Moreover, there are substantial reasons for concluding that a wholesale departure from the status quo at this time would not be in the public interest or consistent with the intended purposes of the decree.
A principal problem is that the diversion of capital and managerial resources in the pursuit of outside ventures may impede the implementation of equal access,
and that this development, in turn, will hinder competition in the inter-exchange market. On that basis, some parties (e.g., MCI) urge that the Regional Holding Companies be prohibited from entering new lines of business altogether until they have fully fulfilled their equal access obligations under the decree. The Department of Justice likewise emphasizes that these companies have an incentive to use available financial resources to enter new markets rather than to meet their equal access obligations and that, given such an incentive, they may implement equal access with substantially less vigor and speed.
Some of the Regional Holding Companies argue that, because section VIII(C) itself does not specifically mention equal access, the Court may not even consider the possible effect that their entry into new markets will have on their ability to meet their equal access obligations. This argument necessarily assumes that the parties to the decree -- AT&T and the Department of Justice -- as well as the Court, contemplated that the Operating Companies would embark on a substantial diversification campaign shortly after divestiture and before equal access was implemented. As the Court noted above, nothing could be further from the truth.
In any event, the narrow approach of the Regional Holding Companies to section VIII(C) waivers is entirely unjustified. The decree's provisions are not independent clauses having no relation to one another but are interrelated components of a plan to reorganize the Bell System and hence -- in effect -- the nation's telecommunications industry.
The Court would be derelict in its duties if it did not consider the possible effect the Regional Holding Companies' entry into unrelated lines of business will have on other provisions of the decree -- one of which requires the prompt implementation of equal access.
It was precisely this type of situation that the Court envisioned when it retained the power to ensure that the parties comply in full with the principles mandated by the decree, both in formulating the plan of reorganization and in their conduct after divestiture.
The Regional Holding Companies contend next that ample financial and legal incentives already exist for equal access compliance.
Yet these companies seem to be already laying the groundwork for blaming their eventual failure to achieve equal access on other factors. Thus, they even now identify the following as potential obstacles to their provision of equal access: (1) the unavailability of switching equipment; (2) the inability of suppliers to provide equipment according to schedule; (3) an inadequate supply of technical experts to engineer equal access; (4) regulatory requirements, including FCC reticence to allow recovery of equal access costs and ambiguity over AT&T's costs guarantees; and (5) the Department of Justice's failure to act on their equal access plans.
These careful predictions do not instill confidence that the capital and other resources of the Regional Holding Companies will be used to provide equal access and not for the pursuit of the outside ventures now being contemplated by these companies.
The companies finally claim that, when the Court approved the schedule for implementing equal access, it recognized that it "could not expect equal access to be achieved immediately or to be phased-in on a more expedited basis than is contemplated in the proposed decree."
That is quite correct. The Court has no intention of requiring the Operating Companies to provide equal access in advance of the deadlines set forth in section A(1) of Appendix B of the decree. But those deadlines stand, and the Court will prevent impediments to the implementation of equal access, including the diversion of needed capital and the distraction of management which would frustrate the scheduled transformation of the local network into an equal access network. Accordingly, the Court will closely scrutinize any waiver request filed before a Regional Holding Company has implemented equal access to ensure that, if granted, it would not interfere with the company's specific obligations under the decree.
Provision of Local Telephone Service
Under the decree, the Operating Companies' basic responsibility is to provide local telephone service to the public. The Plan of Reorganization, in turn, established the Regional Holding Companies for the primary purpose of serving the Operating Companies and facilitating their telecommunications functions. This is evident from the description in that plan of the structure and the responsibilities of these companies
and from section III of the decree itself.
As will now be seen, the vast and diverse programs the Regional Holding Companies are formulating, and the priorities the companies seem to be assigning to these programs, constitute a serious threat to their obligations under the decree and the implementing documents.
As evidenced both by the pending waiver requests and by reports of their intentions,
the Regional Holding Companies are expending significant managerial and other resources to discover and analyze new business opportunities.
Moreover, some of these companies candidly state that they regard the telephone business as of limited interest to them and the fate of the rate-payers as of little significance in the context of the decree. Thus, US West proclaims that the "Operating Companies owned by US West are in the telephone business rather than US West" and that "US West does not itself intend to be a telephone company."
Ameritech similarly asserts that, "while protecting ratepayers may be a worthy goal in the abstract, it is one that should be left to the regulators and the legislators to pursue as they see fit."
And Bell Atlantic argues that its waiver requests must be granted even if diversification into new business will raise the company's cost of capital and divert the attention of its management from providing telephone service, because in its view the effect of diversification on the ratepayers "is extraneous to the Decree" and is therefore not a legitimate criterion for adjudging applications under section VIII(C).
The more the Regional Holding Companies diversify, the less central their telecommunications functions will obviously become to their corporate existence. To the extent that these companies perceive their new, unregulated businesses as more exciting, or more profitable than the provision of local telephone service to the American public -- as they obviously do -- it is inevitable that, should they be permitted to embark upon such business enterprises on a significant scale, their managerial talent and financial resources will be diverted from the business of providing such service. As a consequence, both the quality and the price of that service are bound to suffer. See also, note 122 infra.
Some parties allege that the attention the Operating Companies are presently giving to outside ventures has already had the effect of diminishing their interest in telephone service,
impairing the quality of service and increasing telephone rates. Some of the problems with local service reported in the press have been overstated.
Nevertheless, the Regional Holding Companies themselves concede that complaints over installation, maintenance, and service have increased,
and that appears plainly to be true.
One factor contributing to the service problems is inadequate coordination between the Regional Holding Companies and the interexchange carriers, principally AT&T. It should be clear -- and if it is not, the Court is making it clear now -- that the decree does not stand as an obstacle to such coordination (provided, of course, that it is extended to all interexchange carriers without discrimination). Some parties fear that the Regional Holding Companies may not be cooperating with these carriers as fully as they should because they see them as present or potential competitors, not only in those markets where such competition is appropriate,
but more broadly in the entire field of telecommunications (including interexchange services) and other markets in which these carriers -- and AT&T in particular -- are now beginning to compete. To the extent that the Regional Holding Companies' future business goals are responsible for the current service failures, the present Opinion may assist them in redirecting their focus on their primary role as providers of local telephone service.
Diversification is also believed to have a negative effect on local rates. The Regional Holding Companies must obtain the funds for their new ventures from somewhere, and that source is likely to be the place where, as a consequence of an absence of competition, there is the least risk and the least effective resistance -- the local ratepayers. In recent months, the public has witnessed a number of requests for local rate increases in all parts of the country. These requests are sometimes blamed on divestiture, but in fact they may stem from the need to raise capital for outside ventures, lavish advertising campaigns, and the construction of plants and the hiring of staff suitable for what the Regional Holding Companies consider themselves to be -- diversified conglomerates which are fast outgrowing their modest and relatively pedestrian telephone origins.
The Regional Holding Companies assert that all these problems and fears are outweighed by the benefits they would derive from diversification, i.e., their ability to attract more capital and to increase revenue. In each of the waiver requests, the moving company argues that diversification will enhance its financial viability by reducing its overall risks. Diversified growth companies, it is said, are more attractive to securities investors and for that reason they are able to sell their stock at a higher price-earnings ratio, lowering their cost of equity capital. It follows, according to that line of reasoning, that a Regional Holding Company which is successful in diversifying could pass on its savings from lower capital costs to the ratepayers. These arguments are erroneous in every respect.
First. While the cost of capital depends on many different factors, some tangible and others intangible, there is no evidence that the Regional Holding Companies' cost of capital would decrease as a result of diversification. Because regulators are required by law to permit utilities to set rates which recover their cost of service -- including the cost of capital -- utilities have traditionally been less risky
as investments than competitive ventures and their cost of capital from some sources has therefore tended to be lower.
Thus, to the extent that a Regional Holding Company raises funds jointly for both its competitive ventures and its regulated services, the cost of capital may be lower for the competitive venture (because it will be averaged with the lower capital costs of the regulated monopoly) but higher for the regulated telephone service. The ratepayers will then, in effect, be subsidizing the activities of the competitive venture by assuming, through higher interest rates, part of its cost. It follows that, if diversification of the Regional Holding Companies into new competitive ventures enhances their financial viability at all, the beneficiaries will more likely than not be these holding companies, their managers,
and their unregulated affiliates, not the Operating Companies which provide local telephone service.
Second. Despite the representations now made by some of the Regional Holding Companies, it is unlikely that their new business ventures would produce supra-competitive profits which could be used for other purposes. As the Department of Justice correctly observes, if these companies were able to extract supracompetitive prices in these markets, it would indicate that they were abusing their monopoly power in the local exchange market to gain an unfair competitive advantage over their rivals.
Absent such anticompetitive practices, the companies' profits would probably not exceed those earned by others in the same markets, and little, if anything, would be left over to provide financial assistance to the companies' telephone subsidiaries.
Third. It may confidently be predicted that, even if the Regional Holding Companies could, somehow, reap significant profits from their outside ventures, they would not use them to benefit their regulated telephone affiliates. In fact, the opposite appears to be true. For example, Nynex candidly concedes, even boasts, that
the earnings of the Operating Companies belong to the stockholders of these companies. Those earnings are not automatically invested in any particular enterprise and their use should not be controlled by the Department of Justice.