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UNITED STATES v. WESTERN ELEC. CO.

April 28, 1995

UNITED STATES OF AMERICA, Plaintiff,
v.
WESTERN ELECTRIC COMPANY, INC., et al., Defendants.



The opinion of the court was delivered by: HAROLD H. GREENE

 I

 Introduction

 Pending before the Court is a motion by the Regional Bell Operating Companies (Regional Companies) to modify Section II(D) of the decree to allow them to provide cellular and other wireless services across LATA boundaries. *fn1" In essence, the Regional Companies wish to be able to offer interexchange service (colloquially referred to as long distance service) to their cellular customers.

 This motion comes before the Court with mixed reactions from the other parties. The Department of Justice supports the motion, but only if certain conditions are imposed upon the Regional Companies. The interexchange carriers, on the other hand, oppose the motion, even if the Department's conditions are incorporated. Intervenors and amici have taken various positions, some vigorously opposing the motion, others expressing support.

 When the motion was first filed, congressional action on a telecommunications bill seemed imminent. For that reason, inter alia, the Court deferred consideration of the matter pending such action. However, when it became obvious that a bill would not be enacted in the 103rd Congress, the Court began considering the motion in earnest and convened a hearing on the matter. At that hearing, the Court sought and received additional guidance on the key questions raised by the motion. Having considered this additional guidance, as well as the full record, the Court now concludes that, to a degree and with certain conditions, the motion should be granted.

 In order to understand how this motion is being resolved, one must first understand the factual and legal context in which it arises.

 II

 The Bottleneck Issue

 The Regional Companies have made it a central theme of their argument in support of the waiver that the American public will benefit from more competition in cellular long distance, and that they are a potentially significant resource in this respect. The Court does not disagree with these propositions. Competition is basic to the decree in this case, and it obviously should be fostered. See Part VI, infra.

 The Court's commitment to the protection and enlargement of competition in telecommunications of course includes competition in the cellular portion of long distance. Thus, the Court's immediate inclination was to permit the Regional Companies to enter this market, for both on the basis of their experience in telecommunications and their access to the necessary capital, these companies are particularly well suited to operate in this field as effective competitors to the more entrenched long distance carriers. Beyond that, the Court -- as others, in Congress and elsewhere -- is of course desirous of terminating the restrictions in the decree when this can prudently be done, rather than enshrining them as permanent features of the business landscape.

 That, however, can only be accomplished when the conditions which gave rise to those restrictions no longer exist. Put most simply and bluntly, restrictions on long distance service by the Regional Companies can be completely eliminated only when these companies no longer have the capacity to exploit what has throughout this litigation been termed the "bottleneck." Lest the significance of that condition has been lost to the memory of those who are part of the telecommunications business or have the obligation and power to regulate that business, through legislation or otherwise, it is still worthwhile to recapitulate, briefly, why the bottleneck concept plays such a central role here.

 As the Court explained in its approval of the decree proposed by the Department of Justice and AT&T (the two parties to the underlying antitrust action), the Bell System's anticompetitive activities, which had surfaced in the evidence during the eleven-month trial of this case, were made possible in large part "because of its control of the local Operating Companies -- whose facilities were and are needed for interconnection purposes by AT&T's competitors . . . ." United States v. American Tel. & Tel., 552 F. Supp. 131, 162 (D.D.C. 1982). The Court further noted at that time that, with divestiture, the Regional Companies' guarantee of access to the network by all long distance carriers would be meaningful only because the Regional Companies "will not be providing [long distance] services" of their own. Id. at 165. Other, similar expressions are found throughout the Court's Opinion that approved the decree, as well as in subsequent Orders and Opinions of the Court. See, e.g., especially, United States v. Western Electric Co., Inc., 673 F. Supp. 525 (D.D.C. 1987) (Triennial Review Opinion).

 Thus, in the Triennial Review in 1987, the Court emphasized the central role of the bottleneck in these terms:

 
The first question must necessarily be whether the Regional Companies have retained monopoly control of an "essential facility" . . . It was their control of [such essential facilities] that gave the Bell System its power over the competition. That control enabled the System to foreclose or impede interconnection to its network of lines of its long distance competitors and of the equipment produced by its manufacturing rivals. It also made possible the subsidization of one activity with the profits achieved in another. As long as the Regional Companies retain these same bottlenecks, the potential for the same or similar anticompetitive conduct is plainly still present.

 673 F. Supp. at 536 (internal citations omitted). The concepts expressed in that Opinion still apply today, and the Court continues to be informed by their logic. The continued existence of bottlenecks remains the factual predicate for the interexchange restriction. Before the Regional Companies can enter a new market they will have to show that there is no substantial possibility that they could use their bottleneck monopoly control to impede competition in that market.

 The Regional Companies and the Department of Justice advance different responses to this bedrock proposition. The Regional Companies attack the factual predicate for the restriction, arguing that there is no bottleneck in this particular market. The Justice Department, on the other hand, acknowledges that the bottleneck problems continue to exist, but it contends that these problems can be adequately resolved if certain conditions, which as a practical matter will reduce the risk that the Regional Companies will discriminate against the long distance competitors, are placed on their entry into the long distance cellular market. The Court examines the Regional Company argument in Parts III and IV, infra, and the Department of Justice submission in Part V, infra.

 III

 Cellular Operation

 In order to evaluate the assertion that there is no bottleneck in this particular market, one must first understand some basic facts about how cellular phone service works. What follows below, therefore, is a brief bit of background on the logistics involved in cellular calls in general and long-distance cellular calls in particular. *fn2"

 When a cellular customer places a call, that "call" actually goes through a number of different steps before it reaches the party the customer has dialed. First, the transmission proceeds to the "cell" that is nearest to the customer's phone. If the customer is in an automobile, for instance, the transmission will go to a nearby cell along the road. That call will then be passed from cell to cell until it reaches the Mobile Transit Switching Office. This mobile switching office is the central switch for the particular cellular company. Once the call reaches the mobile switch, the question then arises as to how best to route the call to complete the transmission. If the call is a local one, the choice is easy. The call is merely handed over to the local exchange company (usually the particular Regional Company), and the local exchange company completes the call through the local network.

 If the call is a long-distance call, however, the situation becomes more complicated. The call must eventually get from the mobile switch to the "Point of Presence" of the customer's chosen interexchange carrier. At the present time, the overwhelming majority of calls proceed on this route through some sort of facility provided by the local exchange carrier, usually one of the Regional Companies. The calls proceed either through the regular local exchange or else they advance by way of a dedicated access system -- which is likewise provided by the local carrier. Either way, in their journey from the mobile switch to the interexchange point of presence, the vast majority of calls are handled by the Regional Company. A remaining small minority of calls are carried by Competitive Access Providers that are not affiliated with the Regional Companies.

 This process raises a bottleneck problem because, as noted, in most instances the Regional Companies control a key step in the process. That is not precisely the same bottleneck problem as arises in landline service, but it raises the same types of issues. For the "Mobile Bottleneck" *fn3" gives the local companies (usually the Regional Companies) the ability to control a part of virtually every interexchange cellular call, just as the Landline Bottleneck gives these companies similar, albeit more complex, control over every wired interexchange call.

 This Mobile Bottleneck control would be critical if the Regional Companies were allowed also to carry cellular calls on a long distance basis; these companies would then have both the power and the incentive to use this control against their competitors in the cellular long distance business. This potential discrimination directly parallels the discrimination that led to the interexchange restriction in the first place. In this way, the Mobile Bottleneck on the surface raises the same dangers as does the Landline Bottleneck.

 The Regional Companies contend that the Mobile Bottleneck is unlike the Landline Bottleneck, and that it should be treated differently. They point to two facts to support this argument.

 First, they cite statistics about the increasing use of "dedicated access lines" from mobile switches to the interexchange carriers. They argue that the use of these dedicated access lines allows calls to bypass the general local exchange. The gist of this argument is that, because the calls are not passing through the traditional Landline Bottleneck, there is no problem.

 This argument proves too much. Most importantly, it overlooks the fact that, although the dedicated access lines bypass the local exchange, they are still controlled by the local exchange carrier. What that means, of course, is that the local companies still control a key step in the process, and they would still have the potential to discriminate against competitors in the cellular interexchange business. In other words, the Mobile Bottleneck is just as much of a problem when dedicated access lines are used as when calls are routed directly through the local exchange.

 The Regional Companies also argue that the increasing use of Competitive Access Providers shows that the Mobile Bottleneck is not a real bottleneck. They contend that Competitive Access Providers provide a real alternative to facilities provided by the particular Regional Company, and that the interexchange carriers could use the facilities provided by Competitive Access Providers if they are truly concerned about discrimination by a Regional Company. If Competitive Access Providers were available all over the country and could provide viable competition, the Court would be in complete agreement with the Regional Companies on this point. In fact, it is this Court's strongest hope that such competition will quickly flower and that that competition will justify a wholesale removal of the wireless interexchange restriction.

 But even the Department of Justice concedes that this day has not yet come. Statistics show that Competitive Access Providers carry at this time only a relatively small portion of the calls that proceed from mobile switches to interexchange carriers. *fn4" Furthermore, such processes are often quite expensive. *fn5" More important for this Court, however, is the fact that Competitive Access Providers do not even exist in most areas. In these areas, then, the Mobile Bottleneck is simply a practical reality.

 In the large majority of cases, therefore, the bottom line is that long distance carriers are dependent on facilities provided by local exchange carriers. This means that the Regional Companies would have the usual structural advantage over their competitors if they were allowed to provide long distance service to their cellular customers. And the Regional Companies once again would be in a position to disadvantage long distance competitors by virtue of their control over key local facilities.

 IV

 It does not follow, however, that the motion of the Regional Companies must be denied. What is significant, with respect to this issue, is that the situation varies from State to State and apparently even from one subdivision to another in some of the States. Further, the geographical field in which cellular long distance competition is feasible may be expected to widen further in relatively short order.

 Unlike in 1987, *fn6" there are now some areas where the Mobile Bottleneck is not complete. In those areas, non-Regional Company providers are able to set up the connection from the mobile switch to the interexchange point of presence. Moreover, as a practical matter, the Mobile Bottleneck is not as difficult to bypass as the Landline Bottleneck. A company need not create an entire local network to get around the Mobile Bottleneck; it needs only to create a system to carry calls from the mobile switch to the interexchange carrier's point of presence. Indeed, the very existence of Competitive Access Providers demonstrates that this type of bypass constitutes a viable option. Finally on this issue, there is also some indication that the interexchange carriers themselves can provide the bypass, either through collocation of the mobile switch and the point of presence or otherwise.

 On the other hand, in some areas there may still be legal or regulatory impediments to providing this type of bypass. *fn7" However, the existence of Competitive Access Providers in various States is proof that there are some locations where there are no legal barriers to providing a bypass around the Mobile Bottleneck. *fn8" It is thus clear that areas exist in this country where, at least as a legal ...


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