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December 21, 1982


The opinion of the court was delivered by: RICHEY




 This action was originally filed on March 27, 1978, *fn1" and was brought by Southern Pacific Communications Company and Transportation Microwave Corporation [SPCC] against the American Telephone and Telegraph Company [AT & T] and the Bell System operating companies. *fn2" The complaint was predicated upon Sections 1 *fn3" and 2 *fn4" of the Sherman Act (15 U.S.C. §§ 1, 2) and alleged that the Bell System had monopolized and conspired and attempted to monopolize a relevant market in telecommunications service and had conspired to restrain trade in the market. The plaintiffs withdrew their Section 1 claim at status call on September 2, 1981 (Tr. 7-8), and the case was submitted to the Court for trial on the merits, sitting without a jury, on the charge that AT & T had monopoly power and had misused that power through conduct alleged to violate Section 2 of the Sherman Act. For the alleged violations, the plaintiffs seek $230.2 million4a for damages, which is trebled to $690.6 million pursuant to Section 4 *fn5" of the Clayton Act. (15 U.S.C. § 15). After waiver by both parties of jury demands, trial commenced on May 10, 1982. *fn6" SPCC completed its presentation of evidence, including the testimony of 24 witnesses and approximately 1,400 exhibits, on June 14, 1982. The trial consumed thirty-three trial days for both sides, including opening and closing arguments.

 Defendants filed a motion for involuntary dismissal under Rule 41(b) of the Federal Rules of Civil Procedure on June 8, 1982, and filed supplementation and proposed findings of fact and conclusions of law on June 12, 1982. Plaintiffs filed their memorandum in opposition on June 15, 1982, after which the Court heard oral argument on defendants' motion. On June 21, 1982, the Court announced its decision to defer ruling on defendants' motion until it had heard all of the evidence.

 Defendants began presenting their evidence, which included testimony of 147 *fn7" witnesses and introduction of over 7,900 exhibits on June 23, 1982, and concluded their case on July 2, 1982, after only eight trial days. Plaintiffs presented their evidence in rebuttal on July 9 and 12, 1982, through the testimony of nine witnesses. On July 13, 1982, plaintiffs introduced 326 rebuttal exhibits and defendants introduced 23 surrebuttal exhibits. Both parties filed proposed findings of fact and conclusions of law on July 15, 1982, and reply findings on July 17, 1982. The Court heard oral argument on July 19, 1982.

 The following memorandum opinion shall constitute the Court's findings of fact and conclusions of law, as mandated by Rule 52(a) of the Federal Rules of Civil Procedure.


 Southern Pacific Communications Company

 Southern Pacific Communications Company (SPCC), a plaintiff in this case, is a wholly-owned subsidiary of the Southern Pacific Company (Agreed Fact 8-3-002). The Southern Pacific Company is a large and highly diversified holding company. In addition to ownership of Southern Pacific Transportation Company (SPTCo) and SPCC, Southern Pacific Company has extended interests in real estate, natural resources, and leasing (Agreed Fact 8-3-020; Furth, PX6-0001 at 3-7). In 1980, Southern Pacific Company had assets of $5.3 billion and total revenues of $2.8 billion.

 SPTCo owns and operates one of the nation's largest intercity private microwave systems (Agreed Fact 7-1-009). Construction of this private microwave system began following the FCC's Above 8907a decision in 1959. (Furth, PX6-0001 at 11). When the entire system was completed in 1969, it consisted of approximately 650,000 voice circuit miles and 7,664 route miles from Portland through Oregon, California, Arizona, New Mexico, Texas, Louisiana, Arkansas, Missouri, to Illinois (id.).

 SPCC was formed in January, 1970, to provide communication services to business, industry, government and educational entities over a domestic network between such locations as the Federal Communications Commission (FCC) authorized (Furth, PX6-0001 at 12-13). SPCC's initial plan involved using the existing microwave sites of SPTCo where feasible (id. at 13). Portions of SPCC's microwave system initially were constructed upon the towers, facilities, and right-of-way of the SPTCo private microwave system (Agreed Fact 7-1-009).

 On February 9, 1970, SPCC filed its initial application with the FCC seeking authority to construct and operate a specialized common carrier microwave radio system between Seattle, Washington, and San Diego, California (Furth, PX6-0001 at 13). SPCC filed an additional application in April, 1970, for authority to construct a system between Los Angeles and St. Louis (id.).

 Following the FCC's general authorization of competition in its 1971 Specialized Common Carriers Decision ( PX1-0159, 29 F.C.C.2d 870 (Dkt. 18920), and the subsequent FCC grant of SPCC's construction application PX1-0267, 37 F.C.C.2d 245 (1972)), SPCC commenced commercial operations on December 26, 1973 (Furth, PX6-0001 at 14; Grant, PX6-0004 at 9).

 In 1974, SPCC purchased 100% of the stock of Video Microwave, Inc., the voice and data facilities of United Video, Inc. and purchased through Sunset Communications, a wholly-owned subsidiary of Southern Pacific Company, 95% of the stock of Transportation Microwave Corp. (TMC), also a plaintiff in this case. In 1976, SPCC purchased certain assets of Data Transmission Company (DATRAN), including a microwave system extending from Houston to Chicago via Kansas City and St. Louis (Agreed Fact 8-3-020).

 Today, SPCC offers a variety of services over a multi-million circuit mile system consisting of its own terrestrial microwave transmission facilities, complemented by leased wire, microwave, and satellite facilities (Furth, PX6-0001 at 14).

 Throughout the development of SPCC, Southern Pacific Company has provided it with substantial financial support. Since 1972, Southern Pacific Company has invested $173,547,000 in equity in SPCC and has guaranteed another $174,000,000 in debt. (id.) SPCC has grown from a company with assets of $9,552,303 in 1973 to one with $278,484,000 in 1980 (SPCC annual reports filed with the FCC (S 7-T)). To date, SPCC has yet to make a profit in private line with its losses going from $1,025,969 in 1973 to over $15,000,000 in 1980 (id.). However, there is no dispute that SPCC is a presently profitable company, due principally to the provision of switched services, known as " SPRINT." (See S-7T 1981 Annual Report submitted by SPCC on April 30, 1982 and the May 27, 1982, Wall Street Journal at 18).

 American Telephone & Telegraph Company

 The American Telephone and Telegraph Company (AT & T), a defendant in this case, is the parent company of more than 40 subsidiary corporations (Agreed Fact 8-3-003).

 The major subsidiaries of AT & T are the Western Electric Company, Inc., Bell Telephone Laboratories, Inc., and the Bell Operating Telephone Companies (BOC). Together these companies make up what is known as the Bell System (Agreed Fact 8-3-004).

 As of December 31, 1981, AT & T owned 100% of the stock of Western Electric Company. AT & T and Western Electric each owned 50% of Bell Telephone Laboratories (Agreed Fact 8-3-005). At the time this suit was filed, AT & T owned directly or indirectly, all of the stock of 17 operating telephone companies, the majority of the stock of two companies, and a minority of the stock of five others. *fn8" (Agreed Facts 8-3-015, 8-3-016, 8-3-017, 8-3-018). There are now no minority interests in AT & T-owned companies. AT & T is the minority owner of two BOCs. (Brown, Tr. 5353).

 The 24 consolidated companies had approximately 145.9 million telephones in service as of December 31, 1980, approximately 81% of the total in the United States (PX4-0874 at 3). Each of the Bell operating telephone companies possesses an exclusive franchise or government granted monopoly in the geographic areas in which it provides service (See e.g., Grant, Tr. 646). As of December 31, 1980, these companies' operating areas included 31.4% of the land area of the United States. The 24 Bell operating companies are also named defendants in this case (Complaint). Independent telephone companies now almost 1500 in number, provide service to about 36 million telephones in over half of the geograhic areas of the United States having telephone service (Testimony of Richard A. Lumpkin S-6187 at 1-2). The independents have current annual revenues near $12 billion about half of which is derived from toll services and have approximately $39 billion invested in facilities and equipment. (id.)

 The assets of AT & T and its consolidated subsidiaries were over $125 billion at the end of 1980. As of May 31, 1981, they had reached $129.5 billion (Agreed Fact 8-3-007).

 In 1980, AT & T's total operating revenues were approximately $50.8 billion. Local service accounted for approximatley $22.5 billion of this total; toll service accounted for approximately $26.1 billion; and directory advertisement and miscellaneous accounted for approximately $2.7 billion. (Agreed Fact 8-3-008).

 In 1980, AT & T's total operating expenses were approximately $34.2 billion and its net income was approximately $6.1 billion. Its total operating revenues for the twelve months ending May 31, 1981 were over $53 billion. Its net income for the same period was approximately $6.3 billion (Agreed Fact 8-3-008). AT & T is the largest corporation in the world. (PX1-0017 at 2005).

 As of year end 1980, AT & T employed over one million people, making it the largest employer in the United States next to the federal government (Agreed Fact 8-3-011). In fact, it has more employees than the active duty strength of the United States Army, according to plaintiffs' lead counsel who formerly was the Secretary of the Army.

 The Long Lines Department (Long Lines) of AT & T in partnership with the Bell and independent operating telephone companies provides interstate and intercity telecommunication service in competition with SPCC (Agreed Facts 7-2-016, 7-2-018; Tr. 12; deButts, S-T-131 at 11-13; Owen, PX6-0005 at 4-5; Grant, PX4-0004 at 11-12; Vasilakos, PX6-0006 at 8; Kushan, PX6-0011 at 4; deButts, S-T-131, tab A at 29-30; Brown, Tr. 5334). At the end of 1980, Long Lines had total assets of approximately $7 billion and operating revenue of $3.5 billion. These figures represented approximately 5.2% of AT & T's total assets and approximately 6.9% of AT & T's total operating revenues respectively. At the end of 1980, the Long Lines Department had operating expenses of approximately $2.5 billion and net income of approximately $551.1 million (Agreed Fact 8-3-013).

 In 1980, AT & T had 24 General Departments which provided the Bell operating companies with advice and assistance pursuant to "License Contracts" between AT & T and the Bell operating companies. AT & T bills the operating companies for these services. In 1980, AT & T collected $1.03 billion in revenues from the Bell operating companies under these "License Contracts" (Agreed Fact 8-3-014).


 Although SPCC's allegations relate almost exclusively to actions taken, or alleged to have been taken, during the period 1968-1978, the Court believes that those actions and the charges relating to them can best be understood in the context of the conditions in the telecommunications industry prior to that period. Therefore, before turning to those allegations and the evidence adduced by the parties at trial, the Court will briefly review the largely uncontested facts with respect to the conditions during the period in which the industry came to be regulated as a monopoly and with respect to the circumstances immediately preceding the changes primarily in the federal regulatory policy that occurred during the 1968-1978 decade.

 Prior to World War II, the telecommunications industry was extensively regulated and was widely regarded as a lawful monopoly (Agreed Facts 7-3-043--044.) Local exchange telephone service was provided under franchise by one of the Bell System operating companies or by one of the many independent telephone companies, depending upon the geographical area involved (Agreed Fact 7-2-017). *fn9" Long distance service was provided by the Long Lines Department of AT & T in partnership with the Bell and independent operating telephone companies (Agreed Facts 7-2-016, 7-2-018; Tr. 12; deButts, S-T-131 at 11-13). *fn10" The independent companies recognized the need for agreement on equipment compatibility, operating procedures and division of revenues to facilitate the joint provision of long distance service (Agreed Fact 7-2-016). Under this network partnership, which developed early in this century, telephone service was provided on an end-to-end basis through an arrangement under which the Bell companies and the independent companies assumed joint responsibility for the service. This unique partnership arrangement often required a telephone company operating in one part of the network to take action which did not contribute directly to that company's ability to discharge service obligations in its franchised area. In return, the telephone company was reimbursed for the costs it incurred, including a return on investment, in connection with the provision of intercity service (Hough, S-T-1 at 12-14). Private line services, which are the focus of the issues in this case, were provided jointly by Long Lines and the operating telephone companies over the same facilities used for long distance service (Agreed Facts 7-1-018 -- 020). *fn11"

 During the late 19th century and the early decades of the 20th century, the technology of the new industry advanced to the point where it was technologically possible to connect exchanges together throughout the country, and thus to create a nationwide interconnected network (Agreed Fact 7-2-010). *fn12" However, the technological interdependence of the components of the network gave rise to a need to coordinate operations and the provision of service throughout the network. To meet this need, AT & T consolidated both local and toll facilities into its evolving system (Agreed Facts 7-2-007 -- 008; see also exhibits cited in Regulation and History Doc. Sub. at 2-6 & App. A).

 Regulation of the industry began in 1879, three years after the invention of the telephone, in recognition both of the natural monopoly character of the industry and of the increasing importance of telephone service to commerce and society (Agreed Facts 7-3-002 -- 004; Tr. 11; Letwin, S-T-140 at 8). The purpose of these early regulatory statutes was to assure the provision of telephone service in the public interest (Agreed Fact 7-3-017; Hough, S-T-1 at 15; Letwin, S-T-140 at 10). Because of public dissatisfaction with duplicative exchange service, *fn13" competition in telecommunications services was discouraged (Agreed Facts 7-3-002, 7-3-015), and local telephone companies -- both Bell and independent -- were franchised as monopolies within their respective operating territories (Agreed Fact 7-2-017; Tr. 11; see also exhibits cited in Regulation and History Doc. Sub. at 7-10 & App. B(1)).

 Although there appears to be some dispute about the reasons, in long distance service the same practical effect resulted. With the passage of the Communications Act of 1934, Congress provided that interconnection between telephone companies be ordered only where the public interest would be served by such interconnection (47 U.S.C. § 201(a)). In so doing, Congress refused to do what some had urged -- namely, to make it an automatic duty of each carrier to interconnect whenever requested to do so by another carrier (Letwin, S-T-140 at 34). Moreover, as discussed below, there were arrangements under which the Bell and independent telephone companies divided revenues from long distance service on a basis that would essentially subsidize local service. Defendants have taken the position that the limited right of interconnection prevented uneconomic duplication of plant and facilities; and further, that the division of revenues policies spread the benefits of these economies widely to users throughout the country. The logic of this position is persuasive, and, in any event, consistent with congressional policy reflected in the Communications Act that telephone service be made widely available at reasonable costs (see generally exhibits cited in Regulation and History Doc. Sub. at 10-15 & App. B(2)). *fn14"

 There is no dispute that the emergence and growth of telecommunications regulation was also attributable to public recognition that the telephone had ceased to be a laboratory curiosity or a luxury to be afforded by a few, but had become essential to everyday life and commerce (Agreed Fact 7-3-001; Letwin, S-T-140 at 9). Moreover, there appeared to be a widely held belief at the time -- and no serious dispute among the parties here -- concerning the natural monopoly character of much of the business (Letwin, S-T-140 at 8-9). As a result, market forces were not trusted to provide quality service as widely as was thought to be socially desirable and at prices which were affordable by most households (Agreed Facts 7-3-002 -- 003). Telephone companies were thus subjected to schemes of public utility regulation and to common carrier duties under which the carriers were not allowed to conduct their businesses as ordinary commercial enterprises (Agreed Fact 7-3-015; Hough, S-T-1 at 15-17; deButts, S-T-131 at 7-12; Letwin, S-T-140 at 10-14; see also exhibits cited in Regulation and History Doc. Sub. at 7-9 & App. B(1)).

 The duties and obligations imposed upon the telephone companies varied over time and from State to State. However, the most significant of these duties as it relates to the issues in this case was the requirement to serve every subscriber within a carrier's operating territory, even if service had to be rendered at a price that did not fully cover all relevant costs (Agreed Facts 7-3-023 -- 026, 7-4-002 -- 003; Hough, S-T-1 at 15-16; Letwin, S-T-140 at 37-38; deButts, S-T-131 at 14; see also exhibits cited in Regulation and History Doc. Sub. at 23-26 & App. C). Consistent with the regulatory goal of promoting widely available telephone service at reasonable rates, the carriers structured their rates such that users of some services paid significantly more than the cost of their service in order that service could be provided elsewhere at prices that were low in relation to cost (Agreed Facts 7-4-012 -- 013; deButts, S-T-131 at 15-17; Letwin, S-T-140 at 42-51; see also exhibits cited in Regulation and History Doc. Sub. at 26-35 & App. C).

 With respect to ratemaking for long distance services, the same regulatory policies resulted in the Bell System's price-cost margins being skewed in order to make services more affordable in some areas and to some groups of users (Letwin, S-T-140 at 50-51). The practice of nationwide rate averaging -- which gave rise to the controversy over whether new entry should be permitted by specialized carriers such as SPCC, and if so, what kinds of rate adjustments AT & T should make to respond to such competition -- required the same price for calls of equal distance, notwithstanding differences in the cost of transmitting messages between different points in the country (Agreed Facts 7-4-014--015; Department of Pub. Serv. of Washington v. Pacific Tel. & Tel. Co., 8 F.C.C. 342 (1941) (S-1302); Hough, S-T-1 at 16; deButts, S-T-131 at 17; Letwin, S-T-140 at 42-51; see also exhibits cited in Regulation and History Doc. Sub. at 33-35 & App. C). The combination of rate averaging and continued technological advances in the efficiency of transmitting large volumes of messages between cities caused defendants' uniform long distance rates to reflect ever-widening margins on high-density routes (which are very profitable under an averaged rate structure) and low-density routes (where the uniform rate may be at or below the cost of service). Although plaintiffs attempted to dispute this proposition at trial, as discussed more fully below, no credible evidence was offered to establish the contrary proposition. In fact, many of the documents introduced by plaintiffs themselves explain and document this common phenomenon.

 In addition to promoting the expansion of service to rural and other high cost areas, the Bell System's intercity rate structure was used to support low rates for basic exchange service. This was accomplished under jurisdictional separations procedures through which the FCC and the state commissions have allocated to the interstate rate base ever greater portions of the cost of facilities used jointly for local and interstate services. *fn15" For example, in 1971, the separations process shifted approximately $126 million of Bell System revenue requirements from the various intrastate jurisdictions to the interstate jurisdiction. Between 1972 and 1980, the costs of equipment allocated to the interstate jurisdiction increased from $1.9 billion to $7.3 billion. Similarly, in 1980, interstate revenue requirements were $5.1 billion higher than they would have been had the costs of facilities and equipment been allocated exclusively on the basis of usage (Agreed Facts 7-4-017--022; Hough, S-T-1 at 17; Jones, S-T-53 at 6, 9-16; Letwin, S-T-140 at 51-54; deButts, S-T-131 at 17-18; see also exhibits cited in Regulation and History Doc. Sub. at 36-41 & App. C).

 The regulatory goal of assuring widely available service also had an effect on the interconnection practices of the carriers and thus on the interconnection controversies advanced by SPCC here. There is no dispute that the Bell companies early recognized the need to exercise control over equipment connected to the telephone network in order to assure service quality; that contract provisions required that all equipment used in providing telephone service remain the property of the carrier; and that those provisions prohibited the connection of customer provided equipment or systems to Bell telephone lines (Agreed Fact 7-4-005). Moreover, from the earliest days, regulatory decisions reflected a policy of imposing complete "end-to-end service responsibility"; that is, the carriers were held responsible for providing complete service, end-to-end, and were required to maintain ownership and responsibility for the installation, maintenance, and improvement of all the hardware in the system (Hough, S-T-1 at 19; deButts, S-T-131 at 14; Letwin, S-T-140 at 40-41; O'Reilly, S-T-139 at 4; Wooten, S-T-141 at 4-6). *fn16"

 As a necessary consequence, the connection of other equipment or facilities to the network was prohibited, and regulatory agencies enforced the obligation of the carriers to structure their tariffs in this manner (Hough, S-T-1 at 19-20; Ashley, S-T-132 at 2-9; deButts, S-T-131 at 14; Letwin, S-T-140 at 41-42; Byers, S-T-133 at 4, 9). *fn17" Accordingly, the tariffs of the telephone companies -- both Bell and independent -- contained general prohibitions against attachment to the network of any device not owned and maintained by the telephone companies themselves (Agreed Facts 7-4-005 -- 006). These provisions were not merely sanctioned by the state regulatory agencies; they were required by those agencies as being necessary for the companies to fulfill their common carrier obligations (Hough, S-T-1 at 20).

 By the time the Communications Act was passed in 1934, the intrastate tariffs of virtually all the telephone companies contained such interconnection prohibitions (Agreed Fact 7-4-006). The Court's reading of the Communications Act discloses no apparent congressional disagreement with state policy in this regard. Under the Communications Act, telecommunications common carriers were required to offer to the public a complete end-to-end service, "including all instrumentalities, facilities, apparatus, and services" necessary to provide such service (47 U.S.C. § 153(a), (b)); and the FCC was given broad powers to assure the availability and quality of the equipment needed to provide that service, including the power "to require by order any carrier . . . to provide itself with adequate facilities for the expeditious and efficient performance of its service as a common carrier . . ." (47 U.S.C. § 214(d); Agreed Facts 7-3-047 -- 048; Hough, S-T-1 at 20).

 In the period following World War II, incentives and pressures for selective competitive entry began to emerge (Agreed Facts 8-1-001 -- 004; deButts, S-T-131 at 19-20; Phillips, Tr. 5416-19). There seems to be general agreement that rapid technological change following World War II significantly lowered the unit costs of high-density, long distance transmission facilities relative to the unit costs of low-density transmission facilities and of local service (Froggatt, S-T-2 at 2-4). According to defendants, although they took advantage of these cost saving opportunities, their intercity rate structure was not permitted to reflect the full measure of those savings (Boettinger, S-T-3 at 7-8). One relevant factor discussed above bearing upon this issue is that throughout this period the regulators continued their policy of allocating to the interstate rate base ever-increasing portions of local facility costs through revisions in the separations formula (Agreed Fact 7-4-020). Such increased interstate rate base costs were reflected in artificially higher rates for defendants' long distance services to the extent not offset by increases in productivity (Partoll, S-T-149 at 17-18; Jones, S-T-53 at 27-29). While there is some dispute about whether defendants' nationwide averaged rate structure also impeded their ability to reflect such savings, because the new technology was largely concentrated on high-density routes and the averaged rate structure spread those savings over all routes, the Court has already found that plaintiffs' effort to establish the contrary is unpersuasive.

 At the state level, the pressures for competitive entry made no significant headway. The States were virtually unanimous in refusing entry -- recognizing that competition was incompatible with the continuation of their traditional rate and service policies (deButts, S-T-131 at 20; Symons, S-T-142 at 2; Privett, S-T-143 at 2; Colter, S-T-144 at 4-5). *fn18"

  At the federal level, a very different pattern began to emerge. The FCC apparently continued to follow a general presumption against competitive entry, yet a few limited exceptions were permitted (Hough, S-T-1 at 21; deButts, S-T-131 at 20; Letwin, S-T-140 at 55-56). A review of the FCC's decisions confirms that these exceptions related to narrow segments of the market which required somewhat specialized services or equipment and which defendants and the other established common carriers -- due to shortages occasioned by the war -- were temporarily unable to supply (Agreed Fact 8-1-004; S-1354; Hough, S-T-1 at 21; Letwin, S-T-140 at 55-56; see also exhibits cited in Regulation and History Doc. Sub. at App. D). *fn19"

 Selective entry in a regulated industry, taken together with a regulated industry's skewed rate structure, renders that industry vulnerable to "creamskimming" (Letwin, S-T-140 at 56; Hough S-T-1 at 18). *fn20" In other words, new entrants might choose to serve only the high-profit area of the business and leave those areas where rates are close to, or even below, costs to be served by established carriers with general service obligations (Brown, Tr. 5336-37; Hough, S-T-1 at 19; Byers, S-T-133 at 8-9). Although plaintiffs have sought throughout the presentation of their case to downplay this effect, it is clear to the Court that, in the course of authorizing certain limited forms of intercity competition, the FCC recognized that creamskimming might arise. However, the FCC appeared to conclude that any adverse effects on widely available, reasonably priced service would be minimized through the established carriers' reliance upon their longstanding restrictive interconnection tariffs (S-1367; S-1542; Hough, S-T-1 at 21-22; Ashley, S-T-132 at 5-14; deButts, S-T-131 at 21-22; Letwin, S-T-140 at 55-56; see also exhibits cited in Regulation and History Doc. Sub. at App. D). Implicit in that conclusion was the belief that these tariffs would protect the uniform rate structure from creamskimming by new entrants who might otherwise seek to piece-out their services with those of Bell System companies, *fn21" or expand the scope of their limited service authorizations. *fn22"

  Throughout the 1950s, pressures continued to mount to permit certain users to take advantage of ongoing technical innovations that permitted high-volume communications at costs lower than the Bell System's nationwide averaged rates for such services. As a consequence, the Commission undertook an investigation to determine whether the public interest would be served by permitting a broader right to construct private communications systems (Allocation of the Frequencies in the Bands Above 890 Mc. (Docket No. 11866); Hough, S-T-1 at 23-25; Froggatt, S-T-2 at 2-4; Boettinger, S-T-3 at 7-8).

 In the Above 890 proceeding, the Bell System opposed extension to all commercial enterprises of the right to construct and operate private microwave systems, pointing out that such authorizations could result in a substantial diversion of revenues from the existing carriers through creamskimming and thus adversely affect their ability to serve the public. Although the Commission rejected this position, it insisted it was not discounting the importance of the Bell System's concern about protecting its revenues; rather, the Commission concluded its actions would not result in such a diversion of revenues (27 F.C.C. 359 (1959) (S-1553); 29 F.C.C. 825 (1960) (S-1569)). While recognizing that the matter required continued surveillance (27 F.C.C. at 412), the Commission again rested its conclusion, in substantial part, upon the interconnection restrictions in the tariffs of the carriers (27 F.C.C. at 413-14):


"We believe that there are certain factors or conditions which will operate as practical deterrents to private users in establishing their own systems . . . [One] control is that the tariff regulations of certain common carriers will operate as a limiting factor, particularly where a private system is established and efforts are made to obtain interconnection with a carrier where common carrier facilities are available and the carrier would be compelled to 'short haul' itself."

 Two consequences of great significance to the issues in this case flowed from the Above 890 decision. First, in 1960 AT & T developed the Telpak tariff, a bulk rate competitive alternative to the construction of private microwave systems by large users (Hough, S-T-1 at 23-29; Froggatt, S-T-2 at 5-6; Boettinger, S-T-3 at 6-20). *fn23" Although Telpak became effective in 1961, twelve years before SPCC commenced operations as a common carrier, as will be discussed more fully below, a principal focus of SPCC's pricing charges relates to the claimed anticompetitive nature of Telpak's structure and rate level.

 A second and more immediate consequence of the Above 890 decision was that it fueled the pressure for new entry. Responding to such opportunities for entry, Microwave Communications, Inc. (MCI) applied to the FCC in December of 1963 for authority to construct and operate a microwave radio system between Chicago and St. Louis (see Microwave Communications, Inc., 18 F.C.C.2d 979 (1967) (Initial Decision) (S-1768); 18 F.C.C.2d 953 (1969) (Final Decision) (S-1918)). MCI represented in its application that such a specialized carrier system was necessary to make some of the benefits of the FCC's Above 890 decision available to small businesses by providing new and innovative specialized point-to-point private line services which were not being provided by the established carriers and which would not require connection to the nationwide switched network (18 F.C.C.2d at 981-82; Letwin, S-T-140 at 75-76; Byers, S-T-133 at 15).

 In 1967, while MCI's application was pending, President Lyndon Johnson established a Task Force on Communications Policy which studied the question of competition in the telecommunications industry. The Task Force, chaired by Eugene Rostow, then Assistant Secretary of State (Hinchman, Tr. 2109; Rostow, Tr. 3671), issued a report (S-1873) which concluded, based on considerations of system optimization, system integrity, service reliability, and national security policy (Rostow, Tr. 3646), that the core of the public network ought to remain a regulated monopoly (Rostow, Tr. 3647). The Report did recommend limited entry by specialized carriers, but indicated that such entry ought to be confined to point-to-point services which were not broadly connected to the network (Rostow, Tr. 3652, 3653). *fn24"

 The Report also emphasized that existing common carriers should be allowed to take full advantage of their accumulated capital, plant, and equipment and stressed the necessity of not creating a protected system in which new entrants would be encouraged, but existing companies would not be allowed to compete fully (Rostow, Tr. 3654).

 Notwithstanding the general conclusions reached by the Task Force, defendants and other general service carriers argued in the MCI case that such entry would be contrary to the public interest because telecommunications services could be provided more economically by one supplier as a result of economies of scale; that additional microwave systems would be duplicative and wasteful, and would adversely affect business and residential telephone users; and that specialized carriers without general service responsibilities would creamskim the existing averaged regulated rate structure by selective competition aimed at only the most profitable routes with heavy traffic and thus impose a heavier rate burden upon users on low-density routes (18 F.C.C.2d at 960 (S-1918)); see also exhibits cited in Regulation and History Doc. Sub. at App. E, pp. E-4 -- E-5). *fn25"

 Although finding that "this is a very close case . . . which presents exceptionally difficult questions," the FCC decided by a vote of 4 to 3 that MCI's application should be granted (18 F.C.C.2d at 966 (S-1918)). In reaching this decision, the FCC stated that "MCI is offering a service . . . with unique and specialized characteristics" (18 F.C.C.2d at 960). On the basis of this finding, it rejected the general service carriers' creamskimming argument, concluding that " in the circumstances of this case," no wasteful duplication of facilities was likely to be involved ( id. at 960-62) (emphasis supplied); (Ashley, S-T-132 at 10-11; Letwin, S-T-140 at 75-77).

 It is clear to the Court that there was substantial division within the FCC itself on the question of MCI's entry, and specifically on the question of the extent to which this kind of selective competition would lead to creamskimming (Ashley, S-T-132 at 9-12; Letwin, S-T-140 at 76-77). For example, the Chairman of the FCC, in explaining his opposition to the licensing of MCI, which also showed a concern for all telephone users, stated (18 F.C.C.2d at 972 (S-1918)):


"[MCI] is proposing a typical 'creamskimming' operation. Thus, it has selected a major route, Chicago to St. Louis, with heavy traffic density characteristics and the concomitant lower unit costs. The existing common carriers, on the other hand have been encouraged by the Commission, primarily for social reasons, to base their rates both for message toll and private-line services on nationwide average costs. Thus, the small users in the hinterlands is afforded the same rates as the large users in the major cities. The evidence in this record tends to show, and there is no basis in our experience to believe otherwise, that AT & T and Western Union could offer lower rates for private-line service between Chicago and St. Louis than those proposed by MCI, were they to base such rates on their costs for that route alone.


The chances are and the record so indicates, that AT & T and Western Union will be constrained to lower their private-line rates to meet the competition of MCI. This, however, means that other users, either the small private-line user who are not so fortunate as to live in large cities or message toll users, or both, will have to make up the difference if total revenue requirements are to be met. This is in addition to the higher costs which are bound to fall on all communications users by virtue of the inefficient use of the frequency at stake."

 It is also clear to the Court that the FCC's decision authorized MCI to provide only point-to-point private line service not requiring the use of defendants' switching machines (Byers, S-T-133 at 15-18). The FCC stated its understanding of MCI's proposal as involving "a limited common carrier microwave radio service, designed to meet the interoffice and interplant communications needs of small businesses" *fn26" (18 F.C.C.2d at 953 (S-1918)). Moreover, the FCC recognized that under that proposal MCI would only need what is known as local distribution facilities, in the form of a pair of wires reaching from MCI's microwave sites in the cities it served to the location of its customers in that city, thereby providing a "link between MCI's sites and . . . [a customer's] place of business" (18 F.C.C.2d at 954). Consequently, the FCC made no reference in its MCI decision to any possibility that MCI's circuits would be connected to a telephone company's switches. Indeed, Commissioner Robert E. Lee in his dissenting statement recognized this very problem wherein he stated (18 F.C.C.2d at 973 (S. 1918)):


One of the basic unresolved propositions in this case is how the FCC can expect MCI, who at best possesses extremely marginal financial qualifications, to invest $564,000 which again is a questionable estimate of costs, for a microwave system, which is presumably designed for service to the public without also ruling on the interconnection issue. (emphasis supplied).

 Notable by its absence from the FCC's decision was any declaration that the FCC was moving to a policy of unrestricted competition in the common carrier field, or even of restricted or limited competition beyond the offering of the specialized point-to-point service that MCI had described in its application (Letwin, S-T-140 at 76; Ashley, S-T-132 at 9-15; Partoll, S-T-149 at 7; see also exhibits cited in Regulation and History Doc. Sub. at App. E).

 The MCI decision resulted in a deluge of new applications for authority to construct and operate facilities for specialized common carrier service and served as the springboard for SPCC's entry into the industry (Agreed Fact 8-2-009). SPCC filed applications for authority to provide specialized services initially between Seattle, Washington, and, San Diego, California and between Los Angeles, California, and, East St. Louis, Illinois (Agreed Fact 8-3-020). Other companies filed similar applications, and to deal with this situation, the FCC instituted a broad rulemaking inquiry designed to permit consideration in one proceeding of the policy questions raised by all of these applications ( Specialized Common Carriers, 24 F.C.C.2d 318, 322 (1970) (Notice of Inquiry) (S-2070); Furth, Tr. 395; Letwin, S-T-140 at 77).

 The views and comments submitted by SPCC and the other applicants in the Specialized Common Carriers proceeding described in detail the kinds of services for which they sought authority to construct microwave systems (24 F.C.C.2d at 321-24 (S-2070); see also exhibits cited in Regulation and History Doc. Sub. at App. E, pp. E-5 -- E-6). Based upon a review of the notice and pleadings, the Court is convinced that none of the applicants sought authority to provide ordinary telephone services, and none sought to connect their proposed systems with the switching machines or the switched network of the Bell System and other general service carriers. As will be discussed below, the specialized carriers in their applications and pleadings also made no mention of FX or CCSA-type service and the Commission did not discuss it in its decision. Although plaintiffs' witnesses were somewhat evasive on this point, they confirmed that an essential thrust of SPCC's planned entry was the offering of new and innovative services not then being provided by defendants (Furth, Tr. 380; Miller, Tr. 415-18, 446-47; Brodman, Tr. 1806).

 In June 1971, the FCC handed down its Specialized Common Carriers decision approving in principle the entry of specialized carriers and declaring as a matter of policy that there should be competition in the specialized services to which it applied (29 F.C.C.2d 870 (1971) (S-2211)). In doing so, it appears to the Court that the FCC was following the general recommendations of the Task Force. Thus, although the Commission recognized the threat of creamskimming in its decision (29 F.C.C.2d at 915), it minimized such potential impact on the ground that SPCC and the other newly authorized carriers would serve theretofore untapped markets with "new" and "specialized" services and that creamskimming was therefore likely to be insignificant ( id. at 912; Ashley, S-T-132 at 18-20; Letwin, S-T-140 at 77-78; Partoll, S-T-149 at 7; see also exhibits cited in Regulation and History Doc. Sub. at App. E). *fn27"

  The Specialized Common Carriers decision was not a model of clarity -- *fn28" a fact that is apparent to the Court both from a reading of the decision and the controversy and litigation that surrounded its implementation. Indeed, the Commission either did not discuss or deferred to future proceedings the resolution of all of the major issues raised by the Commission's authorization of competition by the specialized carriers.

 On the matter of the establishment of ground rules for price competition between the specialized carriers and the existing carriers, the Commission recognized that changes in the Bell System's nationwide average rates "may be in order, and . . . will not be opposed by the Commission" and emphasized that the established carriers would have "an opportunity to compete fairly and fully" taking advantage of any price that "will realistically and reasonably reflect economic advantages, if any, that are inherent in [Bell's] plant and operations" (29 F.C.C.2d at 915 (S-2211)). Moreover, consistent with the position advanced by the Department of Justice, the Commission pointed out that it would not condone any "'protective umbrella' for the new entrants or 'any artificial bolstering of operations that cannot succeed on their own merits'" (id.). However, the Commission found it "neither practical nor appropriate" to adopt "precise principles" to govern changes in defendants' rates in the Specialized Common Carriers decision ( id. at 916-17). Instead, the Commission pointed out that the question of general competitive pricing methodology was at issue in another Commission proceeding (Docket No. 18128) and that, in any event, it would "address any problems as they arise" (id.; see also exhibits cited in Regulation and History Doc. Sub. at App. E).

 As to the scope of the specialized carriers' authorization, the decision did not define the specialized services in which it authorized the new carriers to engage, nor did it define the obligations the FCC expected the general service carriers to assume in order to help these new carriers get into business. Instead, it treated the terms "specialized services" and "private line" services as synonymous with the services that SPCC and the other applicants in the proceeding had proposed (29 F.C.C.2d at 906-08, 911 (S-2211)), found these "proposed facilities and services" to be in the public interest ( id. at 920), and indicated that the general service carriers should provide local distribution facilities for such services ( id. at 940; Ashley, S-T-132 at 16-27; see also exhibits cited in Regulation and History Doc. Sub. at App. E).

 Moreover, although the Commission required the established carriers to provide such local distribution facilities on nondiscriminatory terms, it did so without defining what such terms would be and without any apparent consideration of the problems inherent in making services and facilities ordinarily provided jointly between network partners available to customer competitors who were not, and apparently did not desire to be, part of that network partnership.

 Finally, the Commission did not discuss the question of whether the specialized common carriers would be allowed to piece-out Bell System service. Indeed, the Commission made no declaration or order requiring the established carriers to interconnect with competitors for any purpose other than to provide "local distribution service" and only in connection with the specialized services authorized in that case, thus apparently eliminating the possibility of a piece-out situation (Letwin, S-T-140 at 78-79).

 Following the Specialized Common Carriers decision, plaintiffs proceeded with their plans to commence operations. They worked on construction plans, negotiated with equipment suppliers, composed budgets and financial plans and recruited staff members (Miller, PX6-0002 at 10). In addition, SPCC met with representatives of AT & T and Pacific Telephone to discuss obtaining local distribution facilities to serve its initial customers in California and Arizona (Kopf, PX6-0003 at 4-5). Although SPCC claims that there were problems during those negotiations -- claims which the Court will address below -- there is no dispute that a contract between SPCC and Pacific Telephone for the provision of local distribution facilities was executed on October 23, 1973, and, after obtaining necessary tariff amendments from the California Public Utilities Commission, which became effective on December 12, 1973, plaintiffs began serving their first customers on December 26, 1973 (Kopf, PX6-0003 at 16).


 Having traced the development of the telecommunications industry and regulatory policies leading up to the Specialized Common Carriers decision, the Court believes that it is necessary to put in context the evolution of regulatory policy during the decade following that decision as it relates to the broad issues raised by the authorization of competition in the provision of "specialized" private line services.

 There are four broad issues which emerge from that decision and lie at the heart of plaintiffs' specific claims in this case. These are: (1) what was the nature of defendants' permissible pricing responses to the newly-authorized competition and the basis on which such responses were to be justified; (2) what were the scope of both the services the new entrants were authorized to provide and defendants' corresponding interconnection obligations; (3) what was the meaning of the nondiscriminatory operating relationships mandated between the new entrants and defendants and other established carriers; and (4) what was the extent of defendants' obligation to provide plaintiffs and the other specialized carriers with interconnections which would enable the specialized carriers to piece-out defendants' network.

 There is one overriding phenomenon of the evolution of regulatory policy following the Specialized Common Carriers decision that helps both to explain the specific claims at issue in this case and to chart the Court's course in their disposition. It is the existence of pervasive and continuing regulatory uncertainty which was engendered by that decision and which continued throughout the entire period at issue in this case.

 In the pricing area, the Commission had, as discussed above, deferred consideration of an appropriate costing standard to Docket No. 18128. It was not until 1976 that the Commission issued a decision on that question. AT & T, Revisions of Tariff FCC No. 260, Private Line Service, Series 5000 (TELPAK) (Docket No. 18128), 61 F.C.C.2d 587 (1976) (S-4575). Even then, the matter was not resolved as the Commission, after further investigation, abandoned the costing standard it had adopted. Indeed, only recently has the Commission issued a costing manual setting forth guidelines for doing cost studies and the Commission has made clear that even that is only an interim manual. AT & T, Manual and Procedures for the Allocation of Costs, 84 F.C.C.2d 384 (1981) (S-6005). Thus, almost eleven years after the Specialized Common Carriers decision, the question of the appropriate costing methodology still remains open to further change (see exhibits cited in Regulation and History Doc. Sub. at App. E). Yet throughout that period and throughout this trial, defendants' pricing tariffs have been attacked for failing to comply with standards that the Commission was either unable, or unwilling, to articulate in advance.

 Similar uncertainty prevailed during this era regarding the scope of the services the specialized carriers were authorized to provide (Ashley, S-T-132 at 16-28; Byers, S-T-133 at 13-20; deButts, S-T-131 at 24-25; see also exhibits cited in Regulation and History Doc. Sub. at App. E). In their applications to the FCC, the new carriers represented that they only proposed to provide "new and innovative" services not requiring connections to defendants' switching machines. Thus, neither the specialized carriers in their applications and pleadings nor the Commission in its Specialized Common Carriers decision said anything about providing services such as FX and CCSA which required such connections. Subsequently, when the issue arose as to whether MCI was entitled to interconnections to provide FX and CCSA, the Court of Appeals for the Third Circuit held that the Specialized Common Carriers decision was "unclear" as to this issue. MCI Communications Corp. v. American Tel. & Tel. Co., 496 F.2d 214, 221, 224 (3d Cir. 1974) (S-2981). Shortly thereafter, however, the FCC held that the new entrants were authorized to provide these services and directed defendants to make the necessary connections. Bell System Tariff Offerings of Local Distribution Facilities for Use by Other Common Carriers, 46 F.C.C.2d 413 (1974) (S-2987).

 Two years later, when several of the specialized carriers, including SPCC, began providing ordinary switched long distance services, the FCC held that these switched services exceeded the scope of the private line services the specialized carriers had been authorized to provide. In a decision which revolutionized the telecommunications industry, the Court of Appeals for this Circuit reversed the FCC and found that the specialized carriers' operating authority had not been expressly limited by the FCC in the Specialized Common Carriers decision and thus that the scope of their authorization was unlimited. MCI Telecommunications Corp. v. FCC, 182 U.S. App. D.C. 367, 561 F.2d 365 (D.C. Cir. 1977), cert. denied, 434 U.S. 1040, 54 L. Ed. 2d 790, 98 S. Ct. 780, 98 S. Ct. 781 (1970) (S-5123). *fn29" Yet, once again, despite these radical and unanticipated shifts in regulatory policy, defendants have been accused of unreasonably denying interconnections for switched services to the new entrants, where neither defendants, nor even the Commission itself, could reasonably anticipate how regulatory policy on this question would ultimately evolve.

 On a third issue, AT & T's obligation to provide facilities to the specialized carriers on nondiscriminatory terms, the FCC has not yet made clear the meaning of that term in the context of network partners (AT & T-Long Lines, the Bell operating companies and the independent telephone companies) providing joint services, as opposed to the operating companies providing facilities to customers/competitors not involved in a cooperative partnership arrangement. As described more fully below, AT & T attempted to sit down with the specialized carriers and resolve some of these issues under the aegis of the Commission during late 1974 and early 1975, but AT & T's offer to treat the specialized carriers as network partners with the concomitant benefits and obligations was rejected outright by plaintiffs and the other carriers (Kelley, S-T-59 at 22-23). Although defendants were able to develop solutions to certain of these issues with little or no regulatory guidance, and the FCC accepted the settlement agreement which resulted from these negotiations (S-3471) and presided over meetings to monitor its implementation, the FCC has done nothing further to clarify this complex and difficult question. However, much of the controversy in the industry following the Specialized Common Carriers decision, and much of the evidence in this case, relates to charges of "discrimination" (Kelley, S-T-59; see also exhibits cited in Regulation and History Doc. Sub. at App. E).

 Finally, as to a fourth issue raised by the FCC's authorization of competition by the specialized carriers, that of piece-out and its resulting technical and economic problems, the FCC once again created an atmosphere of uncertainty. The FCC accepted the tariffs filed by AT & T in 1968 after the Carterfone decision (13 F.C.C.2d 420 (1968), 14 F.C.C.2d 571 (1968)), which allowed the interconnection of customer-provided terminal equipment and private microwave systems to the network, but contained provisions designed to prevent piece-out (Byers, S-T-133 at 6-13). The FCC similarly accepted substantially identical tariff revisions filed by AT & T in 1971 after the Specialized Common Carriers decision which permitted connections between the facilities of the specialized carriers and those of the defendants, but also contained a "customer-premise" provision designed to prevent piece-out (Hough, S-T-1 at 85-86; deButts, S-T-131 at 59; Byers, S-T-133 at 13-20; see also Darling, S-T-148 at 10; exhibits cited in Regulation and History Doc. Sub. at App. E). On the related question of the leasing of intercity facilities by defendants to plaintiffs and other new entrants, the Court is satisfied that in the Specialized Common Carriers decision, the FCC neither mentioned, nor even intimated, that defendants had any obligation to make such facilities available. Although defendants voluntarily offered to provide such facilities in 1974 and after five years of silence on the issue, in 1976 the FCC declared the piece-out tariff provisions to be unlawful (S-4449C), defendants are accused here of acting unreasonably with respect to both issues.

 Beyond the overriding influence of regulatory uncertainty on the issues in this case, in the Court's view, there is one additional matter that necessarily must be addressed at the outset in order to have a proper understanding of those issues -- that is, the economic bases for AT & T's opposition to new entry in the telecommunications industry. The evidence is clear that AT & T was concerned that it protect its ability to serve the public interest by fulfilling its regulatory obligations through continued adherence to the long-standing pricing and service policies discussed above (deButts, S-T-131). *fn30"

 A principal economic consideration in the FCC's authorization of competitive entry in intercity telecommunications services was to test whether AT & T's economies of scale outweighed any advantages of specialization that might be achieved by new entrants (Rosse, S-T-43). Implementation of such a test was a crucial factor in the position taken by AT & T toward new entry and expanded competition during this period (deButts, S-T-131).

 Economies of scale means that a proportional increase in all inputs to a firm's production generates a greater than proportional increase in its output, all else constant (Rosse, S-T-43 at 3). In other words, when a firm's output increases by 10 percent, its costs increase by a lesser percentage. Thus, a large firm with scale economies is able to produce output more cheaply than a smaller firm using the same technology (id.; Baumol, Tr. 3759-60).

 The record evidence on the Bell System's economies of scale falls into essentially five categories: (i) common sense; *fn31" (ii) engineering-economic studies; (iii) econometric studies; (iv) productivity studies; and (v) perceptions of proposed entrants in the market. Defendants presented compelling evidence in each of these five categories. Common sense suggests that the technology, organization, and historical record of the telecommunications network exhibit economies of scale (Rosse, S-T-43; Tr. 5745, 5752). The engineering-economic studies illustrate the characteristics of the facilities used to provide intercity services and demonstrate the declining unit cost of larger systems (Skoog, S-T-45; Mandanis, S-T-46; Rosse, S-T-43 at 21-26). Moreover, the econometric studies and productivity studies introduced by defendants confirm that these potential economies have in fact been realized by AT & T (Vinod, S-T-44; Christensen, S-T-48; Rosse, S-T-43 at 26-37). Evidence illustrating the perceptions of the proposed entrants similarly confirms the fact that AT & T enjoys substantial economies of scale (Smith, S-T-166 at 3-4; Ginty, S-T-47 at U.S. Tr. 18085-86; Phillips, Tr. 5455-56; S-2197; S-2420).

 It appears to the Court that there are three reasons for defendants having achieved such clear economies of scale. First, as defendants' witnesses explained, higher levels of demand allow efficient use of high-capacity facilities and technologies which provide transmission service at progressively lower unit costs (Hough, S-T-1 at 3-11; Mandanis, S-T-46 at 15-16; Rosse, S-T-43 at 8). Second, the process by which the network is configured allows for the fullest utilization of these high-capacity, low-cost facilities (id.; Mandanis, S-T-46 at 17). Finally, defendants supply the entire spectrum of communications services, and through the networking principle, demand for all those services is concentrated or pooled so that it can be transmitted and switched over the same facilities (id.). This last phenomenon is referred to by economists as "economies of scope" (id.). Economies of scope exist when it is cheaper to produce two or more goods or services together than to produce each one separately (Rosse, S-T-43 at 15; Phillips, S-T-173 at 25). The shared use of physical plant by different services appears to the Court to contribute in large part to the economic advantages of defendants' single integrated telecommunications network (Skoog, S-T-45 at 8; Rosse, S-T-43 at 16; Hough, S-T-1 at 10).

 The Court is thus satisfied that the Bell System enjoys substantial economies of scale which have increased over time (Rosse, S-T-43 at 18; Phillips, S-T-173 at 16-17; Christensen, S-T-48; Mandanis, S-T-46; Ginty, S-T-47; Sutter, Tr. 4930-31; Skoog, S-T-45 at 6, 8; Vinod, S-T-44 at 5; see also exhibits cited in Regulation and History Doc. Sub. at App. E, pp. E-5 -- E-6, E-13 -- E-14). Indeed, based upon the evidence in this record, the Court has no question that defendants' exploitation of economies of scale has been a major factor in the strong productivity growth achieved in the provision of telephone service in this country (Christensen, S-T-48 at 25-30) and has contributed to widely available, reliable telephone service of a kind unrivaled elsewhere in the world.

 Through the rebuttal testimony of Dr. James Heckman, plaintiffs attempted to controvert the proposition that AT & T enjoys economies of scale in its intercity operations. Dr. Heckman's own testimony, however, reveals that he knows "very little" about the telecommunications industry and that he was completely unaware of the high capacity facilities which enable the Bell System to achieve economies of scale in the provision of intercity services (Tr. 5744-45). Consequently, Dr. Heckman's attempt to dismiss Mr. Mandanis' and Dr. Skoog's engineering-economic studies, which demonstrated substantial economies of scale in intercity transmission facilities, was not convincing. Indeed, Dr. Heckman frankly admitted that his study does not address the issue of whether Bell possesses economies of scale for intercity services. In Dr. Heckman's words, his "evidence is somewhat narrow . . . It did not address that specific question [economies of scale in long distance telecommunications services]" because he "didn't study it" (Tr. 5754). Thus, his conclusion of diseconomies of scale results from an econometric analysis of the entire Bell System, including its local operations and cannot support any conclusion that there are no economies of scale in intercity services (Tr. 5755-56). Moreover, the results of Dr. Heckman's econometric study bear no relation to reality. For example, Dr. Heckman acknowledged that his study suggested that the cost of having two firms providing telecommunications services could be as much as 82 percent below the cost of the Bell System providing all such services (Tr. 5756-57). The Court finds such results to be unsound and entitled to no weight.

 Dr. Heckman did concede that the perception of proposed entrants would be "ideal" data in determining whether economies of scale exist in the telecommunications industry (Tr. 5760). In fact, the record in this case is replete with such evidence. For example, Mr. Ginty, a representative of Arthur D. Little and Company who worked with General Electric in evaluating whether that company should construct a private microwave system, observed that "the Bell System could install and operate microwave systems at prices competitive with private systems and in fact lower than competitive systems since their capacity along major routes is much larger than private systems with the attendant economies of scale" (Ginty, S-T-47 at U.S. Tr. 18085-86; see also Phillips, Tr. 5455-56; S-2197; S-2420).

 Because of the Bell System's demonstrated economies of scale and scope, there is no question in this record that defendants' costs are lower than those of plaintiffs for any given output (Rosse, S-T-43 at 48; Phillips, S-T-173 at 30; see also Ginty, S-T-47 at U.S. Tr. 18085-86; Smith, S-T-166 at 3-4). It is conceivable that such scale advantages might be somewhat offset if plaintiffs had access to different technologies (or could exploit technologies in ways not possible for defendants) or if plaintiffs' management were more efficient than defendants' management (Rosse, S-T-43 at 48). However, there is no evidence that this is the case. Indeed, as discussed in more detail below, the record evidence conclusively refutes the possibility that plaintiffs were more efficient than the Bell System. Thus, there is no question on this record that, because of these scale economies, defendants could compete effectively with plaintiffs or others in the provision of private line services if allowed to respond freely (Baumol, Tr. 3759-60).

 In these circumstances, the Court concludes that it was defendants' effort to continue to provide the benefits of the economic advantages it enjoyed to the public, coupled with the continuing regulatory uncertainty with which it was faced, that lie at the heart of the specific issues in this case to which the Court now turns.


 The essential elements plaintiffs must establish to prove a private monopolization claim are not in dispute. These are: (1) that the defendant possesses monopoly power in a relevant market; (2) that the defendant has unlawfully exercised that power to attain, or maintain, a monopoly in the relevant market; (3) that the plaintiff has suffered injury in fact as a result of those unlawful acts; and (4) that damages in a reasonably ascertainable amount have been proved. United States v. Grinnell Corp., 384 U.S. 563, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 50 L. Ed. 2d 701, 97 S. Ct. 690 (1977); Sargent-Welch Scientific Co. v. Ventron Corp., 567 F.2d 701 (7th Cir. 1977), cert. denied, 439 U.S. 822, 58 L. Ed. 2d 113, 99 S. Ct. 87 (1978); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 62 L. Ed. 2d 783, 100 S. Ct. 1061 (1980).

 The application of these principles is qualified where the conduct being attacked involves the exercise of rights protected by the First Amendment. It is not a violation of the antitrust laws to speak out on public issues or to attempt to persuade a regulatory agency to change its policy, unless plaintiffs can demonstrate that such activity was a "sham" designed to deny them "free and meaningful access to the agencies and courts." California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 512, 30 L. Ed. 2d 642, 92 S. Ct. 609 (1972); Federal Prescription Service, Inc. v. American Pharmaceutical Ass'n, 484 F. Supp. 1195 (D.D.C. 1980), rev'd in part and aff'd in part, 663 F.2d 253 (D.C. Cir. 1981), cert. denied, 455 U.S. 928, 102 S. Ct. 1293, 71 L. Ed. 2d 472 (1982). In the absence of such proof by plaintiffs, the First Amendment "shields from the Sherman Act a concerted effort to influence public officials regardless of intent or purpose." United Mine Workers v. Pennington, 381 U.S. 657, 670, 14 L. Ed. 2d 626, 85 S. Ct. 1585 (1965); Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L. Ed. 2d 464, 81 S. Ct. 523 (1961).

  As the Court will now detail in considering plaintiffs' specific pricing, interconnection and other charges, SPCC has failed to present evidence satisfying these standards.


  The threshold showing required of plaintiffs in this case is proof that defendants possess monopoly power in a relevant market. Monopoly power is defined as the power to "control prices or exclude competition" in the relevant market. United States v. Grinnell Corp., 384 U.S. 563, 571, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966); see also United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391-92, 100 L. Ed. 1264, 76 S. Ct. 994 (1956).

  Plaintiffs' position is that the relevant market consists of the market for all business and government intercity telecommunications services and is nationwide in scope (Owen, PX6-0005 at 4; Melody, PX6-0018 at 18). Plaintiffs have defined this product market to include not only private line services, which have been the focus of the issues in this case, but also ordinary long distance services, including MTS and WATS, as well as telegraph, data, facsimile, and broadcast services (Owen, PX6-0005 at 4-11; Melody, PX6-0018 at 17). Defendants, on the other hand, contend that insufficient evidence has been presented to support such an expansive market definition, and urge a relevant market which is narrower both in terms of services and geography (Pace, S-T-156). Defendants further contend that they lack monopoly power in any relevant market, regardless of which party's market definition is adopted.

  Although plaintiffs did present evidence on the issues of market definition and monopoly power through the testimony of their experts, Drs. Owen and Melody, the Court has serious reservations concerning the credibility of both witnesses *fn32" and, in any event, is not satisfied that plaintiffs sustained their burden on either issue. As the Court will now explain, based upon the evidence of record, the Court concludes that the plaintiffs did not establish the relevance of the broad product and geographic market for which they contend; that the market in which the defendants' monopoly power must be assessed is the high-density intercity, interstate private line market to which plaintiffs limited their entry, or would have entered; and that no sufficient showing of defendants' monopoly power, in the private line market or any other market as it relates to this case, has been made.


  The relevant market in this case, as in any monopolization action, must be limited to the geographic area in which the parties effectively compete *fn33" ( Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327, 5 L. Ed. 2d 580, 81 S. Ct. 623 (1961)), and to those products or services which are in fact reasonably interchangeable with one another. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395, 100 L. Ed. 1264, 76 S. Ct. 994 (1956). The purpose of the Court's inquiry into the relevant market, therefore, is to determine the "area of effective competition" in which it makes sense to measure defendants' alleged market power vis-a-vis the plaintiffs. Standard Oil Co. v. United States, 337 U.S. 293, 299-300 n.5, 93 L. Ed. 1371, 69 S. Ct. 1051 (1949).

  The relevant market in this case is telecommunications service, which involves the electronic or electromagnetic transmission of information over distance from identified senders to identified recipients (Owen, PX6-0005 at 4). Local telephone service in all areas of the country is provided by the Bell Operating Companies (BOC's) and the more than 1500 independent telephone companies (Grant, PX6-0004 at 1-2; Owen, PX6-0005 at 4-5; Melody, PX6-0018 at 16 see also Testimony of Richard A. Lumpkin, S-6187, at 1-2). AT & T and the independents are the monopoly suppliers of local distribution facilities in areas served by SPCC (Grant Tr. 696). Neither SPCC nor all specialized common carrier firms compete with the BOC's or the independents in providing local service (Owen, PX6-0005 at 5; Grant, PX6-0004 at 3-4). It is thus the intercity portion of the telecommunications business that is relevant to this lawsuit (Owen, PX6-0005 at 5).

  While plaintiffs have argued for a single relevant product market, including MTS/WATS as well as private line service, the Court is unable to conclude on this record that MTS and WATS services *fn34" were within the zone of effective competition between these parties during the relevant time period. Plaintiffs offered evidence to show that MTS and WATS services display cross-elasticity of supply and demand with private line services (Melody, PX6-0018 at 17-18; Owen, PX6-0005 at 12-15). This evidence included the testimony of several AT & T witnesses, including the immediate past and present Chairmen of the Board of AT & T (Brown, Tr. 5339-5345; Miller, S-2089 at 265; Miller, S-2091 at 415-16; Jones, S-T-53, tab A at 26; deButts, S-T-131, tab A at 85). In addition, defendants' own internal documents also exhibit AT & T's recognition that MTS, WATS and private line service are cross-elastic. (PX1-0003; PX1-0005; PX1-0009; PX1-0012; PX1-0013; PX1-0015; PX1-0018; PX1-0028; PX1-0032; PX1-0044; PX1-0045; PX1-0047; PX1-0048; PX1-0049; PX1-0053; PX1-0078; PX1-0080; PX1-0081; PX1-0092; PX1-0107; PX1-0109; PX2-0025). Moreover, the plaintiffs contend that because each of these services are provided on the same network of intercity transmission facilities, suppliers of these services can shift from supplying one service to supplying another in response to shifts in customer demand (Owen, PX6-0005 at 6-7, 13-14; Melody, PX6-0018 at 18). While there is no doubt that to some extent this is true, in the Court's opinion, the evidence on the degree of cross-elasticity is inconclusive and insufficient to support a determination that MTS and WATS are within the relevant market.

  Important differences in the characteristics of these three services suggest that clear gaps in the chain of substitutability exist between them. *fn35" In fact, when one of plaintiffs' economic experts, Dr. Hieronymus, was asked how anyone could argue that MTS and WATS are in the same relevant market as private lines, he answered that "they are not in the same market" (Hieronymus, Tr. 2857). *fn36" Plaintiffs' experts were thus in disagreement on the question (Hieronymus, Tr. 2856-57), but Dr. Hieronymus' evaluation was consonant with that of defendants' expert, Dr. Pace, who determined that MTS and WATS should be excluded from the relevant market because of insufficient demand cross-elasticity (Pace, Tr. 4853). Moreover, this testimony is consistent with the practical realities of the marketplace, which suggest that a majority of MTS customers would not find private line services to be a practical or economic substitute for MTS. *fn37" As Dr. Pace further pointed out, a common carrier must serve the demand; thus, it cannot shift facilities from one service to another arbitrarily (Pace, Tr. 4854). This appears to be an important constraint in the determination of supply substitutability, and the Court accordingly concludes that the necessary interchangeability has not been shown.

  This is not to say that there is no cross-elasticity between private line and MTS and WATS. The testimony of an AT & T witness reveals that the cross-elasticities were 0.1 or lower (Pace, S-T-156 at 35). Mr. Pace goes on to testify as follows (S-T-156 at 35-36):


For example, Bell Exhibit 4, submitted in Docket No. 19919 (Hi/Lo proceeding, 1973), attempts to estimate shifts from MTS to AT & T's own revised PLS rates or to SCC service. The shift factor developed is 0.1, indicating that a 10 percent reduction in PLS rates would result in only a 1 percent change in MTS revenue (p. 66c). The same document also considers shifts from WATS to PLS. It concludes that "a total shift from WATS to private line of approximately 3 percent was considered as the most that could reasonably be expected at even lower ranges of private line rates" (pp. 73-74).


Bell Exhibit No. 1A, submitted in the 1969 TELPAK case, is another example. This exhibit presented estimates of revenue shifts between TELPAK, MTS and WATS resulting from the implementation of various test rates. Test rate 3, which involved TELPAK rate increases ranging between 20 percent and 30 percent, was estimated to result only in a shift of $9.9 million to MTS/WATS, or less than one-half of 1 percent of the then existing MTS/WATS revenue. The implied cross elasticity is 0.0025.

  A number of SPCC documents reveal that SPCC did not view the cross-elasticities between PLS and WATS/MTS as high. For example, Document No. 1BLE2489-499, a draft speech by an SPCC spokesman, states at pages 10 and 11:


Bell handled 9.5 billion long distance calls in 1973, an 11 percent increase over 1972 levels. Assuming that the contribution to common and fixed costs from $500 million in private lines business is $250 million, recovery of that contribution from 9.5 billion long distance calls would involve an increased charge of 2.6 cents. Most of that long distance business has no cross-elasticity with private line business. (Emphasis supplied).

  Based on the foregoing the Court does not find a high enough cross-elasticity to include MTS and WATS in the same market as private line service.

  Even if the evidence did establish some reasonable degree of interchangeability between MTS/WATS and private line service, the Court concludes that it would nonetheless be appropriate to limit the relevant product market in this case to private line services. *fn38" It is clear that regulation during the relevant period bears directly on the market definition, and the relevant market ought not include areas in which SPCC either was not authorized to compete or chose not to compete. For this reason, the market definition plaintiffs propose is overbroad. It is clear to the Court that SPCC was not authorized by the FCC to provide other than private line services until the 1977 Execunet decision *fn39" (see MCI Telecommunications Corp. v. FCC, 182 U.S. App. D.C. 367, 561 F.2d 365 (D.C. Cir. 1977), cert. denied, 434 U.S. 1040, 54 L. Ed. 2d 790, 98 S. Ct. 780, 98 S. Ct. 781 (1978)). Furthermore, SPCC was authorized to provide intrastate private line service in only three states (Pace, S-T-156 at 26); no other state authorizations were sought; and intrastate service was never supplied by SPCC without such authorization (id.). *fn40" To conclude that unauthorized services should be included in the relevant market would be both factually and legally inconsistent.

  Moreover, it would be patently unfair to include MTS & WATS in the relevant market, for as the toll service revenues of AT & T indicate, private line service accounts for less than 10% of all toll revenues (since the inception of the specialized common carriers. See Table I. n41 In other words, approximately 90% of AT & T's toll service revenues was not a part of this case. SPCC, or any other specialized common carrier was not allowed to compete for that 90% prior to 1977. n41 This chart depicts the percentage of the total toll service represented by private line. See Table I. Table I AT & T TOLL SERVICE REVENUES n.1 1968-1978 Toll Private Line Services Program Message Wide Area Other Trans- Toll Toll Teletype- Tele- mission Year Services Service Telephone writer graph TELPAK Audio ($ 000) (1) (2) (3) (4) (5) (6) (7) 1968 5,431,288 $ 376,405 $232,345 $101,485 $2,733 $215,471 $ 20,558 1969 6,201,504 462,050 260,548 110,078 2,876 276,445 21,262 1970 6,635,443 505,017 284,399 101,16 2,864 349,104 18,177 1971 7,311,591 590,531 298,482 93,928 3,044 358,024 18,323 1972 8,208,787 753,438 347,060 93,577 3,158 368,961 18,117 1973 9,449,713 963,095 398,156 83,447 3,114 397,340 18,167 1974 10,369,932 1,182,695 411,413 75,050 3,046 438,598 18,103 1975 11,517,140 1,426,961 437,91 70,744 3,133 487,446 18,980 1976 13,134,679 1,862,822 499,163 67,978 3,492 511,097 18,524 1977 14,629,816 2,328,403 562,060 58,079 3,524 517,920 19,308 1978 16,663,999 2,808,357 669,885 51,006 3,951 515,854 20,757


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