Wireline Carriers Policy and Law I:

1
Session 3

• Wireline Carriers - Policy and Law I
• The Communication Act of 1934

2
Session Objectives

• Basis and History of Regulation (Review)
• Term paper topics - Concept paper
• Development of the industry structure
• Highlights of the 1934 Act
• The former Bell System
• Evolving competition
• The 1956 consent decree and 1974 antitrust suit

3
Review

• Why regulate?
• What is the basis for regulation? What provision
  in the Constitution underlies telecommunications
  regulation?
• What is commerce? due process? State action?
• Explain the historical development of regulation.
  
• What does affected with public interest mean?
• What does substantive due process mean?

4
Review (contd)

• What aspects of Washington Gas Light constitute
  natural monopoly? Why? What aspects might not?
  Why?
• Is a regulated industry immune from antitrust?
• What are other alternatives to regulation?
• What alternatives do the victims families
  resulting from accidents due to defective
  Firestone tires and Ford Explorers have available
  to them?

5
Early Industry Structure

• Early 1900s. Active competition among many
  small, local companies
• ATT buys up competitors or refuses
  interconnection antitrust concern.
• One system, one policy, universal service
• --Theodore Vail
• 1913 ATT serves 80 of population and agrees
  to stop anti-competitive practices.

6
Communications Act of 1934

• Creates FCC for purposes of
• ...regulating interstate and foreign commerce in
  communication by wire and radio so as to make
  available...
• to all
• without discrimination...
• a rapid, efficient, Nation-wide, and world-wide
  service
• with adequate facilities
• at reasonable charges...
• ...national defense
• safety of life and property
• centralizing authority

7
Communications Act of 1934 (contd)

• Common carrier characteristics
• Services on request
• Reasonable rates
• Nondiscriminatory rates
• Requires certificate of public convenience and
  necessity for new construction or discontinuance
  of facilities. (Why?)
• FCC regulates DoJ may prosecute to enforce.

8
The 1934 Act, Title I

• Sec. 1 Purposes
• Sec. 3. Definitions (selected)
• Bell Operating Company, common carrier,
  construction permit, dialing parity, exchange
  access, information service, local access and
  transport area, local exchange carrier, number
  portability, person, telecommunications, wire
  communications
• Secs. 4, 5. The Commission
• Sec. 7. New technologies encouraged

9
Title II, Part I--Common Carrier Regulation

• Sec. 201. Service and charges
• ...furnishservice upon reasonable request
• All charges...just and reasonable
• Sec. 202. Unreasonable discrimination unlawful
• Sec. 203. Published tariffs
• Sec. 204. Hearings on new charges
• Sec. 213. Disclosure of rate base

10
Title II--Common Carrier Regulation (contd)

• Sec. 214. Extension of lines
• Construction permit (public convenience and
  necessity)
• Universal service
• Sec. 220. Uniform system of accounts
• Sec. 222. Privacy of customer information
• Sec. 223. Obscene calls
• Sec. 229. CALEA
• Sec. 230. Screening and blocking protected

11
U.S. Telephone Industry before MFJ

• Bell System
• Bell Operating Companies (about 22)
• Long Lines
• Western Electric (manufacturing--carrier and CPE)
• Bell Telephone Laboratories (research
  development)
• Independent operating companies (about 1400)
• Federal and state economic regulation
• Separation of revenues by local and toll

12
Evolving Competition in Terminals

• 1968. Carterfone--allows interconnection
• 1969. Connecting arrangement initially
  required
• 1975. Registration, meeting connection standards
• ATT resistance to competition
• Primary Instrument Concept (rejected)
• Classification of private lines as intra- or
  interstate
• No mix of terminal equipment on private lines
• No piece out by customer between carriers
  transmission and carriers terminal equipment
• Bundling

13
Evolving Competition in Transmission

• 1969. MCI route, Chicago and St. Louis
• 1971. Specialized (microwave) common carriers
• MTS and WATS not opened to competition for fear
  of losing universal service subsidies
• Computer Inquiry I--data processing not regulated
• 1978. Court orders ATT to interconnect with
  MCIs Execunet, which competed with MTS/WATS.

14
Other Evolving Competition

• 1976. FCC mandates unlimited resale and sharing
  of private line transmission services.
• 1979. FCC opens MTS and TWX to competition.
• 1980. Unlimited resale and shared use
• 1980. FCC opens MTS and WATS to other (i.e.,
  competitive access) providers (end of natural
  monopoly).
• 1980. IRCs may serve new gateways.

15
Prelude to 1956 Consent Decree

• 1934-39. FCC concerned that Western Electric
  (W.E.) violates antitrust
• 1949. Antitrust suit against W.E. and ATT
• Goal Separation of W.E. and Bell Labs from
  ATT
• 1956. Consent decree (Final Judgment)
• ATT limited to common carrier services
• W.E. limited as to product (telephone equipment)
  and customer (Bell System)
• No data processing for Bell System
• Bell System must license its patents.

16
More Complaints against Bell System

• Value-of-service pricing vs. cost-based
• Residential and rural subsidies from toll
• Gold plating
• Slow introduction of technological advances
• Long depreciation lifetimes (e.g., 40 years)
• Antitrust violations (anti-competitive actions)
• Discrimination in inter-city access and terminal
  equipment connection thru local exchange control
• Limited diversity in service offerings
• Monopoly in competitive segments
• Line-of-business restrictions (from 1956 decree)

17
Issues in the 1974 Antitrust Suit

• Alleged violation of Sherman Act intent
• to preserve free and unfettered competition
• To avoid concentration of power (as there is
  no political king, so should there be no economic
  king)
• Monopoly impairs competition through
• Cross subsidy of competitive ventures (e.g.,
  equipment)
• Discrimination against potential competitors

18
The 1974 Antitrust Suit

• 1974. U.S. antitrust suit seeking
• Divestiture of Bell Operating Companies LEC
  operations from ATT
• Divestiture of Western Electric
• Sought remedy (i.e., penalty for past violations)
  as well as relief (foreclosure of future
  violations)
• 1982. Finally settled by Modification of Final
  Judgement, taking effect in 1984