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UNITED STATES v. WESTERN ELEC. CO.

September 10, 1987

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



The opinion of the court was delivered by: GREENE

 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.

 I

 Background

 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.

 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.

 II

 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.

 III

 Interexchange Services

 A. Introduction

 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.

 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 ...


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