Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.



September 10, 1987

United States of America, Plaintiff,
Western Electric Company, Inc., et al., Defendants

The opinion of the court was delivered by: GREENE

HAROLD H. GREENE, United States District Judge

 Following the submission of a report from the Department of Justice, in accordance with the Court's Opinion of August 11, 1982 which approved the consent decree, *fn1" a number of motions were filed which collectively sought removal of all the line of business restrictions embodied in section II(D) of the decree. *fn2" That section provides as follows:


After completion of the reorganization specified in section I, no BOC shall, directly or indirectly or through any affiliated enterprise:


1. Provide interexchange telecommunications services or information services;


2. Manufacture or provide telecommunications products or customer premises equipment (except for provision of customer premises equipment for emergency services); or


3. Provide any other product or service, except exchange telecommunications and exchange access service, that is not a natural monopoly service actually regulated by tariff. *fn3"

  The Court invited interested persons and organizations to intervene in this proceeding and to file responses to the report and the motions, and the parties as well as the intervenors were given the right to file additional memoranda and replies. *fn4" A total of some 170 organizations and individuals availed themselves of the opportunity to intervene. In addition to submissions from AT&T, the Department of Justice, and the seven Regional Holding Companies (hereinafter referred to as the Regional Companies), *fn5" lengthy and thoughtful memoranda were also filed by competitors or potential competitors of the Regional Companies, representatives of state governments and state and public regulatory bodies, consumer organizations, labor unions, trade associations, and others.

 The Court received a total of about three hundred briefs, totalling some 6,000 pages, including oppositions, responses, replies, and factual appendices, and it heard oral argument for three days from attorneys representing the parties, the Regional Companies, and the major groups of intervenors. This Opinion and the accompanying Order dispose of all the current controversies involving the retention or removal of the line of business restrictions. *fn6" The Opinion is organized as follows.

 There are two introductory sections -- Part I, Background; and Part II, Standard for Removal of the Restrictions. The following three sections address specifically the core restrictions -- Part III, Interexchange Services; Part IV, Manufacturing; and Part V, Information Services. The next two sections provide additional information on the removal issue -- Part VI, Regulation; and Part VII, Current Anticompetitive Activities and Public Policies. Two sections deal with what may be regarded as non-core restrictions -- Part VIII, Information Transmission; and Part IX, Non-Telecommunications Services. The last section, Part X, is the Conclusion.



 The present controversy had its genesis shortly after World War II. At that time the government became concerned about apparent violations of the antitrust laws by the Bell System, *fn7" and in January 1949, an action was brought against that System by the Department of Justice which sought, among other things, the separation of telephone manufacturing from the provision of telephone service. The lawsuit was settled seven years later under circumstances which, in the opinion of the Antitrust Subcommittee of the House Committee on the Judiciary, indicated the presence of political and other corrupt influences. See Report of the Antitrust Subcommittee of the House Committee on the Judiciary on the Consent Decree Program of the Department of Justice, 86th Cong., 1st Sess., January 30, 1959 (Committee Print). *fn8"

  Not long thereafter another agency of the United States entered into the picture. The monopoly of the Bell System in the provision of telephone service, *fn9" which theretofore had been regarded as a given fact, had come to be questioned in the wake of the discovery that microwaves could be substituted for copper wires for the transmission of long distance telephone conversations. *fn10" At the same time, the practice of the Bell System's local Operating Companies to satisfy their huge switching and other equipment needs exclusively from AT&T's affiliate Western Electric, rather than to make use also of outside suppliers, began to be challenged by small, efficient manufacturers with special expertise and special products to sell.

 Initially the Bell System brushed off these attempts at competition as bothersome obstacles to its endeavor to provide integrated and efficient telephone service to the American people, but eventually the complaints of the would-be competitors came to be heard by the Federal Communications Commission, beginning with Carterfone in 1968. *fn11" Thereafter, the FCC struggled with one complaint against the Bell System after another. Although after drawn-out proceedings the Commission was able at times to achieve some small successes, *fn12" it eventually became apparent to everyone, including those in charge of regulation at the Commission, that the FCC, with its relatively small staff and other resources, and its limited authority, would never be able to cope successfully with the Bell System's powerful monopoly position and its ever-changing strategies. See also Part VI, infra.

 The FCC's efforts to regulate the Bell System constituted a major part of the evidence adduced during the eleven-month trial of this case, and many witnesses and a large number of documents pointed to the FCC's lack of success in that regard. Testimony was heard and documents were introduced demonstrating the inability of the regulators to penetrate and evaluate the Bell System's accounting system and its cost and pricing strategies; to determine the utility or lack of utility of devices the Bell System required as a prerequisite to the attachment of competitors' wires to the national telephone network; to assess the legitimacy of the reasons given by the Bell System for making important information available to Bell operational components in advance of its distribution to others; and to reach conclusions concerning other methods employed to disadvantage Bell's competitors.

 Among the Department of Justice's expert witnesses who placed some of these problems in perspective were Professor William Melody who testified with respect to cross-subsidization between the Bell System's regulated and its unregulated activities that "over the last fifteen years, the Federal Communications Commission has both recognized and attempted to come to grips with this problem . . . but its experience has not been a satisfactory one and it has not been able to establish standards and implement them" (Tr. 9347-48). Professor Melody further stated, in response to questions by counsel for the Department of Justice as to whether regulation could be made effective so as to prevent the anticompetitive practices he had described, that it was "very clear on the basis of . . . the entire history of the FCC's attempt to deal with the problem, that there is no way to come to grips with the problem operationally, that AT&T's monopoly power, which extends far beyond the scope of the FCC in terms of its regulation, creates a situation where there is just simply no hope that this could ever be effectively done [by regulation]" (Tr. 9512-13). *fn13"

 Similarly, Dr. Nina Cornell, another government witness, testified that she had analyzed the effectiveness of regulation for achieving effective competition in the telecommunications industry from an economic perspective, and she had concluded that "I don't think regulation can achieve effective competition in the industry" (Tr. 10841). In her opinion, regulation is particularly weak in an area such as telecommunications where the pace of technological change is very fast (Tr. 10853-59). *fn14"

 Significantly, even the two officials who, as heads of the FCC's Common Carrier Bureau for the fifteen years between 1963 and 1978, had been in charge of the regulation of the Bell System during that period, agreed with these assessments. Thus, Walter Hinchman, who was chief of the Common Carrier Bureau from 1974 to 1978, said that "I didn't feel that . . . we were at all effective in . . . controlling competitive practices or creating an environment for really full and fair competition" (Tr. 10469-70), and that, for a variety of reasons, there was a special regulatory void with respect to the Operating Companies (Tr. 10475). *fn15" Bernard Strassburg, chief of the Bureau from 1963 to 1973, concurred, testifying that the Commission had a limited budget; that it had to rely to a large extent upon the Bell System to supply it with technical information; and that its expertise to go behind the Bell System's representations was also extremely limited (Tr. 17312).

 Based upon this and other evidence, the Court concluded following the close of the Department's case, and in accordance with the arguments presented by the Department, *fn16" that "the Commission is not and never has been capable of effective enforcement of the laws governing AT&T's behavior," and that accordingly AT&T had been able to violate the antitrust laws in a number of ways over a long period of time with respect to interexchange services *fn17" and the procurement of equipment. AT&T, 552 F. Supp. at 168, 170, and nn.154, 155; United States v. Am. Tel. & Tel. Co., 524 F. Supp. 1336, 1348-57, 1364-75 (D.D.C. 1981). *fn18"

 It was in the context of the inadequacy of regulation to curb anticompetitive practices that Attorney General William Saxbe authorized, and the Department of Justice filed, the instant antitrust action against the Bell System on November 20, 1974. In the wake of a four-year period of relative inactivity due in substantial part to stays on discovery issued pending the resolution of jurisdictional questions, discovery and other pretrial activity were carried on on an intensive basis beginning in 1979, United States v. Am. Tel. & Tel. Co., 461 F. Supp. 1314, 1337-49 (D.D.C. 1978), and the case went to trial on January 15, 1981. After eleven months of trial, *fn19" at a time when that trial was within approximately three weeks from completion, the parties submitted to the Court for its approval *fn20" under the Tunney Act (see note 8, supra) a proposed consent decree.

 Following extensive proceedings under that Act, with the active participation of intervenors similar in number and interests to those who are participating in the current proceeding, the Court approved the decree, provided some modifications were made. AT&T, 552 F. Supp. 131. One of these modifications, that was accepted by the parties and hence incorporated in the decree, was what is now section VIII(C) of the decree *fn21" -- a provision that is central to the current proceeding.


 Standard for Removal of the Restrictions

 A. Language of Section VIII(C)

 Section VIII(C) of the decree provides that


The restrictions imposed upon the separated BOCs by virtue of section II(D) shall be removed upon a showing by the petitioning BOC that there is no substantial possibility that it could use its monopoly power to impede competition in the market it seeks to enter.

 This provision established the standard to be applied in proceedings such as this for removal of the line of business restrictions imposed by the decree on the Regional Companies. *fn22"

 These line of business restrictions, embodied in section II(D) of the decree, were the necessary counterpart to the divestiture itself. That divestiture removed from AT&T its local Operating Companies, the monopoly bottlenecks which had been the means used by the Bell System as a whole to discriminate against its competitors in the other markets in which it was operating (long distance, manufacturing of telecommunications equipment, information services). In turn, the inheritors of the local monopolies -- the Regional Companies -- were prohibited from entering the competitive markets which had been, and could be expected to be again, the beneficiaries of anticompetitive activities by those in control of those monopolies. *fn23"

 In its Opinion explaining the decree, *fn24" the Court stated that proceedings addressing the continuing viability of the line of business restrictions


should be governed by the same standard which the Court has applied in determining whether [the restrictions] are required in the first instance. Thus, a restriction will be removed upon a showing that there is no substantial possibility that an Operating Company could use its monopoly power to impede competition in the relevant market.

 AT&T, 552 F. Supp. at 195 (footnote omitted).

 The rationale for a particular restriction may cease to provide a sufficient basis for continued application of that restriction, if, as the Court stated in 1982, the Regional Companies lost their "ability to leverage their monopoly power into the competitive markets from which they must now be barred." Id. at 194. It was anticipated that this would occur when technological developments eliminated the Regional Companies' local exchange monopolies or when substantial changes occurred in the structures of the competitive markets. The Court observed that, upon the happening of such events, the need for the restrictions might be fundamentally undermined. Id. Accord, 592 F. Supp. at 858-59, 868; 627 F. Supp. 1090, 1098 n.26 (D.D.C. 1986).

 It is important, however, to note precisely what it is that section VIII(C) mandates. That provision places a direct burden upon those who request a removal of a line of business restrictions, for it mandates that any such petitioner must make a showing25 that there is no substantial possibility that it could use its monopoly power to impede competition in the market it seeks to enter. As the underlined language indicates, a Regional Company will not be relieved of a restriction if it makes no showing at all, *fn26" or if it merely demonstrates (1) that there is no certainty of anticompetitive conduct, (2) that there is no substantial possibility that it would27 use its monopoly power to act anticompetitively, or (3) that its use of monopoly power will not entirely eliminate competition in the market it seeks to enter. *fn28"

 Some of the Regional Companies are advocating a variety of other tests, none of them having any basis either in the decree or in the Supreme Court's Swift decision which would apply absent the specific decree provision. Thus, among other arguments made to avoid the section VIII(C) standard are the contentions of Ameritech *fn29" and Pacific Telesis *fn30" that the market entry restrictions imposed in the decree were an inappropriate way to address possible abuses of monopoly power; those of NYNEX that section II(D)(3) of the decree "never had a true basis in antitrust theory," that the decree's treatment of information services as analogous to interexchange services was not "apt," and that the trial record is not an appropriate basis for judging the Department's recommendations; *fn31" and that of Pacific Telesis that the Court had improperly "made no factual findings of regulatory commission impotence or insufficiency." *fn32"

 BellSouth, for its part, makes the curious observation that since the actual parties to the decree have agreed to the elimination of the information services restriction, *fn33" the Court should implement that agreement "without delay," presumably without regard to the section VIII(C) requirements; *fn34" and U S West, after assuming a (non-existent) commitment by the Court to a de novo consideration of the subject at this time, neatly reverses the burden under section VIII(C), claiming that "a strong argument can be made" that the restrictions are to be relaxed unless the evidence "affirmatively shows" a substantial danger of anticompetitive effects. Comments at 25. *fn35" Like some of the others, U S West also insists upon treating the current proceeding as if it were a new antitrust action in which no judgment had ever been entered. *fn36"

 In view of the fact that what is before the Court is not a new antitrust suit in which the plaintiff would have the burden of proof, but requests for changes in a decree that became final several years ago, these contentions can only be characterized as frivolous. It is plain that collateral attacks on such a decree are inconsistent with the law of the case rule, *fn37" and equally plain that section VIII(C) does not require full-fledging proof of a new "antitrust injury," but that it speaks only of a "substantial possibility" that a Regional Company "could" impede competition.

 More fundamentally, there is not the slighest indication in the record surrounding the negotiation or the approval of the consent decree that, absent the most substantial alteration of market conditions, a judgment that was to end over thirty years of strife in the telecommunications industry and to establish new conditions to govern that industry thereafter, was to be dissolved with respect to one of its two critical elements immediately or almost immediately after entry. *fn38"

 The Department of Justice goes to some lengths to refute AT&T's point that it agreed to the decree so as to prevent litigation and other controversies regarding the leveraging of the monopoly power, and that the Court should not unnecessarily cause the revival of such controversies. *fn39" In one sense, the Department is entirely correct. Restrictions may not be maintained solely or at all to avoid controversy.

 However, the Court cannot help but reflect that one significant reason for the Bell System's agreement to enter into the consent decree was its weariness with constant controversy in the courts, the Congress, before the FCC, and before local regulators, and its willingness to trade those controversies about monopoly bottlenecks for an ability to compete in the interexchange and manufacturing markets without being burdened with the very kind of competition from monopolists that it was just abandoning. See, e.g., AT&T Comments at 7-8; Coll, The Deal of the Century, at 300-02. The Bell System could not know, and surely did not expect, that the word of the United States Department of Justice would be good only for as long as the individuals then in authority remained in their positions. *fn40"

 B. Application of Section VIII(C) Language to the Bottleneck Issue

 Section VIII(C), in effect, mandates a two-part analysis for the determination whether a particular line of business restriction should be removed. The first question must necessarily be whether the Regional Companies have retained monopoly control of an "essential facility," the local switches and circuits. See Otter Tail Power Co. v. United States, 410 U.S. 366, 35 L. Ed. 2d 359, 93 S. Ct. 1022, rehearing denied, 411 U.S. 910, 36 L. Ed. 2d 201, 93 S. Ct. 1523 (1973); United States v. Terminal Railroad Association, 224 U.S. 383, 56 L. Ed. 810, 32 S. Ct. 507 (1912); see also Hecht v. Pro-Football, Inc., 187 U.S. App. D.C. 73, 570 F.2d 982 (D.C. Cir. 1977), cert. denied, 436 U.S. 956, 57 L. Ed. 2d 1121, 98 S. Ct. 3069 (1978). It was their control of these switches and circuits that gave the Bell System its power over the competition. That control enabled the System to foreclose or impede interconnection to its network of the lines of its long distance competitors *fn41" and of the equipment produced by its manufacturing rivals. It also made possible the subsidization of one activity with the profits achieved in another. See generally, AT&T, 552 F. Supp. at 160-63 and 163 n.137. As long as the Regional Companies retain these same bottlenecks, the potential for the same or similar anticompetitive conduct is plainly still present.

 Assuming such continued control, the second question is whether there is a substantial possibility that these companies have the incentive and the ability to use this monopoly power to impede competition in the particular line of business they now seek to enter. *fn42"

 The answer to the first question will not vary with the particular line of business restriction at issue, but may be answered as a threshold matter applicable to all of the restrictions. The answer to the second question may depend to some extent upon the particular restriction under examination, however, and the various restrictions will accordingly be examined in Parts III, IV, and V, infra, in the context of the prohibitions that are sought to be removed by the motions. However, as will be seen below, in practical terms the two tests are not likely to differ much. For unless special circumstances are present, *fn43" as long as a Regional Company maintains monopoly power in an exchange area, it is generally more likely than not that it "could" use that power anticompetitively.

 C. Bottleneck Control

 In this section of the Opinion, the Court considers the first question; i.e., whether the Regional Companies have retained control of the local bottlenecks, and it answers that question unequivocally in the affirmative. *fn44"

 First. Most of the Regional Companies contend that they do not retain their monopoly power over the local bottlenecks. For example, U S West argues that it lacks bottleneck monopoly power because there now exists substantial consumer bypass. *fn45" Ameritech goes to some lengths to attempt to demonstrate that competition has reduced the Regional Companies' market power: it points to the existence of competitive alternatives for the switching and privatization of telecommunications systems, end user purchase of switches, and a diminished pool of monopoly revenues for subsidizing competitive products and services. *fn46" Ameritech Comments at 12-14; see also Bell Atlantic Comments at 12-14; BellSouth Comments at 37-38; and U S West Comments at 40-41. *fn47"

 There is no basis for any of these claims, and no serious effort is made to undermine Dr. Huber's findings to the contrary. Almost all the parties and intervenors other than the Regional Companies themselves acknowledge the continued existence of Regional Company monopoly power. *fn48" The Department of Justice, for example, does not urge removal of the restrictions on the ground that the local exchange has lost its bottleneck characteristics; to the contrary, it concedes that the exchange services continue to be monopolies, and that the Regional Companies continue to retain their monopoly power over "the local exchange bottleneck." *fn49" As explained infra, these assessments are correct; the Regional Companies do retain that power over the local bottlenecks, and there is little "bypass" of their switches and circuits.

 The exchange monopoly of the Regional Companies has continued because it is a natural monopoly. *fn50" Local exchange competition has failed to develop, not so much because state and local regulators prohibit entry into the market by would-be competitors of the Regional Companies, but because of the economic and technological infeasibility of alternative local distribution technologies. *fn51" The evidence introduced at the trial of this case clearly demonstrated that duplication of the ubiquitous local exchange networks would require an enormous and prohibitive capital investment, and no one seriously questions that this is still true.

 Exchange telecommunications is characterized by very substantial economies of scale and scope: as a general matter, the larger a Regional Company's traffic volume, the lower its unit costs. A Regional Company could easily aggregate the one percent of total calls that represent potentially competitive special access traffic with all of its ninety-nine percent monopoly traffic and achieve lower unit costs than could any bypass system. *fn52" In other words, objective economic conditions entirely preclude the provision of local distribution functions at a lower or equal economic cost than could the established local exchange carrier. AT&T, 524 F. Supp. at 1352-53; Department of Justice Memorandum filed August 16, 1981, at 39, 76. *fn53"

 There is likewise no indication that the Regional Companies' natural monopolies have been eroded by technological changes. Contrary to the assertions of several intervenors, the advent of the more widespread utilization of private branch exchanges (PBXs) *fn54" has not significantly, if at all, reduced the efficacy of the Regional Companies' bottlenecks. Some larger businesses have bought PBXs, allowing connection of their telephone lines to those PBXs rather than directly to a local switch controlled by a Regional Company. Huber Report at 2.7. But PBXs, useful as they are for intra-business communications, are not alternatives to the local switches and wires controlled by the Regional Companies. When customers with PBXs place either local or long distance calls to other locations, whether or not a PBX is also available there, the calls must still be carried over Regional Company local loop facilities and switched at one of the Regional Company central offices.

 On this basis, if state entry restrictions were lifted today, a "residual core of local exchange service" would remain a natural monopoly. Department of Justice Report at 97-98. *fn55" However, as will be seen below, the "residual core" of which the Department speaks is almost the entire nation and almost all the local loops and other short haul transmission pathways that connect customers to Regional Companies' central offices and to interexchange carriers' points of presence. See AT&T Comments at 46. *fn56"

  Some of the Regional Companies, while conceding that residential and small business users cannot do without the Regional Company monopoly bottlenecks, assert that this is not true with respect to the large users. *fn57" As the Huber Report conclusively demonstrates, however, that is just not so. The Report notes that even very large private network customers still employ far more switched (i.e., Regional Company) access lines than dedicated (i.e., private) access lines. Huber Report at 3.44-3.46. As the Report further found:


Users' requirements for a bundle of local and interexchange services can make any discrete focus on alternative high capacity systems misleading. Control over a single, essential piece of network, even a seemingly small and comparatively inexpensive one . . . may give LEC's [i.e., Regional Companies] 'account control, ' that is a guaranteed foot in the door with large customers, a window on their business, and the power to insist on dealing directly with them (emphasis added.)

 Huber Report at 3.45. And Dr. Huber further concluded that fully forty to fifty percent of large business customers' payments for private networks are attributable to access provided by Regional Companies. Report at 3.46-3.49, Figure IX.30, Table IX.31.

 To be sure, the Department of Justice and Dr. Huber refer at some length to technological developments, *fn58" particularly the emergence of a geodesic network. *fn59" However, they both acknowledge -- as they must -- that the geodesic network does not now exist, and that all these developments will, if ever, *fn60" impact the Regional Companies bottleneck control only in the future. *fn61" Department of Justice Report at 42-43; Huber Report at 2.23, 2.25-26. *fn62" Indeed, the Department relies on Huber's conclusion on the dispersal of electronic intelligence only for the proposition that it would be difficult for the Regional Companies to maintain a monopoly over local switching and transmission "in the long run." Report at 42-43. However, the proper inquiry under the test mandated by section VIII(C) is whether the Regional Companies control bottlenecks now, not whether they will still do so "in the long run." *fn63"

 The complete lack of merit of arguments that economic, technological, or legal changes have substantially eroded or impaired the Regional Company bottleneck monopoly power is demonstrated by the fact that only one-tenth of one percent of inter-LATA traffic volume, generated by one customer out of one million, is carried through non-Regional Company facilities to reach an interexchange carrier. *fn64" Huber Report at 3.9, Table IX.5. *fn65" To put it another way, 99.9 percent of all interexchange traffic, generated by 99.9999 percent of the nation's telephone customers, is today carried entirely or in some part by the Regional Companies (or their equivalents in the territories served by the independents). *fn66" The Department of Justice found only twenty-four customers in the entire United States who managed to deliver their interexchange traffic directly to their interexchange carriers, bypassing the Regional Companies. Department of Justice Report at 80-81. *fn67" It is clear, therefore, and the Court finds, that no substantial competition exists at the present time in the local exchange service, *fn68" and that the Regional Companies have retained control of the local bottlenecks.


 Interexchange Services

 A. Introduction

 Section II(D)(1) of the decree prohibits the Regional Companies from providing "interexchange telecommunications services." AT&T, 552 F. Supp. at 227. *fn69" "Interexchange telecommunications" is defined as "telecommunications between a point or points located in one exchange telecommunications area and a point or points located in one or more other exchange areas or a point outside an exchange area." AT&T, 552 F. Supp. at 229. "Exchange areas," for purposes of the decree, are the Local Access Transport Areas (LATAs), established by the individual Regional Companies with the approval of the Court, AT&T, 552 F. Supp. at 229, each of the LATAs encompassing "one or more contiguous local exchange areas serving common social, economic, or other purposes." Id. Loosely speaking, interexchange service may be equated with long distance service (although some long distance service occurs within a LATA and is therefore not interexchange service within the meaning of the decree).

 The factual predicate for the interexchange restriction was the large volume of evidence presented at the trial demonstrating that (1) the local exchange facilities operated for the Bell System by its twenty-two Operating Companies were essential for any firm that desired to provide long distance service, because without interconnection with the Operating Companies' switches and circuits it had no means of reaching the ultimate customer, the local possessor of a telephone instrument, and (2) the Bell System, through the Operating Companies, had consistently sought, often successfully, to exclude competition in the provision of long distance service by restricting interconnection to these local facilities. AT&T, 552 F. Supp. at 161-62; AT&T, 524 F. Supp. at 1353-57.

 More specifically, the evidence indicated that the Bell System's refusal to provide local interconnection to its long distance competitors, such as MCI, on fair and nondiscriminatory terms and conditions, and its manipulation of the exchange access and of the tariff system, *fn70" precluded meaningful competition in the provision of long distance services. AT&T, 552 F. Supp. at 160-63; AT&T, 524 F. Supp. at 1358. To put it more directly, the Bell System managed for several decades by a variety of means to stave off significant competition in the long distance market, and to that effort the local Operating Companies and the monopolies they represented were the key component. All of this was done to protect the Bell System's own long distance component -- the Long Lines -- from outside competition.

 In determining what remedy would most effectively protect in the future against similar anticompetitive abuses, both the parties and the Court carefully considered and rejected the alternative of improved FCC regulation. As explained elsewhere herein, federal and state regulation had simply not been capable of preventing the antitrust problems that the decree was to resolve. The Department of Justice argued, and introduced extensive evidence to prove, that the local exchanges are so complex, so technologically dynamic, and characterized by such vast joint and common costs that no set of regulations could realistically prevent competitive abuses. It also appeared that when the FCC did act, its efforts were largely unsuccessful.

 For example, the trial record shows that, despite FCC orders to do so entered in 1971, *fn71" in 1973, *fn72" and in 1974, *fn73" the Operating Companies failed and refused to provide its competitor MCI with the so-called FX and CCSA services that company needed to operate effectively in the long distance market, and that the interconnections necessary for MCI's provision of full-fledged long distance service were not provided until 1978, following the entry of orders of the Court of Appeals for this Circuit in the two Execunet cases. See note 12, supra. See also AT&T, 552 F. Supp. at 172 n.172. There were also unending struggles regarding protective connecting arrangements, *fn74" the location of competitors' switching equipment, and other similar and dissimilar anticompetitive problems.

 Accordingly, the parties agreed and the Court concluded, based upon the type of proof referred to above and in Part I, supra, and upon the more general and broader evidence of the ineffectiveness of regulation, Part VI, infra, that regulatory measures would not be effective in ensuring interexchange competition free of coercion by the carrier in control of the monopoly bottlenecks. A judicial, regulatory-type detailed injunction was likewise discarded as probably equally ineffective. AT&T, 552 F. Supp. at 167-68. That, then, left the long-discussed remedy of divestiture, and it was chosen by the parties and approved by the Court.

 It was on this basis that the decree adopted two closely related remedies: AT&T would continue to provide long distance service, *fn75" but it would be stripped of the Operating Companies with their local monopolies, the essential means for anticompetitive acts against other long distance providers. The Regional Companies *fn76" -- the heirs to the local exchange service and hence to the monopoly bottlenecks -- would, in turn, be prohibited from exercising the long distance function, thus depriving these companies of the incentive for manipulation or discrimination in the use of the local facilities and of the ability to manipulate or discriminate. *fn77"

 In approving the interexchange restriction contained in section II(D)(1) the Court reasoned that, to have permitted the Regional Companies to provide interexchange services, would have "undermine[d] the very purpose of the proposed decree -- to create a truly competitive environment in the telecommunications industry." AT&T, 552 F. Supp. at 188. The Court found that, were the Regional Companies allowed to be present in the interexchange market while they also maintained monopoly control of the local telephone markets, they would be able to pursue precisely the same course as had the Bell System: (1) to discriminate in a variety of ways against their non-monopoly competitors through judicious use of the local monopoly; and (2) to "subsidize their interexchange prices with profits earned from their monopoly services." Id.

  In order to facilitate the growth of a "truly competitive telecommunications industry," the Court therefore approved the proposed decree language prohibiting the Regional Companies from entering the interexchange services market *fn78" as an integral and vital part of the prophylactic remedy represented by the decree. It is that prohibition that is now again before the Court on the basis of requests for its removal.

 B. Original Department of Justice Proposal

 In its Report submitted on February 2, 1987, the Department of Justice, in addition to recommending removal of the restriction on mobile interexchange services (see Subpart F, infra), advocated that the basic interexchange restriction embodied in section II(D)(1) of the decree be sharply cut back. Instead of being prohibited from engaging in interexchange services, each Regional Company would be authorized to render all such services, with the exception only of those interexchange calls that originated or terminated in an area in which the particular company had a legally protected monopoly. Department of Justice Report at 59, 68-76. *fn79" The Regional Companies by and large initially supported this approach, albeit with substantial modifications.

 However, following its study of the comments its proposal had generated, *fn80" the Department reversed its field. Its subsequent submissions to the Court concluded both that the Regional Companies retained the ability to use their control of the monopoly bottlenecks to impair interexchange competition, and that the in-region out-of-region proposal itself presented insuperable practical difficulties. Accordingly, the Department withdrew that proposal. Response of the United States at 24-28. The Court agrees with both prongs of the Department's present position.

 The bottleneck control issue is discussed at some length in Part II of this Opinion, and no purpose would be served by a detailed reiteration of that discussion here. Suffice it only to say once again that the monopoly bottlenecks continue to exist essentially in unchanged scope and form, and that they continue to provide the same basis for anticompetitive activity as they did prior to the Bell System break-up. *fn81" It is worthwhile, however, to describe briefly the basis for the Court's conclusion, paralleling that of the Department, that it is not practical to lift part of the interexchange restriction so as to permit each Regional Company to offer interexchange services outside but not inside its own region.

 The plain and universally recognized fact is that the market for interexchange services is national. Because of that overriding fact, it is unlikely in the extreme that a Regional Company could compete successfully with other interexchange companies (or even exist in the interexchange market) if, unlike its competitors, it were able to offer service in only parts of the country. *fn82" The Regional Companies immediately grasped that flaw in the Department's proposal, and they sought at once to expand it so as to eliminate the conceptually vital in-region exclusion. *fn83" In short, they asked that the interexchange restriction be eliminated in its entirety -- a solution that the Department had properly rejected even in its original submission.

 Beyond that, it is clear that it would be technically difficult to determine what Regional Company facilities were being used to carry traffic to and from its in-region as distinguished from its out-of-region facilities, or what marketing, consulting, or administrative activities related only to the permitted out-of-region services. This uncertainty would greatly facilitate violations and evasions of the new standard, a development to be avoided if at all possible.

 One inevitable consequence of the telecommunications environment created by the Department's six-region proposal would be to confront the Court with the never-ending task of deciding close, finely-tuned disputes between the Regional Companies and their competitors regarding questions such as those referred to above. The result would be that, instead of phasing out its oversight over a substantial part of the telecommunications industry, the Court would become even more deeply and intrusively involved in that task. None of the parties could welcome such a development. Nor does the Court.

 For these reasons, to the extent that the original Department of Justice recommendation still survives in motions filed by others, *fn84" it must be and it is hereby rejected.

 C. Retention of the Restriction With Liberal Grant of Waivers

 The Department now recommends that the interexchange restriction be retained, but that the Court hereafter entertain requests for waivers of that restriction as soon as state and local regulation is lifted with respect to a particular area or locality. Department of Justice Response at 9, 28, 48. That recommendation has even less merit than the Department's original proposal, for a number of reasons.

 First. The recommendation proceeds on the basis of the erroneous assumption that repeal of local regulation will open the local exchange monopolies to competition. To be sure, as long as states and localities prohibit outsiders from competing with the local Operating Companies, the monopolies will continue to exist. But the reverse is not true. Even if all state and local regulation prohibiting competitive entry into the local exchange market were to be repealed tomorrow, *fn85" and anyone were free, as a matter of law, to sell local telephone service, the exchange monopolies would still exist substantially in the same form and to the same extent as they do now. The conditions that caused these monopolies to emerge in the first place -- the need for connecting local consumers of telephone service to the telephone company central office switches by means of wires strung or buried in millions of places throughout America's cities and rural areas, and the enormous capital resources required for this project -- preclude any thought of a duplication of the local networks.

 Only when a practical and economically-sound method is found for large-scale bypass or for connecting local consumers by a different method -- as microwaves and satellites were ultimately found to be feasible for handling long distance traffic -- can the Regional Companies' local monopoly be regarded as eroded. Accordingly, waivers of the restriction could not be granted based on an absence of state and local regulation unless these regulatory changes were accompanied by substantial changes in telecommunications technology, the economics of the provision of local telephone service, or both.

 Second. As experience has shown, to hold out to the Regional Companies the prospect of piecemeal waivers or similar judicial orders under the imprecise conditions suggested by the Department of Justice would (1) serve to encourage their resistance to the grant of full equal access and (2) cause them to redouble their efforts to nibble incessantly at the edges of the restrictions, in the expectation that this would result in their complete entry into the prohibited markets. See United States v. Western Electric Co., 592 F. Supp. 846, 867-68 (D.D.C. 1984); see also Reply of Competitive Telecommunications Association at 5-8. In fact, executives of and spokesmen for the various Regional Companies rarely miss an opportunity to explain their desire, nay their right, to operate interexchange networks, and the groundwork for such expansion is laid whenever and wherever possible. See, e.g., statement of Thomas E. Bolger, Chairman of Bell Atlantic, Washington Post, December 30, 1985, Business Section at 1. The uncertainty, turmoil, and confusion that would be created in the telecommunications industry by implementation of the Department's recommendation are as undesirable as they are unnecessary.

 Third. As stated above, the Court has for some time sought to find means for phasing out or reducing its "oversight" responsibilities consistently with its responsibilities under the decree. *fn86" Several of the decisions made today are steps in that direction. See Parts VIII and IX, infra. However, if the Department's recommendations were adopted, the Court would become involved in detailed regulation of the Regional Companies with a vengeance.

 The Court would be constantly reviewing requests for removal of interexchange and information services restrictions on a state-by-state, possibly county-by-county, basis, in order to determine whether local regulation had changed sufficiently to allow such removals in the particular area. In order to carry out that responsibility, the Court would have to review and to scrutinize, on an ongoing and unending basis, the effect, and possibly the purpose, of old and new state and local regulation of telecommunications providers all over the United States. *fn87" It is difficult to imagine a more systematic and offensive intrusion into local affairs, and on this basis, one intervenor aptly describes the Department of Justice proposal as "an affront to federalism." CP National Corporation Comments at 6.

 The task prescribed by the Department of Justice is one that a federal court should undertake, if at all, only if that is absolutely essential for the protection of federal constitutional or other legal rights. Clearly, that is not the situation here, and the Court accordingly declines to enter that thicket.

 For these reasons, the Court will not entertain applications for waivers that are predicated only upon changes in state or local regulation. Of course, if prima facie showings are made that, for technological or economic as well as legal reasons, competition in local exchange markets is feasible and has, in fact, emerged on a substantial scale, requests for removal of particular restrictions will be both entertained and granted. However, it may well be suspected that this will turn out not to be a piecemeal process as the Department of Justice envisions it, but an eventual broad-scale removal of restrictions as new technology or new market structures emerge on a nationwide basis. *fn88"

 D. Complete Removal of the Restriction

 That leaves, then, the motions filed by the Regional Companies, supported by almost none of the other over one hundred seventy entities that have filed papers in this proceeding except the Federal Communications Commission, *fn89" that the restriction on the provision of interexchange services be removed in toto.

 These requests are met initially by the obstacle, discussed supra, that, with the exception of the minuscule amount of traffic that bypasses the Regional Companies' -facilities, their monopoly bottlenecks are as solid and pervasive as they were when the decree was entered. It is equally clear that nothing has occurred to change the decree conclusion that those in control of the local bottlenecks have the incentive and ability to use their monopoly power anticompetitively in the interexchange market.

 In view of the history of past abuse of the bottlenecks in the Bell System's long effort to disadvantage long distance competitors detailed supra, and the continuing solidity and pervasive nature of the bottlenecks, a dissipation of the ability to act anticompetitively can be assumed only if some other fundamental change has occurred in the situation -- a change that would permit the Court to find that, notwithstanding the continued existence of the local bottlenecks, the risk of Regional Company anticompetitive conduct in the interexchange market has disappeared.

 It is suggested by the Regional Companies that changed circumstances have occurred in five respects: *fn90" (1) more effective regulation by the FCC; (2) the existence of the seven Regional Companies in lieu of the one Bell System; (3) "substantial implementation" of equal access; *fn91" (4) the GTE analogy; and (5) the possibility of new antitrust suits.

 The issue of regulation, which is common to the disputes involving all three of the core restrictions, is discussed with respect to all of them in Part VI, infra. As for the remainder, some of the claimed developments have not, in fact, occurred, and others have not had an effect on the interexchange services market.

  1. Division of Bell System Into Seven Companies

  Much is made by the Regional Companies of the circumstance that they are seven while the Bell System was only one. The difficulty with the arguments advanced based upon that undoubted fact is that the independence of the Regional Companies from the Bell System does not constitute a new development; it was mandated in the very same decree that also mandated the interexchange restriction. The decree, in fact, assumed the necessity for that restriction notwithstanding the break-up of the Bell System into seven or more new entities. *fn92"

  During the proceedings that led to the approval and entry of the decree, the Bell System advised the Court that its evaluation of the decree could and should be premised on the existence of seven Regional Companies, *fn93" and the Court did just that. *fn94" The record shows without the slightest ambiguity that the consequences that were to flow from the divestiture and the restrictions were identified and taken into account in 1982 with respect to the post-divestiture Regional Companies, not merely the pre-divestiture Bell System.

  That was so because the crux of the problem prior to the divestiture was not so much the size of the Bell System (although that played a part) but its control of the local exchange bottlenecks. Now that the control of these bottlenecks has shifted to seven regional entities, they must necessarily be limited as was the Bell System to prevent their exploitation of these bottlenecks, absent some substantive change. And, as discussed in detail above, there has been no substantive change: the bottlenecks are as pervasive as ever. It is undoubtedly for these reasons that the Department of Justice, too, recognizes that "the fact of divestiture itself" is not "a sufficient changed circumstance" to justify a modification of the restrictions. Reply at 57. *fn95"

  The Regional Companies further argue that now, unlike then, benchmarks exist by which the performance of one of them can be measured against that of the six others. *fn96" Again, the possibility of the existence of benchmarks was necessarily included in the decree assumption which imposed the restrictions upon the several successors of the Bell System. Beyond that, as discussed in Part VI, infra, the Regional Companies are free, by virtue of the regulations proposed by the FCC, to adopt entirely dissimilar accounting and other procedures, making impossible intelligent benchmark comparisons between and among them. *fn97"

  2. Equal Access

  As concerns the issue of equal access mandated by Appendix B of the decree on which several of the Regional Companies rely as a changed circumstance, it is by no means established that this objective has been achieved. Several motions are pending before the Court in which the question of compliance by the Regional Companies with their equal access obligations is very much contested. *fn98" These motions raise substantial issues indicating Regional Company violations of their equal access obligations which the Court will have to resolve on their merits. *fn99" At least pending that resolution, removal of the restrictions could not conceivably be predicated upon an assumed fulfillment by the Regional Companies of their equal access obligations.

  More fundamentally, however, even if the equal access requirements had been fully met, *fn100" a valid basis would not exist for a removal of the restriction on equal access grounds. If equal access had been all that was involved, the decree could have simply mandated the Bell System to provide such access in the same manner as Appendix B to the decree prescribes it for the Regional Companies. Instead, the decree directs the massive divestiture and compliance with the line of business restrictions. It can only be concluded from that choice that equal access was intended to reinforce the decree's basic relief provisions, not to be a substitute therefor.

  Finally, equal access is not an objective that, once achieved, remains fixed and cannot be undone. On the contrary; to the extent that the Regional Companies have the incentive, the ability, and the freedom under the decree to do so, they may be expected to chip away at equal access as new configurations, changed technologies, and novel services provide the requisite opportunities.

  The Bell System was for decades under various judicial and regulatory mandates not to discriminate with respect to access by competing interexchange carriers, and it managed as consistently to evade these mandates. The bottleneck monopoly provides opportunities for a wide range of means to disadvantage competitors. *fn101" The Department of Justice has correctly stated that "without significant technological and market structure changes, these dangers will not disappear even after full equal access is achieved, for as the AT&T case showed, network standards and information flows can be used by an exchange provider to disadvantage competitors." Reply at 62.

   3. The GTE Analogy

  Several Regional Companies *fn102" argue that, inasmuch as the Court approved the antitrust consent decree involving GTE, which does not include line of business restrictions similar to those in the instant decree, consistency requires the removal of the restrictions here. There is no merit to that contention.

  In the first place, it cannot reasonably be argued that the adoption of the GTE decree constitutes a change in terms of the section VIII(C) standard of the decree in the instant case. To put it another way, the Regional Companies lack standing to seek a modification of this decree merely because the Department of Justice agreed to a consent decree in another antitrust suit with an entirely different defendant, and the Court approved that decree. The Department of Justice was surely not required under law to insist upon parity in the GTE case with the remedy adopted in the AT&T case. *fn103" As for the Court, it was obliged to give, and it did give, considerable deference to the parties and the agreement they had reached when it, in turn, passed on the GTE consent decree. AT&T, 552 F. Supp. at 151. *fn104"

  Furthermore, when the Court approved the GTE decree in December 1984, it carefully considered the similarities and differences between the Regional Companies and GTE, and it concluded, agreeing with the Department of Justice, that different treatment was justified, for the following reasons:


To be sure, in some significant respects, particularly size and scope of operations, GTE more or less matches the Bell Regional Holding Companies (at least the smaller ones). In other ways, however, the two types of entities differ to some substantial degree.


Each of the Bell regional companies has a very strong, dominant position in local telecommunications in the area in which it serves; GTE's operations, by contrast, are widely scattered. Moreover, the Regional Holding Companies also have the facilities to provide all the intercity and inter-LATA traffic throughout their regions, while the GTE Operating Companies control little by way of intercity facilities, and what facilities they do have are by and large of the entrance type which do not cover the areas in which the companies operate. (Transcript of Hearing at 40-41). Finally, internal planning documents of GTE and Sprint indicate that Sprint's interexchange network will, even by 1985 or 1986, reach only sixteen GTE cities (Transcript of Hearing at 42), and the Department of Justice has observed that of all access lines in existence, only one or two per cent are in GTE cities, and that Sprint has the fewest of these. (Transcript of Hearing at 41). All these factors suggest that entry by other interexchange carriers into the local markets dominated by GTE is far less likely and the anticompetitive effects of improper GTE actions will be both less probable and more easily detectable (footnotes omitted).

  United States v. GTE Corp., 603 F. Supp. 730, 737 (D.D.C. 1984). Nothing of significance has occurred since the GTE decree was entered to alter that assessment.

  It is also worth noting that, when counsel for the Department of Justice appeared before the Court to defend the GTE settlement, he advised the Court that, should the Court believe that approval of that settlement might in any way cast doubt upon the appropriateness of the restrictions in the Bell System decree, the Department would prefer that the Court disapprove the GTE consent decree rather than to cast any shadow on the Bell System decree, particularly its line of business restrictions. *fn105" The Court approved the GTE decree on that basis.

  4. New Antitrust Actions

  The Department of Justice and several of the Regional Companies argue that the restrictions are unnecessary because, should the companies act in an anticompetitive manner, it would always be possible to remedy the situation by a new antitrust action. *fn106" The Department of Justice supports that contention, generally when other explanations fail. *fn107"

  The decree restrictions were to constitute a prophylactic measure, one that would prevent future antitrust violations and thus render new antitrust suits or similar actions unnecessary. AT&T, 552 F. Supp. at 150. It would be illogical or worse to destroy one of the two pillars of a decree that was adopted after an enormous litigation struggle lasting almost ten years, on the basis of the thin hope that, following the evaporation of the essential relief afforded at the conclusion of that struggle, the Department would bring a new antitrust action to start the cycle all over again. *fn108" In fact, the Department itself has in the past called the idea of enforcement through a new antitrust action "disingenuous." Department of Justice Reply to Responses to the Department's Proposals Regarding Section VIII-C Waivers, April 5, 1984 at 49.

  E. There Is Competition in the Markets

  It is not without significance that competition now exists in the interexchange market, and that the entry of the Regional Companies into that market is not necessary to give it vitality. To be sure, AT&T still retains the lion's share of that market, but there are now some 530 long distance carriers in the United States, eight of them serving twenty-five or more states. See Federal Communications Commission, Summary of Long Distance Carriers, at 2-3 (March 12, 1987); see also FCC Comments at 34-35 & n.39. According to the Department of Justice, AT&T's rivals appear to be making sufficient progress that it would be at least premature to view the entry of the Regional Companies as necessary to preserve interexchange competition. Response at 45. The Court agrees with that assessment.

  F. Mobile Services

  The Department of Justice still recommends that the interexchange services restriction be lifted completely with respect to cellular radio, paging, and other mobile interexchange services. Response at 54-59. The basic reason given for this recommended modification is that mobile services constitute markets separate from landline interexchange services, *fn109" and that, as the Department puts it, everyone recognizes that, because of its higher price and limited capacity, cellular radio and other mobile services cannot be substitutes for the landline services, and that such services therefore constitute a separate market. Response at 55. *fn110"

   The Department's analysis appears to be correct, at least as of now, *fn111" but that alone does not resolve the issue before the Court. On a purely literal level, interexchange cellular radio is an interexchange service as defined in section II(D)(1) of the decree. As such, it is of course prohibited to the Regional Companies absent developments that would cause the Court to find that, contrary to cellular radio's status at the time of the entry of the decree, its dynamics have changed to the point that there is no longer a substantial possibility that it could be used to impede competition. It cannot reasonably be claimed that such new developments have taken place.

  More substantively, the entry of the Regional Companies into the cellular business without individualized scrutiny *fn112" would raise precisely the same concern that led to the adoption of the interexchange restriction in the first place: the possibility of discrimination against interexchange competitors in the provision of the access needed to reach the cellular customers. *fn113" A number of developments contribute to the conclusion that such discrimination is not only possible but probable.

  In the first place, several of the Regional Companies are not even willing to accede to the minimal Department of Justice recommendation that, should they be allowed into the interexchange market, they grant complete equal access to competing interexchange carriers, included in the intra-LATA portion of the cellular systems. *fn114"

  Moreover, without even having been in the interexchange cellular business across the board, the Regional Companies appear to have engaged in acts of discrimination against other mobile services providers -- activities that do not inspire confidence that, should the companies be permitted to enter the cellular market without limitation, they would treat competitors in an even-handed manner. According to the Huber Report itself -- upon which the Department of Justice otherwise heavily relies -- the Regional Companies have used their control over the local bottlenecks in a variety of ways to impede competition by providers of mobile service. Some of these anticompetitive activities are catalogued at slip op. pp. 153-54, infra.

  There is also the broader concern that, should the motions be granted, a Regional Company could evade the basic interexchange services restriction itself by the simple expedient of constructing a connection between its mobile telecommunications switching offices and any of their standard end offices, thus providing long distance service throughout the country through a combination of cellular and standard interexchange facilities.

  Several of the Regional Companies, see, e.g., U S West Memorandum at 159-60 & n.171, rely on the grant by the Court of several waivers on a case-by-case basis with respect to interexchange cellular services, contending that such waivers established the principle that the test of section VIII(C) has been satisfied. Not only is that contention entirely erroneous, but it exemplifies the attempts made from time to time by Regional Companies to take advantage of extremely limited precedents as bases for broad departures from the requirements of the decree.

  Whenever the Court has granted waivers, it was essentially in the context of representations that highways and automobile traffic patterns (typically in large metropolitan areas) were such that the public benefits accruing from slight departures from the strict LATA boundaries to accommodate motorists with cellular phones were so substantial that they outweighed, on this limited basis, the dangers to fair competition. AT&T, 578 F. Supp. at 647-48; Memorandum of January 28, 1987 at 3. These waivers are not precedents for the broad relief the Regional Companies seek, and that relief, were it to be granted, would enable these companies to impede competition on a significant scale.

  There is no basis under the decree for the removal of any of the restrictions on interexchange services, and the requests for such relief will be denied.



  A. History

  Section II(D)(2) of the decree, as amended by section VIII(A), prohibits the Regional Companies from manufacturing or providing telecommunications products or manufacturing customer premises equipment *fn115" (CPE). *fn116"

  In every significant respect, this restriction mirrors one of the other core restrictions, that on interexchange services: the manufacturing restriction, too, is based on voluminous trial evidence; the local monopoly is as central to the market here as it is to the interexchange services market; and the incentive and ability to act anticompetitively have not been significantly altered by the division of the Bell System into seven Regional Companies, by FCC regulation, *fn117" or by any other factor. Indeed, in one respect the consequences of a removal of the manufacturing restriction would be even more visibly and directly counterproductive than a removal of the interexchange restriction: a flourishing, broad-based, innovative industry would be cut back to become one dominated by a small number of muscle-bound giants, possibly dominated by foreign conglomerates.

  The manufacturing restriction *fn118" was based in substantial part on evidence presented by the Department of Justice at the trial of this case indicating that the Bell System had improperly monopolized the market for telecommunications equipment, in that its local Operating Companies purchased such equipment primarily from Western Electric Company, the System's manufacturing affiliate, and "engaged in systematic efforts to disadvantage outside suppliers." AT&T, 552 F. Supp. at 190-92. Further; the evidence suggested that, while the Bell System's anticompetitive activities in the long distance market were largely formulated by AT&T headquarters, the discriminatory procurement practices were primarily those of the local Operating Companies. *fn119"

  Since the Bell System accounted for over eighty percent of the nation's central office switching and transmission equipment purchases, *fn120" only small fractions of the market remained open to independent manufacturers. Specifically, the Department alleged, and it appeared to the Court, *fn121" that the local Operating Companies had engaged in three general types of anticompetitive conduct with regard to the telecommunications equipment and CPE markets.

  First. As testimony and other evidence demonstrated, the Operating Companies managed, by one strategem or other, to purchase Western Electric's products, even when those products were more expensive or of lesser quality than alternative goods available from unaffiliated vendors. *fn122"

  Second. The Operating Companies and Bell Laboratories (the Bell System's central research and engineering affiliate) *fn123" engaged in discrimination in the dissemination of information and design by granting Western Electric premature and otherwise preferential access to necessary technical data, compatibility standards, and other information about the Operating Companies' needs and requirements and the evolving characteristics of the local exchange. The delays encountered in these respects by Western Electric's competitors frequently made it difficult, if not impossible, for them to compete for Operating Company business: Western Electric was ready with the products when they were needed, and the competitors were ready several months later. The not unexpected result was a further skewing of procurement toward the Bell System's manufacturing arm and away from independents.

  Third. The Bell System subsidized the prices of its equipment with the revenues from the Operating Companies' monopoly services. *fn124" The effect of this practice, as with respect to cross-subsidization generally, was (1) to permit the Bell System to undercut other producers of equipment (which lacked such a subsidy), and (2) unfairly to burden the consumers with excessive rates for the monopoly services they were furnished by the Operating Companies. These rates reflected not only the costs of those services but also the Bell System's need for funds for underselling the manufacturers and providers of non-monopoly products, e.g., those engaged in the business of making or selling telecommunications equipment or CPE.

  These various abuses should in theory have been discovered and corrected by federal and state regulators, but the evidence showed that, due to the size, power, and complexity of the Bell System and its Operating Companies compared to the small, inadequately staffed regulating bodies, this rarely occurred. See Part VI, infra. Moreover, when occasionally regulators did issue orders to halt improper activities, the Bell System routinely petitioned for reconsideration or rehearing, sought regulatory or judicial stays, played federal law and regulation against state law and regulation and vice versa, and in other ways delayed action until the regulators, more often than not, lost interest or gave up in frustration. *fn125"

  In approving the restriction on the manufacture of telecommunications equipment and CPE, the Court observed that such equipment, to be of practical use, had to be connected, directly or indirectly, to a local exchange. *fn126" The Court also concluded that there is a critical interdependence between telephone company equipment and CPE: the standards for one dictate the standards for the other. Since the Regional Companies were free to choose which equipment to locate in their central offices, they were able to dictate the standards to which the CPE had to be designed.

  All these problems were exacerbated by the fact that, due to the monopoly power possessed by the Operating Companies in the exchange telecommunications end product market, they lacked the competitive restraints "that ordinarily prevent the typical vertically-integrated company from engaging" in discrimination and cross-subsidization. On this basis, the "Operating Companies . . . would be able to pay inflated prices for poor quality equipment and to reflect these costs in their rates without suffering a diminution in revenues." AT&T, 552 F. Supp. at 190; AT&T, 524 F. Supp. at 1368-70. The Court therefore concluded that, inasmuch as there was no competition in the end product market, i.e., exchange telecommunications, and the purchasing decisions of the Operating Companies were largely immunized from competitive pressures, widespread abuses became possible and, in a sense, almost inevitable.

  Since the Regional Companies were to become the "heirs" of the Bell System with respect to ownership and control of the local Operating Companies and their facilities, with the identical incentives and abilities as the Bell System in the telecommunications equipment market, the parties agreed on and the Court approved the manufacturing restriction on these companies embodied in section II(D)(2) of the decree. This, the Court decided, would ensure that purchasing and design discrimination and the consequent misallocation of costs would not be re-created. AT&T, 552 F. Supp. at 190-91. *fn127" And it also concluded that, if after the break-up the Regional Companies were permitted to manufacture CPE or telecommunications equipment or to market such equipment, *fn128" nonaffiliated manufacturers would once again be disadvantaged and "the development of a competitive market would be frustrated." Id.

  B. Anticompetitive Activity is Probable

  In view of that relatively recent history, the question before the Court is whether a removal of the restriction is justified under section VIII(C) or whether such a removal would present a substantial risk that conditions of anticompetitive activity, concentration of the telecommunications equipment market in a few hands, monopolistic pricing, and a relatively sluggish pace of innovation, will return.

  As will be seen infra, the short answer to the question about a renewal of anticompetitive activity here, as with respect to the interexchange restriction, is that no changes have occurred in the last three years that would warrant removal of the restriction on manufacturing: (1) the Regional Companies still have an ironclad hold on the local exchanges; (2) collectively they account for the purchases of what may be estimated at seventy percent of the national output of telecommunications equipment, only slightly less than the share of the pre-divestiture Bell System; (3) if the restriction were lifted, the Regional Companies may be expected to act as did the Bell System: they would buy all, or almost all of, of their equipment requirements from their own manufacturing units rather than from outsiders; (4) no measures, regulatory or otherwise, are available effectively to counteract such activities; and (5) in short order following removal of the restriction, a return to the monopolistic, anticompetitive character of the telecommunications equipment market would be likely, if not inevitable. The Court will now elaborate on several of these conclusions. *fn129"

  The Department of Justice claims that technological and market changes, in addition to the existence of improved federal regulation, have rendered the manufacturing restriction unnecessary, *fn130" and in this assessment it is of course supported by the Regional Companies. *fn131" These changes, it is said, eliminate any substantial risk that the Regional Companies could use their monopoly power in the various telecommunications equipment or CPE markets. *fn132" That analysis is riddled with serious flaws.

  First. The Department and the Regional Companies rely in substantial part on "the continued dispersal of equipment consumption, and the steady consolidation of equipment production," e.g., Department of Justice Report at 161, stemming from the creation of the seven Regional Companies. On this basis, they claim that, because each company accounts for no more than a relatively small percentage of the purchases in any particular market, the purchasing decisions of one or several Regional Companies cannot have much impact on competition in the equipment market as a whole.

  As explained above, on the most basic and literal level the existence of the seven Regional Companies is not a new development not contemplated when the decree was entered. Those who drafted, submitted, and approved the decree included the restriction on manufacturing at the same time as they provided, in the same decree, for the break-up of the Bell System into as many as twenty-two or as few as seven local units and hence into the corresponding dispersal of purchasing power. *fn133" To make sense of the decree as a whole, therefore, it must necessarily be assumed that something more than the seven-fold division of the purchasing decisions is required to constitute the changed circumstances contemplated by section VIII(C) as a prerequisite to a removal of the manufacturing restriction. *fn134"

  It is true, of course, that any particular Regional Company does not, by itself, have a dominant share in the national equipment market. This does not vitiate the substantial possibility, however, that even on its own, such a company could use its monopoly power to engage in anticompetitive conduct in the equipment markets, national or regional.

  The Department of Justice concedes that if the restriction were lifted, each of the Regional Companies would satisfy all or nearly all of its equipment needs from its own manufacturing affiliate.135 Dr. Huber estimates that exclusive in-house purchasing by any particular Regional Company will, depending upon the type of equipment, foreclose five to fifteen percent of the United States equipment market, *fn136" although with respect to some items of equipment that proportion may reach as high as twenty percent. *fn137"

  These figures are of course highly significant in and of themselves. Under the law, serious competitive concerns are raised even when relatively small market shares, for example as low as seven or eight percent, would be foreclosed as a result of leveraging of regulated monopolies into a related but unregulated market. See Otter Tail Power Co. v. United States, supra; Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 275-76 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 62 L. Ed. 2d 783, 100 S. Ct. 1061 (1980); AT&T, 524 F. Supp. at 1379 n.174; International Tel. & Tel. Co. v. GTE Corp., 449 F. Supp. 1158, 1177-83 (D. Hawaii 1978). This leveraging doctrine serves antitrust interests by assuring that more efficient producers are not excluded from the market, and it prevents frustration of public regulation of subscriber rates. *fn138"

   Additionally, the cited figures actually fail to present the full measure of the anticompetitive situation since they focus entirely on national and even international markets. See, e.g., Department of Justice Report at 171-72 n.337, 173. To obtain a realistic picture, one must also evaluate the individual Regional Company power in their regional markets or submarkets. See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 324-25, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). In their regions, these companies occupy positions of unquestionable dominance, *fn139" and substantial anticompetitive effects would be felt in these regional markets if the manufacturing restriction were lifted. *fn140"

  Suggestions have been made that, at least with respect to some items of equipment, not all Regional Companies would purchase it from their own affiliates. Not only is any such assumption contradicted by the Department of Justice and Huber reports, *fn141" but experience since divestiture has been that Regional Companies have entered markets, many entirely foreign to telecommunications, just as quickly as they were legally free to do so by judicial construction, waiver, or otherwise, and occasionally even when they were not legally free to do so. It would be entirely unrealistic to assume that these companies would hereafter fundamentally reverse their pattern of behavior and refrain from entry into the telecommunications and CPE businesses that are allied to enterprises in which these companies are already engaged and that are potentially fertile sources of cross-subsidy skim-offs.

  The companies may also be expected to be motivated to enter these markets by the dynamics of the relations among them and the imperatives of the marketplace. Their corporate images will not tolerate their abstention, and a Regional Company that opted out may be found by shareholders and others to have passed up a profitable extension into an adjacent market. *fn142"

   In any event, as explained above, section VIII(C) of the decree prohibits the lifting of a line of business restriction if a Regional Company merely "could" impede competition in the market it seeks permission to enter; it does not charge the Court with finding that such a company "would" do so. In law, under section VIII(C), and in experience on the basis of Regional Company behavior to date, it is reasonable to assume that all the Regional Companies would enter the manufacturing market; that they would satisfy all or nearly all of their equipment needs from their own manufacturing subsidiaries; and that they would thus foreclose on an average some seventy percent or more of the various equipment markets. *fn143" This would of course constitute an enormous step back to the pre-divestiture situation. *fn144"

  In addition, Regional Company conduct taken in response to its incentive to purchase equipment from its own affiliate or joint venture partner (see Subpart C, infra), would tend to create a balkanized, ideosyncratic equipment market in which each manufacturer would sell primarily to the Regional Company with which it was affiliated -- a development that would even further shrink, and shrink drastically, the size of the equipment market that was not simply parasitical. *fn145"

  C. Joint Regional Company Actions

  These threats to competition would be further aggravated if the Regional Companies acted in concert with respect to manufacturing and purchasing. There has been no showing nor even plausible speculation that the companies could not or would not act in combination (1) by entering into explicit or implicit agreements with each other regarding specifications or interconnection requirements, or (2) by disadvantaging unaffiliated manufacturers by making use of their participation in Bellcore. *fn146"

  It is argued that the Regional Companies are more likely to compete fiercely with each other for the procurement business than to act jointly and in combination. It will no doubt occur to some or all of these companies, however, that each of them would benefit financially if it could manufacture for sale and sell in its own region, all of its manufacturing output, without fear of the only formidable competition -- another Regional Company -- and thus possess an enormous captive market. *fn147" Cutthroat competition by all against all in all the regions would not look nearly as attractive from an economic point of view.

  It has also been suggested that collusion through the Bellcore connection could be prevented by limiting Bellcore's permitted range of activities. Department of Justice Report at 178. That argument, too, looks far more palatable in concept than it does when the necessary details of implementation are examined. No proponent of the Bellcore-limitation approach has suggested, either generally or specifically, how that entity's activities should or could be limited. *fn148" The reason for that reticence is simple.

  Bellcore has responsibility under the decree to prevent the technical fragmentation and hence the deterioration of the national telephone network; to perform the technical and engineering responsibilities that must be performed on a centralized basis if there is to be a single functioning system; to set the technical and performance standards for network equipment; and to act as a central liaison between the civilian telephone system and the military's and other emergency functions. AT&T, 552 F. Supp. at 208-09; Western Electric Co., 569 F. Supp. at 1114-18. To decentralize or otherwise to limit the responsibilities of Bellcore so as to prevent its use as a vehicle for anticompetitive action by the Regional Companies would inevitably fragment and frustrate Bellcore's centralizing responsibilities which, notwithstanding the divestiture, permit the nation's telecommunications systems to continue to function on the basis of one national network with one national quality standard. It would also undermine Bellcore's ability to act as the critical link between the civilian telephone systems and the national defense communications networks. *fn149"

  The Bellcore problem thus resembles the squaring of the circle. If Bellcore's powers are cut back to safeguard against Regional Company collusion in manufacturing, marketing, and purchasing, it will be deprived of the capacity to perform its national coordinating and standard-setting functions; if its powers are left intact, it will stand as a suitable vehicle for joint Regional Company action with respect to the manufacture of telecommunications equipment and CPE.

  D. Effect of Removal on Innovation

  Not only is there no basis for concluding that the conditions that caused the establishment of the manufacturing restriction in the decree have ceased to exist, but the removal of that restriction at this juncture would arrest or nullify significant positive developments that have occurred since then.

  As discussed above, it cannot be seriously disputed that the Regional Companies' local exchanges continue to be monopolies; that a Regional Company that was permitted to enter manufacturing would satisfy its equipment needs exclusively or primarily from its own affiliate; and that such activities would contravene the very purpose of the decree -- to prevent leveraging of Regional Company local exchange monopolies so as to foreclose independent manufacturers from a very substantial part of the telecommunications market. For these reasons, retention of the manufacturing restriction is supported by consumers, *fn150" interexchange carriers, *fn151" independent local exchange carriers, *fn152" cellular carriers, *fn153" manufacturers, suppliers, and servicers, *fn154" labor unions, *fn155" and state regulators. *fn156"

   The Regional Companies argue in response that the negatives, both in regard to substance and to opinion in the marketplace of ideas, are outweighed by the fact that research, innovation, development of new products, and improvements in quality assurance would be inhibited unless they are permitted to participate in the various aspects of the manufacturing cycle. *fn157" One problem with that argument is that it precisely mirrors the points advanced by the Bell System at the trial of this case -- that the efficiencies of integration outweigh such independent competition as might occur as a consequence of freer entry into the market, and that research and development would wither if the Bell System were broken up -- and that were squarely rejected by the decree, as they had to be on these facts under the antitrust laws. *fn158" Almost by definition, these same arguments cannot qualify as changes cognizable under section VIII(C).

  Another, equally compelling answer is that the Regional Company argument has already been proved to be factually wrong: there has been a flowering of research, development, innovation, introduction of new products, and quality assurance; new firms have entered the market; prices of equipment have declined dramatically *fn159" (according to some by as much as fifty percent in some categories); *fn160" and competition flourishes in a market that had seen relatively little of it before. The equipment market now consists of some six or eight very large firms, one to two hundred medium-sized firms, and hundreds of still smaller, vigorous, and inventive firms, *fn161" some of them in profitable relationships with one or more of the Regional Companies. *fn162"

  If the restriction were removed, there would be a serious risk of a return to conditions of anticompetitive activity, concentration of the telecommunications equipment market in few hands, monopolistic pricing, and a relatively sluggish pace of innovation. According to a distinguished outside observer, the Regional Companies would then become "central vigorous players in the equipment market, buying many of the smaller [firms], integrating services and equipment sales, and developing into seven smaller versions of what once was AT&T." *fn163"

  Certainly the emergence since entry of the decree of a dispersed equipment market characterized to an unprecedented extent by innovation *fn164" is proof that the fruitful competition the decree sought to establish is here. If this nation is serious about the need for competing effectively with ever more ingenious foreign producers, especially in a high technology market such as telecommunications, the sources of invention and innovation represented by competition and by competitors that do not rely on fixed rates of return as the principal source of their income must not be shut off.

  In any event, insofar as this Court's obligations under the antitrust laws and under the decree are concerned, it is not prepared to halt the progress that has been made by independent manufacturers and sellers, large and small, toward a genuinely competitive environment in the telecommunications equipment market, by modifying the decree so as to turn back the clock toward domination of the market by the Bell monopolists.

  E. Foreign-Dominated Firms Crowding Out Specialized Manufacturers

  The Regional Companies finally contend that such factors as the economies of scale involved in manufacturing, the increasing standardization of interconnection requirements, and the vigor of the existing competition will prevent them from becoming regional monopolists should they be allowed into the manufacturing market. That contention, too, lacks merit.

  In the first place, several of the assumptions underlying this contention are not correct. For example, although economies of scale apply to some types of equipment, they do not to others. Likewise, the trend in interconnection requirements for such items as data communications equipment has actually been toward less uniformity. *fn165"

  Beyond that, while the competitive nature of the equipment manufacturing business depends to an extent upon the type of market that is at issue, the fact that competition is presently healthy and strong in many markets does not diminish the ability of the Regional Companies to leverage their monopoly power should they be allowed into manufacturing.

  The Department of Justice acknowledges that removal of the restriction will be followed by the displacement of many of the competitors, postulating that increasing concentration in the equipment markets is inevitable. Report at 171-76. However, trends with respect at least to some types of equipment have been precisely in the opposite direction, and whatever inevitability there is to greater concentration would flow primarily from the effects of the removal of the restrictions. See slip op. pp. 99-100, infra. The Department's position contemplates, with what may only be characterized as remarkable equanimity for an antitrust enforcement agency, the ready destruction of many high-quality firms producing high-quality goods that have emerged since divestiture, and that are performing important service to the economy. Indeed, according to another government agency, the Commerce Department's NTIA, the most innovative and efficient American businesses are rarely the largest or the most highly integrated but smaller, specialized firms. *fn166" NTIA Trade Report: Assessing the Effects of Changing the AT&T Antitrust Consent Decree at 17-18 (February 4, 1987). *fn167"

  Moreover, the Department of Justice lack of concern regarding concentration ignores the effect such concentration will have on the survival of competition itself in several equipment markets, and the threat that will be posed by the ensuing manufacturing monopoly or oligopoly involving foreign firms. According to NTIA, the most plausible scenario in at least one telecommunications market is that, in the event of a removal of the decree restriction on manufacturing, the Regional Companies will join forces with mammoth manufacturing empires, *fn168" most likely foreign, *fn169" and that this will pose a substantial risk of destruction of the United States central office equipment manufacturing industry. NTIA Trade Report at 125-26. *fn170"

  These predictions are plausible. Dr. Huber's survey has found that affiliations between central office switch manufacturers and telephone service companies have tended to develop around the world wherever structural restraints are absent. Huber Report at 14.21-23. This is not surprising. Manufacturers have strong incentives to seek market share "guarantees" in the form of an affiliation with large exchange service providers such as the Regional Companies; and these companies, in turn are attracted by the acquisition of expertise and, more importantly, the minimization of risk embodied in partnerships with huge manufacturers with ample capital.

  Because of their size, capital, and assured source of income from the ratepayer-supported telephone affiliates of the Regional Companies, these international giants will have the market power to adjust price almost at will to achieve market share, to the inevitable detriment of independent domestic producers. In short, the effect of the Justice Department's scenario is likely to be the displacement of small, efficient American firms by a few huge syndicates composed of foreign company and Regional Company components whose survival and domination in this environment will have been achieved by factors unrelated to efficiency or quality of performance.

  Among its many other undesirable consequences, such a development would further reduce competition in this country, if only because the combination of foreign capital and the Regional Company monopoly position *fn171" with a captive market amounting to some seventy percent of the total market will prove fatal to whatever independent or smaller producers still survived. Another likely consequence would be a strong detrimental effect on the international competitiveness of the American telecommunications industry and the employment opportunities of American workers. NTIA Trade Report at 108-09.

  In sum, not only has no change occurred in telecommunications and CPE manufacturing since 1982 that would justify the removal of the restriction under the section VIII(C) standard, but the opposite is true: a removal of the restriction would be likely to extinguish or substantially curtail the healthy competitive domestic market that has emerged in the last three years. There is no justification for removing the manufacturing restriction, and the requests for such removal will be denied.


  Information Services

  Section II(D)(1) of the decree prohibits the Regional Companies from providing "information services." AT&T, 552 F. Supp. at 227. *fn172" An information service is defined as "the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information which may be conveyed via telecommunications." AT&T, 552 F. Supp. at 229. *fn173"

   While the decisions on interexchange services (Part III) and on manufacturing (Part IV) are not particularly difficult, because no persuasive case has been or can be made that the particular restrictions are eligible on any reasonable basis for removal under section VIII(C) of the decree, the problem is more difficult with respect to the information services restriction which is discussed here and in Part VIII, infra.

  If the Court were to consider only the request of the Regional Companies and of the Department of Justice for a complete removal of the restriction on the provision of information services, without distinction between content and transmission, that decision, too, would plainly have to be in the negative, for the information services restriction is supported by the same factors that require retention of the interexchange and manufacturing prohibitions.

  As the Court stated in the 1982 Opinion explaining the provisions of the decree:


All information services are provided directly via the telecommunications network. The Operating Companies would therefore have the same incentives and the same abilities to discriminate against competing information service providers that they would have with respect to competing interexchange carriers. Here, too, the Operating Companies could discriminate by providing more favorable access to the local network for their own information services than to the information services provided by competitors, and here, too, they would be able to subsidize the prices of their services with revenues from the local exchange monopoly.

  AT&T, 552 F. Supp. at 189 (footnote omitted).

  The Court went on to say at the time that, if the Operating Companies were excluded from the information services market, they would have an incentive to design their networks to accommodate the maximum number of information service providers on account of the earnings they could expect to receive from these providers in terms of access fees. On the other hand, if these companies were permitted to provide their own information services, their incentive would be "to design their local networks to discourage competitors, and thus to thwart the development of a healthy, competitive market." AT&T, 552 F. Supp. at 189-90 (footnote omitted).

  Based upon these considerations, the Court has consistently upheld the restriction as incorporated in the proposed consent decree submitted by the parties. Thus, it explicitly rejected the suggestion, made early on, that the Regional Companies could "most efficiently provide information services by taking advantage of various economies," for example by the use of the same equipment for exchange telecommunications and information services. AT&T, 552 F. Supp. at 189 n.238. The Court concluded that it would be impossible to determine whether such an advantage was due to inherent efficiencies or to efficiencies resulting from the deliberate design of the network in a discriminatory fashion. Id.174 Similarly, in response to a 1984 request by the Regional Companies for a waiver of the line of business restrictions in section II(D)(1) of the decree, the Court reaffirmed that removal of the information services restriction would have to await "significant technological or structural changes" that would substantially reduce the dependence of information service providers on the local exchange networks. AT&T, 592 F. Supp. at 868. And the Court found that, as of that time, no such changes had occurred. *fn175"

   A. The Regional Company Bottlenecks

  There still has been no significant, relevant change in the situation. As discussed in Part II-B, supra, the Regional Companies continue to possess bottleneck control over the local exchange facilities, and these are the facilities upon which competitive information providers, like the Regional Companies' competitors in the interexchange and the manufacturing markets, depend. *fn176" As then Assistant Attorney General Douglas J. Ginsburg stated in a September 19, 1985 letter, to John D. Dingell, Chairman of the House Committee on Energy and Commerce, at pp. 5-6:


the Decree's basic restrictions on the BOCs' ability to provide information services are based on the BOCs' control of access to telephone customers through the local exchange network . . . should conditions change to the degree that the BOCs no longer possess bottleneck monopolies over the local networks, it would be appropriate to consider removal of the information services restriction.

  Competition in the local exchange markets is foreclosed now as it was then, because of the economic infeasibility of alternate local distribution technologies on a substantial scale. To be sure, information services can bypass the local monopoly bottlenecks controlled by the Regional Companies to a slightly greater extent than can interexchange services. However, as will now be seen, the various additional bypass technologies do not provide meaningful channels to the information service providers who, by the very nature of their business, must seek to reach large, dispersed audiences over reasonably priced, interactive facilities. NTIA, Competition in the Local Exchange Telephone Services Market at 29.

  Thus, the physical transport of media through computer disks or CD-ROMS *fn177" is not comparable in functionality to on-line database services. The CD-ROMS are essentially storage mediums; they do not provide transactional capabilities, and they have largely fixed user costs. Another possible alternative, satellite transmission, is unsuitable for all except possibly some of the very largest users because (1) the general public itself could not be reached by way of satellite communications but only the Regional Companies' own facilities, and (2) satellite transmission is used efficiently primarily for a continuous, high volume stream of one-way data. *fn178" And while cable networks are not dependent for transmission on the local exchange network, they do depend on permission from the Regional Companies for attachment of their cables to the telephone companies' poles and the sharing of their conduit space. *fn179" In any event, regardless of the nature and scope of cable dependence on local exchange facilities, ubiquitous cable networks have yet to be developed, *fn180" and cable, too, generally provides only one-way data.

  In short, there does not exist any meaningful, large-scale alternative to the facilities of the local exchange networks, and the information service providers remain as dependent upon those facilities, and those who control them, as they did in 1984 and as interexchange providers do at the present time.

  Dr. Huber, the Department of Justice's expert, not only recognizes this conclusion throughout his report, *fn181" as does the NTIA, *fn182" but he correctly emphasizes that, because of their very nature, information services are especially vulnerable even to slight manipulation and discrimination, as they are also to small degradations in transmission quality. For that reason, he correctly concludes that the various examples of non-access-dependent services cited by the Department of Justice are not real substitutes, especially for "time-sensitive information services, [whose] competitive health . . . depends strongly on continuing non-discriminatory access to [Regional Company] *fn183" services and facilities." Report at 6.23. In another section in his report, he notes that


competition among database providers and electronic publishers is critically dependent on reliable fast delivery at a reasonable cost. The telephone network provides a critical link between many providers and their customers. The possibility of [Regional Company] entry into these information markets therefore raises the familiar concerns about the possibility of discriminatory access to [Regional Company] facilities.

  Report at 7.7.

  Again, according to Dr. Huber, the national value added networks "depend heavily on the [Regional Companies] to provide transparent access to end user's data traffic." Report at 5.13. In sum, while in his view new transport technologies are "on the horizon, the [Regional Company] still provides critical links in the transport pyramid." Report at 7.15. *fn184"

  B. Incentive and Ability to Discriminate

  It is necessary next to determine whether, with respect to the provision of information services, the incentive and ability of the Regional Companies to engage in anticompetitive conduct remains the same as it was when the decree was entered. The answer is plain. There has been no change whatever in this respect since 1984, and no demonstration that now, unlike then, there is no substantial possibility that the Regional Companies could not, and indeed would not, use their monopoly power to impede competition in the information services market.

  The Regional Companies argue at some length that they have no incentive to discriminate against competitors in the information service market because to do so would diminish use of the network and hence a reduction in their revenues. *fn185" But in any market where the Regional Companies are in competition with independent information service providers, their economic interest lies in manipulating the system toward use of their own services, rather than in encouraging maximum use of the network by their information service competitors. Only ten to twenty percent of the total cost of an information service is accounted for by Regional Company usage costs, Huber Report at 6.29, and a Regional Company would therefore earn far more from a customer base through use of its own information service than it would through network usage by calls made by and to its information service competitors.

  That the ability for abuse exists as does the incentive, of that there can also be no doubt. As stated above, information services are fragile, and because of their fragility, time-sensitivity, and their negative reaction to even small degradations in transmission quality and speed, they are most easily subject to destruction by those who control their transmission. Among the more obvious means of anticompetitive action in this regard are increases in the rates for those switched and private line services upon which Regional Company competitors depend while lower rates are maintained for Regional Company network services; manipulation of the quality of access lines; impairment of the speed, quality, and efficiency of dedicated private lines used by competitors; development of new information services to take advantage of planned, but not yet publicly known, changes in the underlying network; and use for Regional Company benefit of the knowledge of the design, nature, geographic coverage, and traffic patterns of competitive information service providers. *fn186"

  Dr. Huber, too, has recognized that the Regional Companies are able to discriminate in the provision, maintenance, and restoration of private lines, access or timing of new basic transmission services, and misuse of customer and competitor information, Report at 7.10, and furthermore that costs can be shifted to regulated business on a large scale. *fn187" Huber Report at 12.16, 11.18, 10.23, 13.11, 9.9, 8.12, 7.15; see also Comments of Information Industry Association at 13-15.

  Even now, when the opportunity for improper activity by the Regional Companies is minimal compared to what it would be if the restriction were lifted, danger signals have begun to appear. For example, Dun & Bradstreet complains that in the Yellow Pages directory market BellSouth is duplicating the Bell System pattern of refusals to deal with competitors, protests of willingness to do so being followed by bad faith negotiation, and further delay. That particular dispute appears to be pending in the courts. Comments at 35-36 n.15.

  Similarly, Metscan, an automatic meter reading and monitoring system, claims to have been treated with respect to its connecting jacks just as the Bell System treated equipment competitors -- delays, excessive charges, and difficulties in achieving satisfactory access of necessarly interconnection devices. Comments at 7-8.

  To the extent that it is possible for them to do so, the Regional Companies may even now be engaged also in improper cross-subsidization. For example, a study undertaken by the staff of the California Public Utilities Commission of Pacific Bell's relationships with its affiliates found evidence that: (1) Pacific Bell and its ratepayers were not adequately compensated for the loan or transfer of skilled personnel to unregulated operations; (2) Pacific Bell provided legal and training services to competitive operations at below market value and Pacific Bell employees performed unbilled work for unregulated affiliates; (3) properties were transferred from Pacific Bell to unregulated operations at below fair market value; (4) technology was transferred to competitive operations from Pacific Bell on an uncompensated basis; and (5) PacTel unregulated operations were gratuitously benefiting from their affiliation with Pacific Bell. California Public Utilities Commission, A Report on Pacific Bell's Affiliated/Subsidary Companies, Proceeding No. A.85-01-034 (June 3, 1986).

  Perhaps even more telling is the Department of Justice's recognition that "one cannot be as definitive with respect to to the potential competitive effects of a [Regional Company's] provision of information services that use [its] local exchange facilities" as with respect to those that do not. *fn188" Report at 122. *fn189" As discussed above, almost all information services must and do use the Regional Companies' local exchange facilities.

  In short, the reasons cited by the Court in 1982 and in 1984 are as valid today as they were then. There is no question but that the Regional Companies would have the same incentives and the same abilities attributed to them at that time, and that to open up the information services market to its full extent, as requested by some, would be to take the very risks *fn190" that neither the Department of Justice nor the Court were willing to take three years ago, and that the decree plainly forbids. The restriction on the sale by the Regional Companies of information content will accordingly be maintained. With respect to the issue of information transmission, see Part VIII, infra.



  The Regional Companies and the Department of Justice argue that, unlike during the period prior to the entry of the decree, FCC regulation can now be depended upon to keep those in control of the local exchanges from engaging in anticompetitive activities, whether in interexchange services, in manufacturing, or in information services. The Court has carefully considered these arguments as well as the regulations on which they are based. Upon such consideration, the Court has concluded that there is no reasonable basis for assuming that the regulations will solve the antitrust problems presented by this case.

  A. General

  First. As discussed in Part I, supra, despite the decades-old requirements in the Communications Act, 47 U.S.C. § 202(a), and various FCC regulations requiring nondiscrimination, equal access, and proper cost allocations, and notwithstanding the Commission's own persistent and dedicated efforts for a number of years, the FCC was unable to prevent or to remedy major anticompetitive abuses by the Bell System achieved through the activities of its local affiliates.

  A substantial part of the trial of this case revolved around the ever-changing Bell strategies and the Commission's largely futile efforts to cope with these strategies. The Department of Justice argued, and at the trial it introduced voluminous expert testimony and other evidence in support of its argument, that the local exchanges are so complex and so technically dynamic, and that they comprehend so many and such complex joint and common costs, that regulation could not prevent anticompetitive activities. *fn191" The Department accordingly stated in its Response to Public Comments on the Proposed Modification of Final Judgment, 47 Fed. Reg. 23,320-336 (May 27, 1982), at the time the consent decree was under consideration that:


At the heart of the government's case in United States v. AT&T was the failure of regulation to safeguard competition in the face of the powerful incentives and abilities of a firm engaged in the provision of both regulated monopoly and competitive services. Neither of these problems [cross-subsidization and discrimination] has thus far proven amenable to successful regulatory solution. Indeed, the very basis for divestiture is that the anticompetitive problems inherent in the joint provision of regulated monopoly and competitive services are otherwise insoluble. Thus, permitting BOC entry into competitive markets would undermine the rationale for the divestiture that is the central remedial mechanism of the modification.

  The Department went on to say that there was "little possibility" that regulation would be capable in the future of detecting or preventing discrimination by the Regional Companies. Response of the United States to Public Comments, supra, 47 Fed. Reg. at 23336. *fn192"

  Second. At the time of the drafting of the consent decree, the parties also considered several detailed "regulatory" injunctions, in lieu of the more drastic solution finally adopted. These proposals were appropriately labelled by the parties "Quagmire I" and "Quagmire II." Department of Justice Competitive Impact Statement at 51-53. Ultimately, the Department concluded that regulatory measures could not "approach even remotely" the effectiveness of the more decisive decree that was submitted to the Court, id. at 53, and the Court endorsed that position. AT&T, 552 F. Supp. at 166-68.

  There cannot be the slightest doubt, therefore, that as of the time of the entry of the decree, the parties *fn193" and the Court had concluded that regulation would not and could not be made to work, and that only the divestiture and the concomitant imposition of the line of business restrictions on the Regional Companies could be depended upon to prevent a resumption of anticompetitive activities.

  Third. Given that record, reliance could properly be had on regulation as a basis for the removal of the decree restrictions only upon a showing of a reduced need for regulation or a substantial improvement in the regulatory language and practice. *fn194" Yet neither has occurred since 1982.

  If anything, the need for the line of business restrictions is greater today than it was before the Bell System breakup. At least in theory, and to an extent in practice, the Bell System was regulated in almost all of its structures and operations. *fn195" By contrast, many of the current operations of the Regional Companies take place in unregulated markets. This complex mixture of regulated and unregulated activities provides these companies both with a powerful temptation and with ample opportunity to commit anticompetitive abuses in the competitive markets and to subsidize their competitive operations with profits earned in the monopoly markets. *fn196" In view of the fact that, when compared with the Bell System, the organizational state of the Regional Companies is much less rigid and far more complex -- with their subsidiaries, partnerships, joint ventures, and other enterprises, some regulated, some unregulated, some regulated in part *fn197" -- discrimination against competitors and cross-subsidization are far more difficult to detect, prevent, and rectify through regulation now than they were in 1982. *fn198"

  Fourth. To the extent that there has been any recent change in the regulatory picture itself, it has been to weaken the regulations governing telecommunications carriers, not to strengthen them. This is shown most dramatically by the FCC's repeal of the separate subsidiary requirement for Regional Company competitive enterprises -- a requirement that it had theretofore regarded as its most effective regulatory tool. *fn199" The FCC has also announced that it will preempt any state from attempting to require structural separation or otherwise to institute stricter safeguards for Regional Company CPE operations than its own. CPE Decision, 2 FCC Rcd at 158-61; BOC Structural Relief Order at para. 112. *fn200"

  Fifth. Between the 1950s and the early 1970s, the FCC was committed, as was the nation generally, to vigorous regulation of a variety of business enterprises, especially those with public utility characteristics. Much of that has changed. The FCC and individual members of the Commission have repeatedly expressed themselves in favor of wide deregulation. *fn201" The Court of course does not express any judgment on the wisdom of that policy; that is beyond its jurisdiction. However, a regulatory body that is committed in principle to as little regulation as possible can hardly be cited at the same time in support of the proposition that it will probably regulate more vigorously and more effectively than its predecessors which wanted to engage in tight regulation and operated in a general governmental environment that regarded strict regulation as a positive goal. *fn202"

  Sixth. The FCC now has fewer resources with which to regulate telecommunications carriers than in the past, particularly in the difficult and complicated area of cost allocation that was a central issue in the trial and that is central to the issue of cross-subsidization today. Since the time of the entry of the decree, the FCC's budget and manpower have decreased significantly. In 1980, the FCC had an authorized ceiling of 2,103 employees; this had fallen by 1987 to 1,855 employees, and the Commission was apparently short by 120 employees of even that lower ceiling. *fn203" According to former FCC Chairman Fowler, this "severe reduction of our staffing level, if allowed to continue, will limit our ability to meet the demands of our ever increasing workload in a timely and responsive manner." Testimony before Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies, U.S. House Committee on Appropriations, February 18, 1987, at 2-3.

  B. Cross-Subsidization

  The Court will now examine in more detail current regulations relied upon by those who claim that there has been a change and who, on that basis, advocate removal of the restrictions. This examination is conducted under two headings: regulations designed to deal with improper cross-subsidization; and regulations designed to prevent discriminatory interconnection. As will be seen infra, none of these regulations provides support for the cause of removal, for one of two reasons: (1) the particular regulation predates the decree and thus had addressed the problems on paper, but unsuccessfully, for many, many years; or (2) the regulation does not yet exist in effective form but is only on the drawing boards.

  1. General

  The cross-subsidization problem is as acute now as it ever was. The Huber Report states on the subject of cross-subsidization that (1) seventy to ninety percent of the costs underlying the interexchange access charges are joint and common; (2) the list of information provider costs that might overlap with exchange operating exchange costs is long and cross-subsidization opportunities are extensive; (3) there are substantial cross-subsidization opportunities in the Yellow Pages provision; (4) more than half the costs of a VSR service bureau (excluding network usage costs) are at least potentially shiftable; (5) seventy percent of electronic mail costs are potentially shiftable; (6) forty-four to seventy-eight percent of electronic credit card transaction services are potentially shiftable; and (7) seventy to ninety percent of alarm services costs are highly susceptible to misallocation. *fn204" What changes have occurred from the situation revealed by the trial record have been toward the existence of more problems in regulatory oversight rather than fewer.

  It is intrinsically difficult for a relatively small group of regulators to prevent cross-subsidization within several multi-billion dollar entities, particularly if the entities are as complex internally and as fluctuating organizationally as the Regional Companies. Not only does each of these companies, as noted, represent a complicated mix between regulated and unregulated affiliates and operations, but the products, too, lend themselves easily to such a practice. As Dr. Huber observed, ". . . regulatory requirements that [Regional Companies] buy equipment competitively crumble quickly when the product being purchased is technically complex and readily differentiated." Huber Report at 14.13.

  An additional problem arises from the large disparity in size between the two types of affiliates. A subsidy that may be vital to the operations of a relatively small, unregulated entity operating in the competitive marketplace, is likely to be impossible to detect on the books of the larger, regulated (telephone) entity. Huber Report at 16.23. And of course it is to the books of the regulated affiliate that regulators would be looking. *fn205"

  2. Joint Cost Order

  As discussed above, previous regulatory programs did not succeed in preventing cross-subsidization in the Bell System with its far less complicated and less obscure structure. There is only one new FCC regulation of any significance to deal with this subject now, *fn206" the so-called Joint Cost order. *fn207" It is said to be the purpose of this order to ensure that carriers engaged in both regulated and unregulated activities will not improperly burden ratepayers or gain an anticompetitive advantage by assigning costs of unregulated activities to the regulated activities. Whatever may ultimately be effectiveness of that order (see infra), it cannot, in any event, serve as a substitute for the decree restrictions now because it is not yet finalized or in force and is not scheduled to become effective until some time next year, if then.

  When the Department filed its Report in favor of the removal of some of the restrictions, based in significant part upon the Joint Cost order, the FCC had not even released the text of the order, and the Department's conclusions with respect thereto were reached on the basis of an FCC news release. *fn208" But even the regulation that was ultimately issued is far from being in final form. *fn209"

   As presently drafted, the order would require each of the Regional Companies to adopt a cost manual in accordance with cost allocation standards, *fn210" and there would be rules for transactions with affiliates said to be designed to protect against cross-subsidization. *fn211" The Regional Companies had until September 1, 1987 to file their proposed cost allocation manuals. These manuals will hereafter each be subject to public comment and subsequently to review by the FCC for final approval. Based on normal regulatory schedules, some substantial period of time will elapse before this process is completed, and implementation of such manuals as are approved will obviously take some additional time. Finally, there is the delay inherent in petitions for reconsideration, see slip op. p. 134, infra, and the ever-present likelihood of requests for judicial review.

  The problems with the Joint Cost order do not end with the timing of its issuance in final form; they also relate to substance. As stated above, and as experience has amply shown, cross-subsidization is easy to achieve by firms engaged in both regulated and unregulated business but difficult to detect and to remedy. If regulations are to have any hope of success, they must facilitate such detection to the maximum extent possible. The Joint Cost order is not likely to accomplish this objective. To the contrary, it complicates the process of detection by allowing each Regional Company (1) to adopt a manual different from the others; (2) to choose its own cost allocation procedures, (3) to select its own accountants to review and certify the manual, *fn212" and (4) to use its own reporting categories and terminology. *fn213" In short, there will be no common denominator. Additionally, the rules will apply only to interstate services, while much of the Regional Company business, mixed and interrelated though it is, is technically intrastate in nature. *fn214"

  The Commission had its own good reasons for adopting this particular system, *fn215" and the choice of regulatory means is obviously a matter for decision by that body, not this Court. But the issue before the Court is whether changes have occurred since 1984 to render obsolete the line of business restrictions of the decree. To pass on that issue, the Court must necessarily consider the efficacy of the regulations that have been suggested as one such significant change. It is difficult to escape the conclusion that, even if the Joint Cost order were actually in effect now -- which of course it is not -- it could not be regarded as a more effective regulatory instrument with respect to cross-subsidization than existed when the decree restrictions were adopted. *fn216"

  A final cloud is cast upon the Joint Cost order by the fact that at least four of the Regional Companies -- which incidentally rely in this Court on the existence of that order to support their motions for removal of one or more of the decree restrictions -- have petitioned the FCC for reconsideration of the order. *fn217" CC Docket No. 86-111, 62 Rad. Reg. (P & F) 163 (1987).

  3. Self-Help

  In the absence of effective regulation now, and with like prospects for the future, there is the suggestion that self-help is the answer. The Department of Justice believes that the line of business restrictions are not necessary even if regulation is absent or not particularly effective because, at least with respect to equipment manufacture, most of the leading competitors could respond in kind by cross-subsidizing on their own. *fn218"

  That argument is not only in stark and fundamental opposition to the Department's position for the ten-year period when the AT&T case was pending in the courts prior to the entry of judgment; it also loses sight of the function of the antitrust laws.

  There is not the slightest reason to conclude that Congress believed that antitrust violations should be remedied, not by resort to law, but by retaliatory self-help measures. More particularly, there is no evidence that the laws, the courts, and the regulators were intended by the Congress that enacted the Sherman Act, and by successive Congresses and Presidents that endorsed that statute as fundamental to American economic life, to be silent spectators at cross-subsidization battles between large corporations, some of them -- like the Regional Companies here -- already under Sherman Act judgment. The congressional purpose throughout has been to see antitrust violations remedied in the courts under the rule of law, not through ordeal by combat or by survival of the fittest, or perhaps the least scrupulous. *fn219"

  C. Interconnection

  Just like the regulations involving cross-subsidization, those which, it is claimed, will prevent discrimination in the installation or maintenance of interexchange transmission lines and the interconnection of lines or equipment, either predate the decree or are not in final form. Thus these regulations, too, fail entirely to provide assurance against such discrimination.

  1. Part 68

  The scene is appropriately set by the Department of Justice's 1982 defense of the decree, as follows:


Particularly in a technologically dynamic industry such as telecommunications, there is little possibility that regulation is capable of detecting or preventing the very subtle forms of discrimination that would be available to the BOCs. Thus, even were it possible to prescribe in detail the appropriate technical parameters of interconnection under current technological conditions, regulators would have to have sufficient foresight to determine in advance the discriminatory potential inherent in tomorrow's technology . . . Even if it were possible, moreover, effectively to monitor the technical aspects of interconnection in an evolving technological environment, there would remain still more subtle means of discrimination in operational activities, such as the timely provision, maintenance, testing and restoration of facilities. In short, the BOCs, if permitted to engage in competitive activities, would have substantial ability to frustrate regulatory attempts to prevent discriminatory conduct.

  Response to Public Comments at 58.

  The Department of Justice now asserts that the FCC regulations that provide the requirements for the connection of terminal equipment to the local network, the so-called Part 68, *fn220" limit the risk of interconnection discrimination. See, e.g., Department of Justice Report at 187-88 n.379, 163-64.

  Reliance by the Department on Part 68 is truly ironic: these regulations were adopted in 1975, 1976, and 1977; they had become fully operational long before divestiture; and, most notably, they were the subject of much testimony and argument adduced by the Department during the trial of this case, all of it designed to demonstrate that they were ineffective. In 1982, the Department noted that "the very basis for divestiture is that the anticompetitive problems inherent in the joint provision of regulated monopoly and competitive services are otherwise insoluble." Response of the United States to Public Comments (May 20, 1982). Even if the technical aspects of interconnection were susceptible to regulatory monitoring, "there would remain still more subtle means of discrimination in operational activities such as timely provision maintenance, testing, and restoration of facilities." Id. The trial evidence did, in fact, demonstrate the FCC's lack of success in the enforcement of these regulations, *fn221" and neither the Department nor any Regional Company has pointed to any developments indicating that these enforcement problems could be or have now been overcome. *fn222"

  2. Regulations Not Yet Adopted

  The proponents of a removal of the restrictions contend with somewhat more confidence that the FCC's Computer III decision *fn223" would impede the Regional Companies' ability to discriminate with respect to interconnection. That decision permits the Regional Companies to provide enhanced services, i.e., generally speaking, information services *fn224" without the structural separation that was required by the earlier Computer II decision, provided that those entities comply with newly developed Comparably Efficient Interconnection (CEI) *fn225" and Open Network Architecture (ONA) *fn226" requirements. These requirements are claimed to have been designed to ensure equal access to network facilities, *fn227" and both the Department of Justice and the Regional Companies contend that a Regional Company's ability to discriminate will be limited by the "open architecture" switches. See, e.g., Department of Justice Report at 177 n.352.

  Just as is true of the Joint Cost order, reliance on the requirements of ONA and CEI is at a minimum premature. At this juncture, ONA is only a "developing concept," and "full implementation of ONA is several years away." *fn228" The ONA plans of the Regional Companies are not even scheduled to be filed until February 1, 1988, *fn229" and the FCC will then receive public comment on these plans. After studying the comments and adjusting the regulation in accordance with this new information, the Commission will then presumably take further action of an as yet unspecified nature. *fn230"

  These rules have already experienced extended and bitter controversy, and submission of the ONA plans by the Regional Companies is likely to engender further delay and dispute. Indeed, just as it true of the Joint Cost rules, ONA, too, is under challenge before the FCC by the very entities that rely in this Court on its requirements as making unnecessary the decree restrictions in this case. *fn231"

  The Department of Justice itself concedes that it is "unclear just what the impact of ONA on the potential for discrimination will be and how those effects will vary from market to market." Report at 177 n.352. In fact, the Department also acknowledges that stronger controls were in effect before the decree, and that these controls were ineffective. Report at 164 n.323.

  In short, since ONA has neither been fully defined nor adopted or tested in the real world, *fn232" it is impossible to evaluate its effectiveness in preventing discrimination in interconnection *fn233" or, obviously, to rely on it as ensuring, in the words of section VIII(C) of the decree, that there is no substantial possibility that the Regional Companies could use their monopoly power to impede competition. *fn234"

  3. ONA Suffers From Significant Defects

  Additionally, here again, even if these regulations were fully in force and effect, they would not be likely to have a decisive impact, for several defects in such standards as have been announced are already apparent.

  First, as several intervenors *fn235" note, ONA will apply only to digital switches -- switches that serve only one-fourth of all access lines available. Second, ONA will not assure equal access or equal cost since it will not require the Regional Companies to provide colocation of competitors' enhanced services within the Regional Companies' central offices. *fn236" Third, the Regional Companies will have no incentive to provide equal access for rival enhanced service providers, for with respect to these potential competitors, the Regional Companies will not be disinterested parties if the restriction is lifted. Fourth, ONA, as it stands now, will not address problems that will arise with new technical developments, but it applies only to conditions that pertain to current technology and those that are plainly anticipated now. *fn237" Fifth, the only Regional Company to have filed its CEI plan as of May 1987 -- Bell Atlantic -- has submitted what may be a flawed product, for it eliminates outside plant and transport costs for its own service, while charging standard tariffs for competitors' access. Reply of Consumer Federation of America at 7. *fn238"

  4. Other Standards

  The Regional Companies and those who support their requests also place some faith in national and international standards for interconnection. *fn239" But not only is it not at all clear that across-the-board, uniform national standards even exist, *fn240" but what standards there are have in part been established by private organizations, some of them dominated by the Regional Companies themselves. *fn241" Furthermore, the existing standards are strictly voluntary and could be ignored by the Regional Companies if they wished: *fn242" to deploy a new service, a Regional Company need only file a tariff.

  International standards, developed in the Consultative Committee on International Telephone and Telegraph, have already proved not to be effective constraints, for although they have been in place for several years, the United States government and American corporations have generally ignored them. *fn243"

  D. Network Design Information

  FCC regulations require the Regional Companies to disclose, reasonably in advance of implementation, information regarding the introduction of new network services or changes in existing network services as well as additional marketing information, when such information is provided to their separate subsidiary. *fn244" This regulation, too, was in existence and governing at the time of divestiture, and it did not prevent Bell System anticompetitive conduct based on the timing of disclosures. See AT&T, 524 F. Supp. at 1371-76.

  Moreover, the FCC has actually weakened the disclosure requirement since that time. *fn245" See BOC Structural Relief Order at paras. 50-51. As a result of that order, the disclosure obligation is triggered only when the Regional Company makes a decision to "make" or "buy" a product that relies on the new or changed network characteristic. In addition, even when the trigger point for disclosure is reached, information is made available only to those manufacturers who enter into nondisclosure agreements with the Regional Companies.

  Consequently, a Regional Company is now able to use network information to design its new equipment or CPE device as soon as the information is finalized by the network planners, while other manufacturers must be furnished the information necessary to engage in similar design activities only when the Regional Company is actually ready to fabricate its new product. Most of the time this will be so late, given time needed for the design phase, that independent manufacturers will be unable to compete. The FCC itself has previously recognized that disclosure at this period would sometimes be "too late." See Disclosure Order, 93 F.C.C. 2d at 1224.

  Additionally, the regulations do not require disclosure of information necessary for the design of equipment that will meet the specifications of the Regional Companies' exchange networks; they only require the disclosure of network changes that affect "intercarrier interconnection or the manner in which customer premises equipment is attached to the interstate network." 47 C.F.R. § 64.702(d)(2). That being so, the data communications market will be especially susceptible to discrimination.

   Data communications equipment requires careful attention to and coordination with all the parameters of the transmission facilities with which it is to be used, because such equipment is operable only if the equipment at the customer's premises mirrors that at the exchange carrier's serving offices -- the standard for one dictates the standard for the other. Thus, any disparity in access to information about the characteristics of existing, changed, or new transmission services can result in substantial differences in equipment design, characteristics, and costs. Since the FCC regulations do not require the disclosure of network requirements, their effect is likely to be to leave independent manufacturers hopelessly behind.

  The FCC has also issued regulations that are claimed to prevent a Regional Company from obtaining an unfair head start over CPE rivals. These regulations would in theory prevent a Regional Company from using its local exchange status to utilize customer proprietary information unavailable to rivals in a dependent competitive market. 47 C.F.R. § 64.702(d)(3) (1986); BOC Structural Relief Order at para. 70. See Department of Justice Report at 164-65; Response at 113. However, that regulation, too, contains at least one very large loophole.

  The regulation addresses only the use of customer proprietary network information for CPE marketing; it is not concerned with CPE manufacturing even though manufacturing information could and no doubt would also be used to gain advantage in that market. It is generally understood that it is highly important for anyone attempting to decide what new products to develop to have access to information regarding customers' network configurations, traffic patterns, and current equipment capabilities. The Department of Justice, for one, recognizes this defect but overcomes it by "presuming" that the FCC "would impose customer information rules that would prevent a BOC from discriminating . . . ." Report at 187-88 n.379. This speculation is an insufficient foundation upon which to base the removal of a restriction that effectively and presently reduces the possibilities of discrimination. *fn246"

  In sum, the regulations relied upon by the Regional Companies and the Department of Justice to curb discrimination by the Regional Companies against their putative competitors in the markets they seek to enter are entirely inadequate: they either predate the decree and were found at the trial to be ineffective; they are not sufficiently comprehensive; they contain large loopholes; or they are a long way from being promulgated, let alone being implemented.


  Regional Company Activities and Public Policies

  In addition to the factors discussed in the preceding sections of this Opinion upon which the Court's decision denying the motions for removal of the core restrictions is based, there are several other considerations much mooted by the parties and intervenors. Since these considerations are argued at some length by parties and intervenors, and since the Court also refers to them at times, they are discussed herein, albeit not at great length or detail. However, it should be noted that, with the exception of the topics discussed in Parts VIII and IX, infra, these considerations do not have an actual impact on the Court's decisions.

  A. Current Anticompetitive Activities

  The Regional Companies are of course limited in the breadth and scope of the anticompetitive activities in which they are able to engage inasmuch as the most effective vehicles for such activities are beyond their reach due to the existence of the core restrictions of the decree. What is startling, however, is given the relative paucity of the field available for such acts, in how many ways these companies appear *fn247" nevertheless to have managed to discriminate and to cross-subsidize.

  1. Individual Companies

  Dr. Huber observes in his report that the Regional Companies *fn248" are continuing to use their monopoly power "to discriminate among users in the prices they charge for functionally identical switched lines." Huber Report at 2.9, 2.18-2.19, so as to impede competition in the intrastate toll markets. For example, the companies "have generally priced private lines so that (1) those terminating at AT&T facilities cost the most, (2) until April 1986 private lines terminating at other carriers' facilities were somewhat cheaper, and (3) lines terminating at LEC facilities or at private nodes remained the cheapest" (footnotes omitted). Report at 3.34; see also Report at 3.48 and n.153. Similarly, the Department of Justice states that the complexities of access charge pricing give the Regional Companies ample opportunity to manipulate these prices to their advantage, and that "such discrimination is not easy to remedy." Response at 34. *fn249"

  More specifically, the Huber Report observes that, in the mobile services field, where because of the peculiar nature of the industry and the services a closer relationship exists between permitted and prohibited activities than is true elsewhere, Regional Companies have already (1) denied technically efficient interconnections to competing cellular carriers; (2) filed tariffs which set higher rates for competing cellular carriers than were offered for their own interconnections; *fn250" (3) imposed unreasonable and non-cost-based charges for interconnection; (4) threatened to discontinue service to competing cellular carriers if they did not accept whatever interconnection contracts were offered to them; and (5) refused to provide compensation to carriers that terminate or originate cellular calls on behalf of a landline carrier. Dr. Huber therefore concluded that "direct competition between [Regional Companies] and non-wireline mobile carriers does raise serious questions about discriminatory access." *fn251"

  Regional Company efforts, similar to those of the Bell System in its heyday, to escape regulatory scrutiny seem also to be continuing. In September 1986, a committee of the National Association of Regulatory Utility Commissioners (NARUC), issued a report based upon audits of five Regional Companies -- Bell Atlantic, BellSouth, U S West, Ameritech, and Pacific Telesis. The committee found that (1) during the audit process, the Regional Companies consistently attempted to block access to accounting and cost allocation records; (2) the information provided was frequently of poor quality; (3) the audit revealed that customers of several Regional Companies had improperly been forced to subsidize the activities of competitive subsidiaries of these companies; (4) valuable lines of service (e.g., Yellow Pages) were transferred from the telephone companies to unregulated subsidiaries; *fn252" and (5) the Regional Companies tended to transfer virtually all telephone income to the parent Regional Companies, with minimum infusions of equity from these companies to the telephone subsidiaries. *fn253" Comments of Washington Utilities and Transportation Commission at 3-5, citing "Summary Report on the Regional Holding Company Investigations," National Association of Regulatory Utility Commissioners, Washington, D.C., September 18, 1986. Similar findings were reported by the staff of the California Public Utilities Commission with respect to Pacific Telesis. *fn254"

  Further, in actions that likewise remind the Court of much of the evidence adduced during the trial regarding the Bell System's manouvers toward competitors' requests, Bell Atlantic claims that it is technically impossible to provide equal access for mobile calls originating and terminating in the Washington/Baltimore area (Opposition to Conditions at 11-12); BellSouth says that it cannot do so for calls terminating at a mobile phone in certain cellular service areas (Response at 9); and according to complaints filed with the Department of Justice, Bell Atlantic, NYNEX, and Southwestern Bell have all refused to furnish to interexchange carriers access to information, such as the mobile service customers' names, that is a necessary prerequisite to the marketing of the carriers' services. Dun & Bradstreet Corporation Comments at 34-37; Phonequest, Inc. Comments at 15; ALC Communications Corporation Comments at 29-30; Huber Report at 3.30 & n.105. *fn255"

  A number of other allegedly anticompetitive acts of Regional Companies have been brought to the attention of the Court, the Department of Justice, the FCC, or the public by various segments of the telecommunications industry. See, e.g., slip op. pp. 112-14, and note 101, supra. These individual complaints will no doubt be resolved in due course, and in any event, no purpose would be served by a catalogue here. Such a listing would be bound to leave out some meritorious claims, and it is equally probable that it would include others that will ultimately be determined to be unfounded. It may be useful, however, to examine the recent performance of the Regional Companies from a somewhat broader perspective.

  2. Statistical Analysis

  Following the divestiture, the telephone Operating Companies controlled by the Regional Companies requested and were awarded large rate increases almost everywhere in the nation, *fn256" even though their profits substantially exceeded those of comparable corporations. Regional Company return on equity amounts to 14.0 percent compared to an all-industry composite of 10.9 percent. *fn257" At the same time, in addition to their twenty-two telephone Operating Companies, the Regional Companies have created some one hundred-fifty corporations, partnerships, subsidiaries, and other entities having sometimes but a remote relationship to telephone operations. Business Week has estimated that the Regional Companies spent $ 1.2 billion in 1985 acquiring real estate, financial services, software, publishing companies, and the like. The companies are publishing Yellow Pages in Australia, they are building cellular phone networks in Costa Rica, and they are selling real estate in Dallas. "The Baby Bells Take Giant Steps," Business Week, December 2, 1985.

  An observer might well be justified in concluding that the participation of the Regional Companies in these far-flung enterprises is bound to diminish their management's interest in and attention to the local telephone business -- that, after all, was these companies' raison d'etre, and that is still the aspect of their operations most vital to the public since, under present conditions, if the Regional Companies do not attend to local telephone service, no one will or can. More to the point of the present discussion, however, what is wrong from an antitrust point of view with the combination of (1) telephone rate increases and (2) Regional Company outside ventures is that these ventures appear to have been funded from and are being supported, at least in part, by the local phone rates. The following table compares the performance of the Regional Companies' telephone operations with those of their non-telephone subsidiaries and affiliates engaged in competitive enterprises. Income from Income or Loss Telephone From Competitive Operations n258 Subsidiaries Ameritech 1820 -65 Bell Atlantic 1828 -59 BellSouth 2435 -4 NYNEX 1776 -79 Southwestern Bell 1630 -36 Pacific Telesis 1799 -47 U S West 1684 -180


© 1992-2004 VersusLaw Inc.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.