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District Court to order the divestiture of those parts of the Bell System that provided local exchange services.
The case went to trial in January, 1981. At the close of the DOJ's case, the District Court denied AT&T's motion to dismiss, finding that the DOJ had presented sufficient evidence to support most of its allegations. On January 8, 1982, in order to settle the 1974 suit, the DOJ and AT&T announced a proposed modification of a Consent Decree entered in 1956, which itself terminated an earlier antitrust action brought by the United States against AT&T. The 1956 Consent Decree prohibited AT&T and its affiliated Bell Operating Companies ("BOCs") from engaging "in any business other than the furnishing of common carrier communications services".
The proposed MFJ called for AT&T to divest itself of the local exchange monopolies so as to eliminate the incentive to use control of the local exchange monopolies to distort competition in long distance services and equipment sales. In addition, the divested local operating companies, the BOCs, were to be required to make technical changes in their exchange facilities in order to provide competitive interexchange carriers access to their local exchanges equal to that enjoyed by AT&T ("equal access"). AT&T was to be freed from the restrictions on entering competitive markets imposed by the 1956 Decree. The BOCs, however, were to be limited to providing exchange and exchange access services; they were expressly prohibited from providing interexchange (long distance) services and information services and from manufacturing or providing telecommunications equipment and customer premises equipment. These prohibitions were included in the belief that, in their absence, the BOCs would continue to have the same incentive to abuse their control of the bottleneck local exchange networks as had AT&T previously.
Following Tunney Act proceedings, the District Court issued a lengthy opinion discussing the proposed MFJ. The Court found that most of the MFJ provisions were in the public interest, but it required certain modifications, including the addition of a provision expressly providing that the Court would remove the line of business prohibitions upon a showing "that there is no substantial possibility that [a BOC] could use its monopoly power to impede competition in the market it seeks to enter". AT&T and the DOJ agreed to these modifications and the Court entered the
MFJ on August 24, 1982. The Supreme Court summarily affirmed this decision the following year. Pursuant to a plan of reorganization submitted by AT&T and approved, with some modifications, by the DOJ and the District Court, divestiture took place on January 1, 1984.
The Bottleneck Concern
The principal reason for the imposition of the MFJ's line-of-business restrictions on the BOCS was their ability to use their local bottleneck facilities to impede competition in other businesses. The bottleneck, in practical terms, is demonstrated by the simple fact that virtually all telephone users residential or business have no alternative but to use local telephone company facilities to originate and terminate long distance calls. The Huber Report ("The Geodesic Network: 1987 Report on Competition in the Telephone Industry"), compiled in connection with the first Triennial review of the MFJ, revealed that 99.9% of all interexchange traffic still is originated and terminated over the local exchange carriers' (LECS') bottleneck facilities. Some BOCs have argued that bypass of the local network is a significant threat, but Judge Greene noted in an opinion last year that "the Department of Justice found twenty-four customers in the entire United States who managed to deliver their interexchange traffic directly to their interexchange carrier, bypassing the Regional Operating Companies". And, even those bypassers still must depend upon the local network to carry their local calls. As Judge Greene explained:
"The exchange monopoly of the Regional Companies has
There are two principal methods by which the BOCS could use their local bottlenecks to impede competition. First, since every long distance carrier must use the local network to originate and terminate calls, and virtually every user of information services must similarly use the local network to reach an information service provider, a BOC could discriminate against its competitors in the provision of interconnections to the network.
By providing itself with superior connections, by delaying the provision of interconnections to competitors, or by charging its competitors only slightly more for connections than it charges itself, a BOC could place competitors at a tremendous competitive disadvantage. Each of these forms of discrimination can be very subtly employed, making detection and, therefore, regulation very difficult.
The second method of potential anticompetitive conduct available to the BOCs as a result of their local bottlenecks is the ability to subsidize competitive services with revenues earned from regulated ratepayers. Many BOC local and long distance telecommunications services and information services share the same facilities and administrative resources. To accurately establish rates for its services, a BOC must correctly allocate its joint and common costs among its various services. Even a small misallocation of its costs to its regulated services can result in the pricing of the BOC's competitive services below their actual cost.
Both discrimination and cross-subsidization can adversely affect competition. In a market where price differences among competitors are measured in fractions of pennies per minute and participants compete on the basis of quality as much as price, even limited amounts of discrimination or cross-subsidization can readily have a significant negative impact on competition.
I'm sure, in that regard, that it will not escape the notice of this Subcommittee that United Telecom/US Sprint appears to be organizationally integrated in a fashion similar to the predivestiture Bell System; and, therefore, the question arises as to whether similar bottleneck concerns exist. Such questions were, indeed, raised before the DOJ both when United Telecom acquired U.S. Telephone (one of the predecessor companies to US Sprint) in 1984, and when US Sprint was formed in 1986. In a news release dated April 27, 1984, the DOJ announced that it had decided not to challenge the merger of United Telecom/U.S. Telephone, pursuant to its investigation under the Hart-ScottRodino Antitrust Improvements Act, due to the size and dispersion of United Telecom's local telephone franchise areas. It specifically noted that United Telecom's franchises generally consist of smaller urban, suburban,
and rural areas, serving fewer than three percent of the nation's telephone
Moreover, in its June 30, 1986 Report to the Court for the approval of the formation of US Sprint, the DOJ "carefully considered whether the proposed joint venture increased the danger that the parents' local bottleneck monopolies would be used to impose a significant competitive disadvantage on interexchange competitors". After applying the six-factor analysis established by the Court in the 1985 GTE case (which approved the GTE acquisition of Sprint in 1983), the DOJ concluded "that the joint venture is not likely to have significant anticompetitive effects". The DOJ specifically noted that "United's exchanges are even more rural and widely dispersed than GTE's; among United's 1,042 exchanges, only 72 have more than 10,000 lines". Those conditions have not materially changed in the last three years. Thus, United Telecom remains significantly different from the BOCS.
The line-of-business restrictions contained in the MFJ are the current focus of Congress' attention. Those restrictions, embodied in Section II (D)
of the MFJ, provide that:
The MFJ Restrictions
"[N]o BOC shall, directly or indirectly or through any affiliated
Provide interexchange telecommunications services or
Manufacture or provide telecommunications products or
As active participants in the telecommunications industry, United Telecom and US Sprint are obviously deeply interested in the current considerations regarding the possible relaxation of the MFJ's line-ofbusiness restrictions. Accordingly, I would like to describe to the Subcommittee the positions of United Telecom and US Sprint on each.
Given the BOCs' continuing bottleneck control over the local connections necessary to long distance service providers, removal of the interexchange (interLATA) restriction at this time would be totally inappropriate and injurious to the ongoing development of an effectively competitive long distance market. There are no demonstrable benefits to be derived from BOC participation in the interLATA long distance service marketplace. Competitive long distance carriers, including US Sprint, continue to make progress in establishing themselves in an increasingly competitive marketplace, notwithstanding the dominance of AT&T. The public is benefiting today from lower prices, increased choices and improved quality services.
While US Sprint recognizes that the BOCs, with their telecommunications experience and resources, should not be arbitrarily or permanently excluded from markets, they should not be permitted to enter such markets unless they can demonstrate that there is no longer a substantial possibility that they could use their bottleneck positions to impede competition. Current evidence indicates that such a demonstration is not possible, as discussed earlier.
The information services line of business restriction was initially imposed by Judge Greene on the same basis and for the same reasons as the interLATA restrictions, i.e., the incentive and ability of the BOCS to use the local bottleneck in an anticompetitive fashion. The BOCs have recently asserted, nevertheless, that consumers' interests would be advanced by permitting them to freely provide information services. In the first Triennial review of the MFJ restrictions before Judge Greene, United Telecom and US Sprint substantially supported the concept of permitting the BOCS more freedom to offer information services, provided certain safeguards were in effect.
In his September 10, 1987 opinion, Judge Greene initiated a significant narrowing of the information services restriction. While he