must come to obtain service. There is an abundance of evidence showing the Bell Companies' anticompetitive efforts to act upon this threat by thwarting the development of cable television. This misconduct was fully documented in the course of the Department's 1974 lawsuit.4 For example, the BOCS conditioned cable companies' access to telephone poles upon agreement not to provide pay television, closed-circuit TV or two-way services.

New cable

3

Plaintiff's Third Statement of Contentions and Proof at 1021, filed in United States v. AT&T, No. 74-1698 (D.D.C. Jan. 10, 1980).

Id. at 1010-1067.

entrants were coerced into leasing BOC transmission facilities rather than construct their own. And in cases where cable

operators did construct their own plant, they were subjected to exorbitantly high pole attachment rates.

Over the same time period, the FCC struggled to

regulate and curb these same practices.

Throughout the 1960's,

the agency attempted, unsuccessfully, to bring to bear virtually every regulatory tool at its disposal

tariff

review, pre-construction facilities approval, complaint adjudication, etc.5 In 1970, the FCC finally gave up hope for successfully regulating telephone company misconduct, and formally recognized that only a prohibition on entry could satisfactorily resolve the problem.6

Congress itself acted to ameliorate these problems, first in 1978 with the Pole Attachments Act and then in 1984 with the Cable Act's codification of the telephone cross-ownership restriction. Of course, the 1982 Consent Decree provided a much broader remedy in precluding Bell Company entry into all information services.

5 See e.g., Common Carrier Tariffs for CATV Systems, 4 F.C.C. 2d 257 (1966); Gen. Tel. of Calif., 13 F.C.C. 2d 448 (1968), aff'd 413 F.2d 390 (D.C. Cir.), cert. denied 396 U.S. 888 (1969); Better TV, Inc. of Dutchess County, 31 F.C.C. 2d 939 (1971), recons. denied 34 F.C.C. 2d 142 (1972).

6

Final Report and Order, 21 F.C.C. 2d 307, recons. in part, 22 F.C.C. 2d 746 (1970), aff'd sub nom. Gen. Tel. Co. of the Southwest v. U.S., 449 F.2d 846 (5th Cir.