Page images


accounting rules which have been proposed by the FCC and have found them inadequate to guard against cross subsidy. Others, especially state regulators, are concerned that the holding companies have the incentive and ability to withhold the financial data necessary to make such rules work.

For example, in 1987, the U.S. General Accounting Office (GAO) conducted a study of the FCC's proposed "Joint Cost" accounting rules, and found them wanting. "The level of oversight (the) FCC is prepared to provide will not, in GAO's opinion, provide telephone ratepayers or competitors positive assurance that FCC cost allocation rules and procedures are properly controlling cross subsidy." The GAO noted that there are only fifteen F.C.C. auditors available to audit RBOC books. Accordingly, the FCC "would (be able to) examine each of its audit arcas at the major carriers or bolding

m.35 companies only once every 16 years." In essence, the FCC has proposed rules which it cannot enforce, and pronounced them a solution to the cross subsidization problem.

Judge Greene, in his opinion upholding MFJ line of business restrictions on the RBOC's, concluded that accounting controls proposed by the FCC were inadequate. He said, "[c]ross subsidization is easy to achieve by firms engaged in both regulated and unregulated business, but difficult to detect and to remedy. If regulations are to have any hope of success, they must facilitate such detection to the maximum extent possible. The (FCC's) Joint Cost Order is not likely to accomplish this objective.-36

Even the Federal Communications Commission has acknowledged that the FCC cannot prescribe effective cost allocation standards for the RBOCS. "Ojur policies and programs can do no more than deter and attempt to detect such activities, they cannot eliminate the powerful incentive that rate-of-return regulation establishes to engage in cross subsidization. -37

Many state regulators agree that it is extremely difficult to establish regulatory safeguards that depend on information provided by the phone companies themselves. "Accessability of records is a major concern of the state Commission staffs," semphasis

38 in original) according to a NARUC audit of US West. A NARUC audit of

34 U.S. General Accounting Office. Telephone Communications. Controlling Cross Subsidy Between

Regulated and Competitive Services October 1931, p. 3. 35 Ibid, p. 53. It is worth noting : Department of Justice comment on this issue. The failure to devote

sufficient resources to the audit process will reduce any prophylactic program, no matter how sound in theory or principle, to a sham that deceives rather than proiecis ratepayers." (Commeats of Department of

Justice in CC Docket 86-111, June 1986, p. 36.) 36 Triennial Review Order, 673 F. Supp. a 573. 37 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Further Notice of

Proposed Rulemaking, May 3, 1988, p. sz. 38 Report oa lavestigation of US West, Loc., submitted to NARUC Subcommittee on Accounting September

1934, p. 10.


BellSouth, as another example, noted that the company was not required to provide information to state regulators, and only allowed review of its financial records when "the Company felt the information was required or related to the establishment of local (phone) service rates." The NARUC audit concluded that "extreme difficulty will surround future regulatory audits [of] BellSouth.».39

Moreover, BellSouth's choice of a certain accounting approach for reporting Bellcore (Bell Communications Research, the RBOC research consortium) expenses led NARUC auditors to believe that "adjustments for these expenses (to be made by

740 auditors) will be only slightly short of a nightmare." A NARUC audit of NYNEX found a similar problem, that the company "has refused to disclose certain financial data relating to non-regulated transactions which may have an impact on the monopoly segment (i.e., captive ratepayers)... NYNEX can increase its corporate profits if the telcos subsidize its competitive businesses and this condition may not be detected without unrestricted access to non-regulated affiliate records.41

Other state regulators have complained about their ability to make accounting rules work. The California P.U.C. noted in a rate case that "[t]oday, we face reaching a decision on Pacific) Bell's revenue requirement without the benefit of a completed staff audit of affiliated transactions, and in our view this unfortunate situation was avoidable but for the posture taken by Telesis Group affiliates. -42 The NARUC audit of Ameritech expressed fears about the RBOC's unwillingness to release all information necessary for accurate regulatory analysis, stating that "nothing precludes Ameritech from dictating which records it will make available."

[ocr errors]

Finally, in 1986 a Washington state regulator told a Congressional subcommittee that "[i]n the case of US West, we have no effective way of finding out how much capital may have been diverted from the still monopolistic operating companies to the deregulated subsidiaries. Washington (State) has one of the toughest affiliated interest laws in the nation, but we still have very little information on the flow of money and resources from the monopoly ratepayers to the unregulated US West subsidiaries."


39 NARUC Audit of BellSouth, attached memo from Jocelyn Perkerson, October 26, 1984, p. 1. 40 Ibid, p. 2. 41 NARUC Audit of NYNEX, p.2 42 California P.U.C. Decision 86-01-026, quoted in NARUC Audit of Pacific Telesis, June 3, 1986, p.1. 43 NARUC Audit of Ameritech, p. 6. 44 Testimony of Sharon L. Nelson, Chairman, Washington Utilities and Transportation Commission, before

Subcommittee on Telecommunications, Consumer Protection, and Finance, Committee on Energy and Commerce, U.S. House of Representatives, Transition in the Long Distance Telephone Industry, 99th Congress, 2nd Session, February 19, 1986, p. 156



Telephone company entry into the television business would not only harm consumers, but would also thwart competition. Phone companies could use not only cross subsidization but also discrimination, (the ability to deny or obstruct competitors' access to essential phone company facilities) to reduce or eliminate competition in the television business. The evidence shows that phone companies have engaged in discriminatory and anticompetitive acts in the past, and further shows that regulators are not able to prevent such anticompetitive behavior.

A. Discrimination in Access to Facilities

Cross subsidization harms not only phone customers but potential competitors to the telephone companies in the diversified businesses. Able to price below cost in their diversified subsidiaries due to cross-subsidization, local phone companies can undercut the prices of all competitors by shifting the costs of competitive services to the captive ratepayers. Aside from such cross-subsidization, discrimination in access to phone company facilities is another category of phone company behavior which harms competition.

As Judge Greene has noted, "there does not exist any meaningful, large-scale alternative to the facilities of the local exchange networks, and the information service providers remain as dependent upon those facilities, and those who control them, as they did in 1984 and as interexchange providers do at the present time." Indeed, it was the very nature of the telephone monopoly to deny or obstruct access to its facilities that led to the break up of the old Bell System in the first place.

In a world where the telephone company owns the wires, and also owns the products (such as television programming) transmitted over those wires in competition with the products of independent companies, the phone company can discriminate against the independent competitors in favor of their own subsidiaries. The phone company can deny the independent competitor access to the wires, or force the competitor to spend more time and money achieving equivalent access, thereby giving the phone company a competitive edge.

45 Triennial Review Order, 673 F. Supp. at 564
46 Peter Temin, The Fall of the Bell System, Cambridge University Press, 1987, p. m


Lo one example of this type of discrimination, the Ohio Supreme Court in 1988 ruled that Allnet Communications Services was justified in its complaints that Ohio Bel147 charged "unjustly discriminatory" access rates while providing inferior access services. The Court remanded the case for Ohio PUC hearings, stating that "list appears that these allegations do set forth reasonable grounds for complaints that the services received, the rates for those services, and Ohio Bell's practices affecting or relating to those services are unreasonable, unjust, discriminatory, and unjustly preferential in violation of state law."


Instead of outright denial of access, or provision of inferior access, telephone companies can do great damage merely by bringing to bear delaying tactics. Dun and Bradstreet, an information service provider, noted in its comments in the Triennial Review of the MFJ that its court case concerning denial of access had been pending for over two years as of late 1987. "The combination of telephone company entrenchment and the unavailability of quick, inexpensive, reasonably sure remedies would be devastating to new competitors if MFJ restrictions were lifted."49

Discriminatory behavior occurs not only with facilities like wires and electronic equipment but also with other assets in the possession of the regulated telephone company, such as detailed and updated information about customers. If a phone company affiliate in a competitive business has quicker or exclusive access to information, then this company has an unfair competitive advantage, and one that is paid for by telephone customers.

As one example, a Washington Utilities and Transportation Commission law judge had to order US West to turn over needed marketing information to intra-LATA long distance competitors. A state court ruling denied US West's subsequent suit to

50 prevent disclosure of such data.

Another variety of discriminatory behavior was described by Judge Greene in his MFJ opinion: " any market where the Regional Companies are in competition with

47 One of the operating companies of Ameritech. 48 Allnet Communications Services, Inc. v. Pub. Util. Comm, 38 Ohio St. 3d 195; 527 N.E. 20 840; 1988.

Allaet competes with Obio Bell in the provision of so-called "intra-LATA" long distance phone service, or

toll calls that stay within a limited geographical service arca. 49 Comments of the Dun and Bradstreet Corporation on Department of Justice Recommendations, Civil

Action No. 82-0192, pp. 35-36. 50 Washington Utilities and Transportation Commission, Docket No. U-88-2032-P; and Pacific Northwest

Bell v. W.U.T.C., Thurston City, No. 88-2-01931-0. Reported in Communications Daily, 9/6/88, p. 9; also Telephopy, 10/3188, p. 16.


independent information service providers, their economic interest lies in manipulating
the system toward use of their own services, rather than in encouraging maximum use
of the network by their information service competitors."S1 Remarking on a parallel
situation, "If the restriction (on equipment manufacture) were lifted, the Regional
Companies may be expected to act as did the Bell System: they would buy all, or
almost all, of their equipment requirements from their own manufacturing units rather
than from outsiders.52 As an example of how this type of discrimination has worked,
Pacific Bell was found to have referred customer inquiries about where to purchase
telephones directly to affiliates rather than letting consumers compare available
equipment providers. They note "a referral from Pacific Bell is extremely valuable to
the (RBOC affiliate). 53

Greene also concluded that RBOCs would discriminate against competitors (e.g., competing television programmers) even though they have some incentive to encourage independent companies to use their network. The RBOCs would not want to encourage independent companies to maximize use of the network because "[o]nly ten to twenty percent of the total cost of an information service is accounted for by Regional Company usage costs, Huber Report at 6.29, and a Regional Company would therefore earn far more from a customer base through use of its own information service than it would through network usage by calls made by and to its information service competitors."54

[ocr errors]

B. Inadequacy of Tools to Prevent Discriminatory Behavior

Judge Greene underscores the fact that the above examples of discrimination are just current examples of a history of anticompetitive behavior that has occurred despite regulatory oversight. Various abuses of the old Bell System "should in theory have been discovered and corrected by federal and state regulators, but the evidence showed that, due to the size, power, and complexity of the Bell System and its Operating Companies compared to the small, inadequately staffed regulating bodies, this rarely occurred". 55

[ocr errors]

51 Triennial Review Order, 673 F. Supp. at 565-566.
52 Triennial Review Order, 673 F. Supp. at 555.
53 NARUC Audit of Pacific Telesis, p. 12-9.
54 Triennial Review Order, 673 F. Supp. at 566. Huber Report reference: Dr. Peter Huber, The Geodesic

Network: 1987 Report on Competition in the Telephonc Industry, U.S. Department of Justice, January,

1987. 55 Triennial Review Order, 673 F. Supp. at 554.

« PreviousContinue »