Michigan State University College of Law
Digital Commons at Michigan State University College of Law
Faculty Publications
1997
The Legal Process and Political Economy of
Telecommunications Reform
James Ming Chen
Michigan State University College of Law, [email protected]
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Part of the Communications Law Commons
Recommended Citation
Jim Chen, The Legal Process and Political Economy of Telecommunications Reform, 97 Colum. L. Rev. 835 (1997).
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THE LEGAL PROCESS AND POLITICAL ECONOMY OF
TELECOMMUNICATIONS REFORM
Jim Chen*
American telecommunications law as regulatory phoenix appears to
smolder in repeating cycles of reform, only to rise again from its ashes. From
the heyday of public utility law's regulatory compact, through "mid-life"
phases oj crisis and reform, to the mix of triumph and letdown that is the
Telecommunications Act of 1996, telecommunications law has passed
through four distinct "ages." In each age, a dominant institution arose to
address the perceived economic concerns of the day, only to run headlong
against legal and political limits on its effectiveness.
During the Age of Accommodation, which suroived the passage of the
Communications Act of 1934, state public utility commissions nurtured the
Bell monopoly in its infancy. The Federal Communications Commission's
efforts to deregulate equipment manufacturing and long distance defined an
Age ofAnxiety in the 1950s, 1960s, and 1970s. During the twelve-year Age
of Antitrust, the Modified Final Judgment attempted to confine the divested
Bell companies to the last of their monopolies, local carnage. Today's Age of
Anticipation, heralded by the 1996 Act, boasts numerous strategies for enhancing entry and competition throughout the industry.
Telecommunications reform has been shaped by client politics, institutional stagnation and reform, impeifect economic competition, and technological innovation. The intrinsic political economy of telecommunications
has defeated efforts to alter "legal process" through institutional revitalization and realigument. Redistributive debates over universal service and residential subsidies linger despite drastic technological change and legal evolution, while obvious solutions (such as immediate long-distance deregulation)
languish. Far from converging into a single coherent body ofpolicy, telecommunications law will continue to reflect longstanding tensions within the
legal process and political economy of American telephony.
THE REGULATORY PHOENIX
Ashes to ashes, dust to dust. The Communications Act of 19341 is
dead; long live the Telecommunications Act of 1996.2 Sweeping reforms
have wiped clean several generations of telecommunications law in the
United States. As a matter of strictly positive law, the new legislation has
fulfilled academic prophesies that communications law would "collapse
like the walls ofJericho."3
* Associate Professor of Law, University of Minnesota Law School
<[email protected]>. Daniel A Farber, Daniel J. Gifford, J. Todd Metcalf,
and E. Thomas Sullivan provided helpful suggestions.
1. 47 U.S.C. §§ 151-613 (1994).
2. Pub. L. No. 104-104, 1996 U.S.C.C.A.N. (110 Stat.) 56 (to be codified in scattered
sections of 47 U.S.C.).
3. J. Gregory Sidak, Telecommunications in Jericho, 81 Cal. L. Rev. 1209, 1209 (1993)
(book review).
836
COLUMBIA LAW REVIEW
[Vol. 97:835
Yet federal telecommunications law may not be ripe for burial. So
strong are its regulatory stirrings that federal telecommunications law
may be regarded as a legal phoenix-resurrected and even rejuvenated
despite its apparent smoldering. Neither telecommunications law nor
the grander traditions from which it springs have "come tumbling down
all at once like the walls ofJericho."4 Ashes to ashes, indeed: We are not
witnessing the destruction of a legal scheme, but rather a cataclysmic
reinvention of economic regulation.
Telecommunications law as regulatory phoenix? We should have expected as much. Economically informed scholarship has trained us to
view regulatory laws and institutions in terms of life cycles.5 From its origins in landmark Supreme Court decisions on public utility regulation 6 to
the 1996 Act, the tortuous path of federal telecommunications law has
shown that the notion of life cycles describes not only administrative
agencies, but the full range of activities and actors in the regulatory state.
Telecommunications law has undergone multiple stages of development,
each shaped by contemporaneous political circumstances and warped by
obsolete economic assumptions.
This Article describes the institutional, economic, and political
evolution of American telecommunications law. Mindful of the incoherence of existing distinctions between wireline and wireless communications' and between common carriage and broadcasting,S I will nevertheless focus on the law of local and long-distance telephony. Part I traces
four ages of American telecommunications law, from the heyday of state
public utility law, through "mid-life" phases of crisis and reform in federal
communications and antitrust law, to the current blend of triumph and
letdown that is the Telecommunications Act of 1996. Part II describes
telecommunications reform as the product of client politics (agency capture by regulated firms and other stakeholders), institutional stagnation
and reform, imperfect economic competition, and technological innovation. It concludes that telecommunications law, far from converging into
4. Grant Gilmore, The Ages of American Law 68 (1977).
5. See, e.g., Marver H. Bernstein, Regulating Business by Independent Commission
74 (1955) ("The life cycle ofan independent commission can be divided into four periods:
gestation, youth, maturity, and old age.");john K. Galbraith, The Great Crash, 1929, at 171
(2d ed. 1961) ("[R]egulatory bodies, like the people who comprise them, have a marked
life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later
they mellow, and in old age ... they become ... either an arm of the industry they are
regulating or senile.").
6. See, e.g., Bluefield Water Works & Improvement Co. v. Public Servo Comm'n, 262
U.S. 679 (1923); Smyth V. Ames, 169 U.S. 466, afI'd as modified, 171 U.S. 361 (1898);
Munn V. Illinois, 94 U.S. 113 (1876).
7. See, e.g.,john Thome et al., Federal Broadband Law §§ 1.2,2.1-2.9, at 4-7,61-120
(1995); Monroe E. Price & john F. Duffy, Technological Change and Doctrinal
Persistence: Telecommunications Reform in Congress and the Court, 97 Colum. L. Rev.
976, 982 (1997).
8. See Howard Shelanski, The Bending Line Between Conventional "Broadcast" and
Wireless "Carriage," 97 Colum. L Rev. 1048, 1049 (1997).
1997]
837
THE TELECOMMUNICATIONS PHOENIX
a single coherent body of policy, will continue to reflect longstanding
tensions within the legal process and political economy of American
telephony.
I.
THE AGES OF AMERICAN TELECOMMUNICATIONS
LAw
The Telecommunications Act of 1996 is justly described as watershed
legislation. The Act purportedly completes the transition of telecommunications law from the "public utility model" to market-oriented strategies
such as unbundling and interconnection. This transformation has been
effected by a cyclical power struggle among the four leading institutional
players in American telecommunications: state public utility commissions
(PUCs), the Federal Communications Commission (FCC), the federal
courts as antitrust proving grounds, and Congress.
Almost exactly twelve decades passed between the February 14, 1876,
filing of Alexander Graham Bell's application for a patent on "certain
new and useful Improvements in Telegraphy"9 and the February 8, 1996,
passage of the Telecommunications Act. This period spans four
ages of telecommunications law: (1) a state PUC-dominated Age of
Accommodation, (2) an Age of Anxiety triggered by the FCC's deregulation of telecommunications equipment manufacturing and long-distance
telephony, (3) an Age of Antitrust defined by the twelve-year reign of the
Bell divestiture decree,1O and (4) today's Age of Anticipation, heralded by
the passage of the 1996 Act. Each age has witnessed the rise of one preeminent institution, animated by the economic concerns of the day and
ultimately stymied by legal and political limitations. In telecommunications, as elsewhere, the regulatory axiom of matching the perceived economic defect with the appropriate set of substantive rules and regulatory
institutions is most "often honored in the breach."ll
A. Accommodation
Contrary to the conventional view of telephony as the quintessential
natural monopoly, the rise of the Bell octopus was neither natural nor
inevitable. Indeed, one century ago, an informed observer might have
expected competition to discipline the telephone industry in the United
States. By 1895, Bell's principal patents had expired, and Guglielmo
Marconi had invented the "wireless telegraph."12 At the tum of the cen9. The Telephone Cases, 126 U.S. 1,6 (1888). See generally Michael K. Kellogg et al.,
Federal Telecommunications Law § 1.2.1, at 5-6 (1992) (describing Alexander Graham
Bell's development of the telephone).
10. See United States v. AT&T Co., 552 F. Supp. 131 (D.D.C. 1982), aff'd memo sub
nom. Maryland v. United States, 460 U.S. 1001 (1983).
11. Stephen Breyer, Regulation and Its Reform 5 (1982).
12. See Gerald W. Brock, The Telecommunications Industry: The Dynamics of
Market Structure 103, 162 (1981). See generally Edward A. Doering, Federal Control of
Broadcasting Versus Freedom of the Air 4 (1939) (discussing the law's role in promoting
the deployment of radio technology).
838
COLUMBIA LAW REVIEW
[Vol. 97:835
tury, nearly half of the American cities with telephone service could
choose from multiple providers. IS The Bell system was preparing for
mortal combat against wireless competition. 14 There was little reason to
anticipate that a single firm, aided in its monopolistic ambitions by accommodating regulators, would dominate American telephony.
Competition in local exchange (LX) markets would not survive. The
Bell system secured rights to the two crucial pieces of technology-Iongdistance "loading" and the vacuum tube electronic amplifier-that made
interexchange (IX.) service feasible. I5 In its quest for "One Policy, One
System, Universal Service, "16 the Bell system swiftly absorbed unaffiliated
local exchange carriers (LECs),17 AT&T combined twenty-four LX affiliates, a Long Lines Department, Western Electric, and Bell Laboratories
under a single corporate umbrella. IS Leveraging and self-preference,
among the oldest and most dreaded phenomena in imperfectly competitive industries,19 transformed American telephony into a sprawling but
"unitary enterprise."20
Federal law failed to stifle the Bell monopoly in its infancy. The earliest congressional prescriptions for telephony deviated from the "incipiency" theory that inspired the Clayton Act of 1914.21 Although the
Mann-Elkins Act of 1910 defined telephone companies as "common carriers," regulated by the Interstate Commerce Commission (ICC) and obli13. See Warren G. Lavey, The Public Policies That Changed the Telephone Industry
into Regulated Monopolies: Lessons from 1915, 39 Fed. Comm. LJ. 171, 178 (1987).
14. See Ithiel de Sola Pool, Technologies of Freedom 31 (1983).
15. See De Forest Radio Tel. & Tel. Co. v. Radio Corp. of Am., 20 F.2d 598, 599 (3d
Cir. 1927); Brock, supra note 12, at 118, 162, 164-65; Kellogg et aI., supra note 9, § 1.2.3, at
8-9.
16. Kellogg et aI., supra note 9, § 1.3, at 12.
17. See Glen O. Robinson, The Federal Communications Act: An Essay on Origins
and Regulatory Purpose, in A Legislative History of the Communications Act of 1934, at 3,
7, 9 (Max D. Paglin ed., 1989) [hereinafter Legislative History]; Dean Burch, Common
Carrier Communications by Wire and Radio: A Retrospective, 37 Fed. Comm. LJ. 85,
86-87 (1985).
18. See Charles F. Phillips, Jr., The Regulation of Public Utilities 750-52 (3d ed.
1993); cf. Neil H. Wassennan, From Invention to Innovation: Long-Distance Telephone
Transmission at the Tum of the Century 38-39 (1985) (describing AT&T's primary
purpose as that of operating the long-distance network that connected the Bell LECs).
19. See, e.g., AT&T Co. v. United States, 299 U.S. 232, 239 (1936); Berkey Photo, Inc.
v. Eastman Kodak Co., 603 F.2d 263, 275-76 (2d Cir. 1979).
20. Federal Power Comm'n v. East Ohio Gas Co., 338 U.S. 464, 488 (1950) Uackson,
j., dissenting) (applying this description to the natural gas industry).
21. Unlike the Shennan Act of 1890, which targeted mature conspiracies and
monopolies, the Clayton Act was designed to deter anticompetitive acts in their
"incipiency," before irreparable economic hann could set in. See 15 U.S.C. § 12 (1994)
(Clayton Act); see, e.g., United States v. American Bldg. Maintenance Indus., 422 U.S. 271,
277-78 (1975); United States v. Penn-Olin Chern. Co., 378 U.S. 158, 170-71 (1964);
United States v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 589, 597 (1957); Standard
Fashion Co. v. Magrane-Houston Co., 258 U.S. 346, 355-56 (1922); S. Rep. No. 63-698, at 1
(1914). The Communications Act of 1934 modelled the FCC's broadcast licensing
standards after the Clayton Act's "incipiency" theory. See 47 U.S.C. § 314 (1994).
1997]
THE TElECOMMUNICATIONS PHOENIX
839
gated "to provide service on request at just and reasonable rates, without
unjust discrimination or undue preference,"22 Congress did not extend
tariff filing obligations to telecommunications carriers.23 In the most
meaningful respects, then, "AT&T was free to determine its rates, its return on investment, and its service obligation."24
Judicial developments widened the legislative gap. Emboldened by
the Supreme Court's view that common carrier obligations did not extend to competitors,25 federal and state courts permitted interexchange
carriers (IXCs) to refuse interconnection to nonaffiliated LECS.26 The
effect, of course, was to permit AT&T to favor its affiliates and to squeeze
out rival LECs until they folded or sold out at a distressed priceP
AT&T's imperial ambitions stalled temporarily when it agreed in the 1913
Kingsbury Commitment to stop acquiring independent LECs and to offer
interconnection to all nonaffiliates on equal terms. 28 The cycle of mergers and acquisitions resumed in 1921, however, when Congress authorized the ICC to approve telephone company consolidations. 29 The awkward "adaptation of railroad regulation to the communications field"
flopped;3o an ICC consumed by railroad regulation "contributed very little to the development of [telecommunications] pOlicy."31
Meanwhile, the competitive threat from wireless telephony dissolved
altogether. AT&T and the Radio Corporation of America (RCA) used
their joint control of the electronic amplifier32 to negotiate a "gentlemanly agreement ... [to] replace [ ] competition with complementary
monopolies."33 AT&T sold RCA its remaining radio properties (includ22. Essential Communications Sys., Inc. v. AT&T Co., 610 F.2d 1114, 1118 (3d Cir.
1979); see Mann-Elkins Act of 1910, ch. 309, § 7,36 Stat. 539, 545 ("Service. " shall be just
and reasonable, and every unjust and unreasonable charge ... is prohibited and declared
to he unlawful.").
23. See Western Union Tel. Co. v. Esteve Bros., 256 U.S. 566, 573 (1921); Essential
Communications, 610 F.2d at 1118. To its credit, the ICC did establish a uniform system of
regulatory accounting for the telecommunications industry. See Northwestern Bell Tel.
Co. v. Railway Comm'n, 297 U.S. 471, 477 (1936).
24. Essential Communications, 610 F.2d at 1119.
25. See Express Cases, 117 U.S. 1, 27-28 (1885); cf. Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585, 611 n.44 (1985) (declining, exactly one q:ntury
later, to endorse or reject proposed antitrust doctrine that firms with monopoly power
have obligation to provide competitors with access to "essential facilities").
26. See, e.g., Pacific Tel. & Tel. Co. v. Anderson, 196 F. 699, 703 (E.n. Wash. 1912);
Home Tel. Co. v. People's Tel. & Tel. Co., 141 S.W. 845, 848 (Tenn. 1911).
27. See Burch, supra note 17, at 87; Lavey, supra note 13, at 179.
28. See Kellogg et aI., supra note 9, § 1.3.3, at 16-17.
29. See Willis-Graham Act of 1921, ch. 20, 42 Stat. 27, repealed by Communications
Act of 1934, ch. 652, § 602, 48 Stat. 1064, 1102.
30. H.R Rep. No. 73-1850, at 4 (1934).
31. Robinson, supra note 17, at 8.
32. See Kellogg et aI., supra note 9, § 1.3.4, at 19; cf. Radio Corp. of Am. v. Lord, 28
F.2d 257, 261 (3d Cir. 1928) (noting that RCA had amassed a "monopoly of the radio tuhe
business •... to the extent of somewhere between 70 percent and 95 percent").
33. Kellogg et aI., supra note 9, § 1.3.4, at 19.
840
COLUMBIA LAW REVIEW
[Vol. 97:835
ing flagship station WEAF), while RCA agreed to use Bell lines for transmitting materials to NBC affiliates.34 Widespread use of wireless technologies in local telephony would not emerge until the 1980s.
The Radio Act of 192735 ratified the communications giants' privately negotiated division of markets: The Act barred the cross-ownership
of telephone companies and broadcasting stations36 and declined to regulate radio broadcasters as common carriers.37 By the time Congress
passed the Communications Act of 1934,38 it was clear that federal regulators were targeting Big Broadcasting, not Big Telephony. It was "the
broadcasting field," not its telephonic counterpart, that inspired Congress
to "move [ ] under the spur ofa widespread fear [of] monopolistic domination."39 In 1942, the FCC and federal antitrust attorneys forced RCA to
split its broadcasting empire between the NBC and ABC networks. 40 By
contrast, Bell divestiture would wait another four decades.
Cushioned by the law, Bell came to dominate all aspects of telephony, from equipment manufacturing and local service to long distance.
"For reasons of bureaucratic convenience, government officials preferred
... monopolies of [local] size and scope."41 State regulators systematically favored the incumbent LEC, usually a Bell affiliate, over competitive
alternatives. In the absence of aggressive federal intervention, state PUCs
enjoyed great freedom in franchising and regulating LECs according to
the "regulatory compact" of classic public utility law. 42
Federal inaction enabled state PUCs to become the dominant institu- .
tional players of the age. State regulators systematically transferred
wealth from commercial to residential customers and from interstate to
34. See id., § 1.3.4, at 18.
35. Ch. 169, 44 Stat. 1162, amended by ch. 788, 46 Stat. 844 (1930), repealed by
Communications Act of 1934, ch. 652, § 602, 48 Stat. 1064, 1102. See generally Federal
Radio Comm'n v. Nelson Bros. Bond & Mortgage Co., 289 U.S. 266, 274-87 (1933)
(discussing Radio Commission's power and duties); Federal Radio Comm'n v. General
Elec. Co., 281 U.S. 464, 466-67 (1930) (same).
36. See Radio Act of 1927, ch. 169, § 17, 44 Stat. 1162, 1169-70.
37. See id.; see also 47 U.S.C. § 153(10) (1994) ("[A] person engaged in radio
broadcasting shall not ... be deemed a common carrier.").
38. Ch. 652, 48 Stat. 1064 (codified as amended at 47 U.S.C. §§ 151-613 (1994».
The 1934 Act effectively consolidated the powers of the ICC under the Mann-Elkins Act
and the Radio Commission under the Radio Act. See Louisiana Pub. Servo Comm'n v.
FCC, 476 U.S. 355, 369-70 (1986); Richard McKenna, Preemption Under the
Communications Act, 37 Fed. Comm. LJ. 1, 12-18 (1985).
39. FCC V. Pottsville Broad. Co., 309 U.S. 134, 137 (1940) (emphasis added); accord
NBC V. United States, 319 U.S. 190, 219 (1943).
40. See NBC, 319 U.S. at 208; NBC V. United States, 44 F. Supp. 688, 691 (S.D.N.Y.
1942) (Hand,].), rev'd on other grounds, 316 U.S. 447 (1942).
41. Kellogg et aI., supra note 9, § 1.3.3, at 17.
42. See Jersey Cent. Power & Light Co. v. FERC, 810 F.2d 1168, 1189 (D.C. Cir. 1987).
The compact gave "[e]ach party ... something in the bargain": The regulated firm's stateenforced monopoly would be offset by "a regime of intensive regulation" that guaranteed
local ratepayers "universal, non-discriminatory service and protection from monopolistic
profits." Id.
1997]
THE TELECOMMUNICATIONS PHOENIX
841
intrastate traffic. In financial terms, the federal stake in telecommunications was puny; scarcely VIVO percent of all phone calls before 1934
crossed state lines. 43 The PUCs' legal arsenal included at least three devices that endure to this day: universal service obligations (sometimes
coupled with provisions for "lifeline" accounts and other below-cost services), price-averaging, and more or less arbitrary "access fees."44 The Bell
system offered little or no resistance to these parochial tactics. Local Bell
affiliates could accept costly universal service obligations as a small price
for their exclusive LX franchises under state law. As a fully integrated
firm, AT&T could recoup any losses incurred by its Long Lines
Department through its LX subsidiaries.
The lone federal legal obligation borne by the state PUCs proved
illusory. In Smith v. fllinois Bell Telephone Co., the Supreme Court rejected
a consolidated approach to regulatory accounting for a fully integrated
telephone company and demanded instead a concrete "separation of ...
intrastate and interstate property, revenues and expenses."45 Although
the Court later contended that "the segregation of properties and business [in Smith] was essential in order to confine the exercise of state
power to its own proper province,"46 Smith effectively gave state PUCs
carte blanche in structuring local rates. The question of allocating common costs, more so than all other questions in cost-of-service ratesetting,
was and "will always be an embarrassing question. "47 Smith itself cited one
PUC's transparently arbitrary assignment of "'25% of the long-distance
toll revenues'" to the regulated LEC "'as compensation for the use made
of the local plant in rendering long distance service. "'48 But the rule of
Smith and its subsequent codification49 "ignore[d] the physical reality of
. . . this country's telephone network": the simple technical problem
"that most local telephone plants are used to carry both intrastate and
interstate traffic."5o State regulators could easily clear the legal hurdle
43. See Eli M. Noam, Federal and State Roles in Telecommunications: The Effects of
Deregulation, 36 Vand. L. Rev. 949, 954-55 (1983); Carl 1. Wheat, The Regulation of
Interstate Telephone Rates, 51 HaIV. L. Rev. 846, 848-49 (1938).
44. See David L. Kaserman &John W. Mayo, Cross-Subsidies in Telecommunications:
Roadblocks on the Road to More Intelligent Telephone Pricing, 11 Yale J. on Reg. 119,
126-30 (1994); James A. Montanye, Rent Seeking Never Stops: An Essay on
Telecommunications Policy, 1 Indep. Rev. 249, 262-63, 274 (1996).
45. 282 u.S. 133, 143, 148 (1930).
46. Lone Star Gas Co. v. Texas, 304 U.S. 224, 241 (1938).
47. Smyth v. Ames, 169 U.S. 466, 546, aff'd as modified 171 U.S. 361 (1898); accord
Duquesne Power & Light Co. v. Barasch, 488 U.S. 299,308 (1989); see also Permian Basin
Area Rate Cases, 390 U.S. 747, 790 (1968) ("[N]either law nor economics has yet devised
generally accepted standards for the evaluation of rate-making orders ....").
48. Smith, 282 U.S. at 151 n.4 (quoting City of Houston v. Southwestern Bell Tel. Co.,
259 U.S. 318, 322 (1922».
49. See 47 U.S.C. § 152(b) (1994) (denying FCCjurisdiction over intrastate common
carriage of telecommunications traffic).
50. John R Haring & Kathleen B. Levitz, The Law and Economics of Federalism in
Telecommunications, 41 Fed Comm. LJ. 261, 295 (1989).
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COLUMBIA LAW REVIEW
[Vol. 97:835
posed by Smith by making a nominal effort to identify "the actual uses" of
a regulated utility'S property.51 Federal law then left the PUCs free to
extract subsidies from commercial and long-distance telephone traffic.
B. Anxiety
Telecommunications law in the Age of Accommodation planted the
seeds of its own destruction. Although the Communications Act of 1934
sought "to divide the world of domestic telephone service neatly into two
hemispheres" of interstate and intrastate jurisdiction52 by denying the
FCC jurisdiction over "intrastate communication service,"53 that statute
eventually became the vehicle by which the FCC displac~d the state PU Cs.
The 1934 Act took away, but it also gave. Unlike the ICC, the newly constituted FCC received the critical power to receive and review common
carriers' tariffS.54
Though the New Deal laid the legal framework for a federal assault
on state public utility law, the real impetus for reform came from the
laboratory. The technology explosion of the 1940s and 1950s reconfigured telecommunications. Bell Labs alone accounted for three of the
era's leading innovations: coaxial cable, microwave transmission, and the
51. Smith, 282 U.S. at 151; cf. Lindheimer v. Illinois Bell Tel. Co., 292 U.S. 151, 155
(1934) (noting that this "difficult task was so well performed" on remand from Smith "that
no question [was] •• raised as to the allocation of property to the [LEC's] intrastate and
interstate services, respectively").
.
52. Louisiana Pub. Servo Comm'n V. FCC, 476 U.S. 355, 360 (1986); see also Public
Util. Comm'n V. FCC, 886 F.2d 1325, 1329 (D.C. Cir. 1989) (describing this provision as
having created "a persistent jurisdictional tension" in American telecommunications law).
53. Communications Act of 1934, ch. 652, § 2(b), 48 Stat. 1064, 1065 (codified as
amended at 47 U.S.C. § 152(b) (1994». This provision was intended to deny the FCC the
power to preempt. state-law ratemaking, see Federal Communications Commission:
Hearings on H.R. 8301 Before the House Comm. on Interstate and Foreign Commerce,
73d Congo 136-37 (1934) (state!llent of]ohn E. Benton, Gen. Solicitor, Nat'l Assoc. ofR.R.
& Utils. Comm'rs), reprinted in Legislative History, supra note 17, at 343,482-83; Federal
Communications Commission: Hearings on S. 2910 Before the Senate Comm. on
Interstate Commerce, 73d Congo 156, 179 (1934) (statements of Andrew R. McDonald,
First Vice President, and John E. Benton, Gen. Solicitor, Nat'l Assoc. of R.R. & Utils.
Comm'rs), reprinted in Legislative History, supra note 17, at 119,278,301, a federal power
first recognized in the Shreveport Rate Case, Houston, E. & W. Tex. Ry. CO. V. United
States, 234 U.S. 342, 351-52 (1914). See Louisiana Pub. Serv. Comm'n, 476 U.S. at 372-73.
54. See CommunicationsActofl934, §§ 203(a), 204, 48 Stat. 1064, 1070-72 (codified
as amended at 47 U.S.C. §§ 203(a), 204 (1994»; MCI Telecomm. Corp. V. AT&T Co., 512
U.S. 218, 235 (1994) (Stevens,]., dissenting).
1997]
THE TELECOMMUNICATIONS PHOENIX
843
transistor. 55 Direct long-distance dialing appeared in 1951. 56 Microwave
transmission posed the most immediate threat to Bell, for its modest
economies of scale invited corrosive entry onto AT&T's IX turf. 57 Even as
technology was making IX service cheaper, however, the overall price of
telephone service was creeping upward. 58 The increasing profitability of
IX carriage might have warranted rate reductions, but IX service instead
became a source of new subsidies for residential customers. In the struggle between reduced IX rates and increased LX subsidies, Congress sided
with local telephony.59
Two technologically driven controversies eventually forced the FCC
to articulate the basic case for increased competition. Customer premises
equipment (CPE) and IX service, two of the Bell system's most lucrative
and most jealously guarded sources of revenue, would become the two
fronts on which the FCC would fight the federal government's first significant battles to deregulate telecommunications. A 1940 antitrust suit by
the independent manufacturer of an "autodialer" signaled a legal struggle over CPE.60 In 1948, the FCC landed its first blow. Rejecting the
claim that all CPE not supplied by the Bell system threatened the integrity
of Bell's LX networks, the FCC invalidated "foreign attachment" provisions in federal tariffs insofar as they prohibited recording devices with
no "perceptible effect on the functioning of the telephone apparatus or
the quality of the telephone service."61 By 1955, however, the FCC retreated from CPE deregulation by banning the Jordaphone, a prototypi55. See Kellogg et al., supra note 9, §§ 1.4.1-.2;John R. McNamara, The Economics
of Innovation in the Telecommunications Industry 18-21 (1991) (describing laboratory
improvements in the 1940s and 1950s). Cable television, first deployed in the 1940s "to
bring clear broadcast television signals to remote or mountainous communities," Turner
Broad. Sys., Inc. v. FCC, 512 U.S. 622, 627 (1994); see also United States v. Southwestern
Cable Co., 392 U.S. 157, 162-63 (1968) (describing emergence and rapid growth of
prototypical cable systems), eventually spawned a distinct industry now reviled as a threat
to conventional broadcasting, see Turner Broad. Sys., Inc. v. FCC, 117 S. Ct. 1174, 1190
(1997) ("finding a substantial basis" for upholding the "must-carry" provisions of the Cable
Television Consumer Protection and Competition Act of 1992) and heralded as a source of
competition in local telephony, see H.R. Conf. Rep. No. 104-458, at 148 (1996), reprinted
in 1996 U.S.C.CAN. 124, 160 (arguing that cable television's 95% market penetration
suggests the possibility of "meaningful facilities based competition" in many LX markets).
56. See Phillips, supra note 18, at 749.
57. See Peter W. Huber, The Geodesic Network II: Report on Competition in the
Telephone Industry 3.3 (1992) [hereinafter Geodesic Network II]; Leonard Waverman,
The Regulation ofIntercity Telecommunications, in Promoting Competition in Regulated
Markets 201, 232-33 (Almarin Phillips ed., 1975).
58. See Gerald W. Brock, Telecommunication Policy for the Information Age: From
Monopoly to Competition 67-68 (1994).
59. See id. at 68 (documenting congressional opposition to reduction in longdistance rates as contrary to interests of "the average housewife and business or
professional man who do not indulge in a great deal oflong distance"); Peter Temin &
Louis Galambos, The Fall of the Bell System 25 (1987) (discussing same).
60. See Pastor v. AT&T Co., 76 F. Supp. 781, 782 (S.D.N.Y. 1940).
61. Use of Recording Devices in Connection with Telephone Service, 11 F.C.C. 1033,
1036 (1948).
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cal answering machine,62 and the Hush-A-Phone, a rubber attachment
designed to mimic a hand around the mouthpiece. 63 In the wake of the
D.C. Circuit's stinging reversal of the Hush-A-Phone ruling,64 the FCC
pledged closer attention to the line "between the harmful and harmless"-between legitimate menaces to system integrity and Bell's monopolistic excuses for excluding its CPE competitors. 65
By 1968, the FCC again reversed field. In Carteifone, the Commission
approved a device that connected telephone subscribers with such wireless services as ship-to-shore radio. 66 The Bell system not only repeated
its old claim of systemic harm to its network, but also complained that the
Carterfone would allow customers to bypass AT&T's IX and wireless services and thereby undermine Bell's ability to provide universal service. Demanding but not finding concrete proof of a "'cream skimming' effect"
that outweighed "the benefits of interconnection," the FCC struck down
the Bell system's foreign attachment tariffs in their entirety.67 The
mechanical device controversies in Hush-A-Phone and Carteifone cleared
the way for vastly more ambitious FCC initiatives on protective connecting arrangements and network control signaling devices. 68
In long-distance matters, the FCC seized early control. In 1959, over
AT&T's objections, the FCC's landmark Above 890 proceedings "authorize[d] private users to use microwave frequencies for point-to-point operations."69 AT&T tried to cling to its high-volume business customers with
62. See Jordaphone Corp., 18 F.C.C. 644, 671 (1954) (reasoning that Commission
should defer to state PUCs because recording device in question was used principally with
intrastate calls). But cf. North Carolina Utils. Comm'n v. FCC, 552 F.2d 1036, 1044-48
(4th Cir. 1977) (upholding FCC's asserted jurisdiction over CPE matters even though CPE
is more commo'nly used for intrastate calls).
63. See Hush-A-Phone Corp., 20 F.C.C. 391, 420 (1955) (concluding that Hush-aPhone was "deleterious to the telephone system" and that, in general, "telephone
equipment should be supplied by and under control of the carrier"), rev'd, 238 F.2d 266
(D.C. Cir. 1956).
64. See Hush-A-Phone Corp. v. United States, 238 F.2d 266, 269 (D.C. Cir. 1956)
(describing overly-broad tariff provisions against foreign attachments as an "unwarranted
interference with the telephone subscriber's right reasonably to use his telephone in ways
which are privately beneficial without being publicly detrimental").
65. See Hush-A-Phone Corp., 22 F.C.C. 112, 113 (1957); David O. Stewart, Note,
Competition in the Telephone Equipment Industry: Beyond Teferent, 86 Yale LJ. 538, 546
& n.33 (1977).
66. See Use of the Carterfone Device in Message Toll Telephone Services, 13 F.C.C.2d
420 (1968).
67. Use of the Carterfone Device in Message Toll Telephone Services, 14 F.C.C.2d
571, 572-73 (1968).
68. See Proposals for New or Revised Classes of Interstate and Foreign Message Toll
Telephone Service (MTS) & Wide Area Telephone Service (WATS), 56 F.C.C.2d 593
(1975); Mebane Home Tel. Co., 43 F.C.C.2d 473 (1975).
69. Allocation of Frequencies in the Bands Above 890 Mc, 27 F.C.C. 359, 413 (1959);
see also id. at 411 (finding no evidence "that substantially adverse economic effects would
flow from the licensing of private point-to-point" microwave transmission systems).
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THE TELECOMMUNICATIONS PHOENIX
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Telpak, a significantly cheaper package of rates for bulk purchasers of
private line services. The FCC invalidated these rates as discriminatory.70
A decade later, and almost contemporaneously with Carterfone, the
FCC blew the IX market wide open. In 1969, the Commission allowed
Microwave Communications, Inc., to provide private microwave service in
St. Louis, Chicago, and nine intermediate locations. 71 The bitterness of
the FCC's 4-3 split permeated the Commissioners' opinions. Whereas
Commissioner Rosel H. Hyde bemoaned the impact of MCl's "typical
'cream skimming' operation" on the FCC's commitment to "nationwide
average ratemaking,"72 Commissioner Nicolas Johnson celebrated the introduction of "a little salt and pepper of competition to" traditional public utility law's "rather tasteless stew of regulatory protection."73 Johnson
noted with particular glee the FCC's contemporaneous efforts to liberate
the market for "equipment known to the Bell Telephone-Western
Electric complex as 'foreign attachments."'74 However narrowly, MCI
had won its first of many skirmishes against AT&T.75
MCI sparked a conflagration that the FCC could not contain. In the
first year after MCI, applicants before the Commission proposed to build
"1713 microwave stations, more than one-third the number in the entire
Bell System."76 The FCC responded with Specialized Common Carrier
Services, a rule whose vague but evident intent was to allow non-Bell companies to offer private-line communications services to large corporate
customers. 77 When the Ninth Circuit upheld the rule,78 the firestorm
70. See Telpak SeIV. & Channels, 23 F.C.C.2d 606 (1970), rev'd on other grounds sub
nom. AT&T Co. v. FCC, 449 F.2d 439, 450, 453 (2d Cir. 1971); Telpak SeIV. & Channels, 37
F.C.C. llll (1964), modified, 38 F.C.C. 761 (1965), aff'd sub nom. American Trucking
Ass'ns v. FCC, 377 F.2d 121, 134 (D.C. Cir. 1966).
71. See In re Applications of Microwave Communications, Inc. (MCI), 18 F.C.C.2d
953 (1969).
72. Id. at 972 (Hyde, Comm'r, dissenting).
73. Id. at 978 (statement ofJohnson, Comm'r).
74.Id.
75. See Larry Kahaner, On the Line: The Men ofMCI -Who Took on AT&T, Risked
Everything, and Won! (1986). ,
76. In re MCI Telecomm. Corp., 60 F.C.C.2d 25, 36 (1976), rev'd, 561 F.2d 365 (D.C.
Cir. 1977).
77. See In re Specialized Common Carrier SeIVS., 29 F.C.C.2d. 870 (1971), aff'd sub
nom. Washington Utils. & Transp. Comm'n (WUTC) v. FCC, 513 F.2d ll42 (9th Cir.
1975). The rule spawned widespread confusion. See MCI Communications Corp. v. AT&T
Co., 496 F.2d 214,221,224 (3d Cir. 1974) (describing rule as "unclear" and recognizing a
"legitimate dispute" over the rule's scope); MCI Communications Corp. v. AT&T Co., 708
F.2d 1081, 1095 n.13 (7th Cir. 1983) (quoting federal judge's description of Specialized
Common Carrier Services report and order as "an 'abomination,' and 'one of the worst
examples of legal draftsmanship I have ever seen''').
78. See WUTC, 513 F.2d at 1142; see also id. at 1156 n.21 (recognizing "the increasing
and widespread need for diverse and flexible specialized communications services" and
contending that "[c]ompetition in specialized communications would enlarge the
equipment market for manufacturers other than Western Electric, and thus stimulate
innovation").
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began in earnest. The FCC initially refused MCI permission to launch its
Execunet service on the grounds that SPecialized Common Carrier Seroices
had contemplated "customized communications service offered on a private line basis" rather than full-blo'wn "switched public message telephone service."79 The D.C. Circuit twice ordered a recalcitrant FCC to
complete its deregulatory dirty work, first by accepting MCl's Execunet
tariffS° and then by ordering Bell LECs to interconnect switched longdistance services offered by nonaffiliated companies. 81 A chastened
Commission eventually conceded that IX service could be provided on a
competitive basis82 and began ordering interconnection as a matter of
course. 83
Despite the Commission's limp finish in Execunet, the FCC's CPE and
IX decisions completed a dramatic reversal in federal telecommunications policy. Contrary to the traditional assumption that CIa monopoly
carrier subject to regulatory supervision" could satisfy all current and anticipated demand, decisions such as Carteifone and MCI "put[] the burden on the common carrier system to justify the need for monopoly. "84
In an era of dramatic, accelerating technological change, the FCC
showed the plausibility of competition throughout telecommunications
and crafted a modest regulatory presumption in favor of open entry. The
Commission ,vas especially successful in protecting its CPE agenda; as Bell
divestiture loomed, the FCC successfully preempted state-law efforts to
obstruct CPE deregulation.85 Though the federal courts as heirs to the
FCC's deregulatory legacy would later complain about the Commission's
limited reach and glacial pace,86 "the Commission's record [,vas] better
79. MCI Telecomm. Corp., 60 F.C.C.2d at 36.
80. See MCI Telecomm. Corp. v. FCC, 561 F.2d 365, 379 (D.C. Cir. 1977).
81. See MCI Telecomm. Corp. v. FCC, 580 F.2d 590, 591 (D.C. Cir. 1978).
82. See In re MTS & WATS Market Structure, 81 F.C.C.2d 177 (1980).
83. See, e.g., Lincoln Tel. & Tel. Co., 72 F.C.C.2d 724 (1979), affd, 659 F.2d 1092,
1094 (D.C. Cir. 1981).
84. Lionel Kestenbaum, Competition in Communications, 16 Antitrust Bull. 769, 776
(1971).
85. See, e.g., Computer & Communications Indus. Ass'n v. FCC, 693 F.2d 198,214-16
(D.C. Cir. 1982); New York Tel. Co. v. FCC, 631 F.2d 1059, 1064-66 (2d Cir. 1980);
California v. FCC, 567 F.2d 84, 87 (D.C. Cir. 1977) (per curiam); North Carolina Utils.
Comm'n v. FCC, 552 F.2d 1036, 1048 (4th Cir. 1977); North Carolina Utils. Comm'n v.
FCC, 537 F.2d 787,791-93 (4th Cir. 1976).
86. See, e.g., United States v. Western Elec. Co., 894 F.2d 1387, 1389 (D.C. Cir. 1990):
MCI Telecomm. Corp. v. FCC, 627 F.2d 322, 340 (D.C. Cir. 1980) (noting that reasonable
delay in FCC's ratemaking decisions may "encompass [ ] months, occasionally a year or two,
but not several years or a decade"): United States v. Western Elec. Co., 673 F. Supp. 525,
530-32 (D.D.C. 1987), affd in part, rev'd in part, 894 F.2d 430 (D.C. Cir.), modified, 900
F.2d 283 (D.C. Cir. 1990): Southern Pac. Communications Co. v. AT&T Co., 556 F. Supp.
825, 881 n.53, 1097 (D.D.C. 1982) (blaming apparent explosion of antitrust litigation in
telecommunications during late 1970s and early 1980s on the FCC's "known regulatory
lag"), affd, 740 F.2d 980 (D.C. Cir. 1984): United States v. AT&T Co. 552 F. Supp. 131,223
(D.D.C. 1982), affd memo sub nom. Maryland v. United States, 460 U.S. 1001 (1983).
1997]
THE TELECOMMUNICATIONS PHOENIX
847
than generally acknowledged"-indeed, good enough to complete "most
of the transition to a competitive marketplace" before the Bell breakup.87
Indeed, in light of the Commission's substantial legal and political
constraints, the FCC's performance in the post-war period competition
was nothing short of remarkable. On the eve of the legal revolution in
the CPE and IX markets, the Supreme Court had sharply rebuked the
FCC for adopting a presumption favoring competition over commandand-control regulation. "Merely to assume that competition is bound to
be of advantage, in an industry so regulated and so largely closed as this
one," said the high court, "is not enough."88 The technological and economic upheaval in American telephony, however, enabled the FCC to
distinguish bea'leen "satisfactory substitute service[s] ... offered at lower
rates than rates for existing services" and the sort of new "service[s]
which, if not [provided], would result in a serious deficiency in the communication services available to the public. "89 Thanks to the seemingly
inexhaustible demand for new services and the stream of new inventions
in response to that demand, the FCC routinely overcame the judicial presumption against competitive alternatives to regulation. 9o
Strangely enough, the FCC owed its deregulatory successes to the
absence of a coherent agenda. In this respect, the Commission may have
benefited from its relative reticence during its early years as a telecommunications regulator. As "the [New Deal's] myth of administrative competence ... erode[d] in the post-World War II period,"91 deep disillusionment crippled the federal agencies that had been most active during the
halcyon days of presumed administrative omnipotence.92 Perhaps fortuitously, the FCC had dedicated much of its formative first quarter-century
87. Kellogg et a!., supra note 9, § 1.5, at 31; see also AT&T Co., 552 F. Supp. at 161-62
("[B]y the mid-1970s, the FCC had clearly begun to promote competition in
telecommunications.") .
88. FCC v. RCA Communications, Inc., 346 U.S. 86, 97 (1953).
89. AT&T Co. Regulations and Charges for Developmental Line Switched Service, 35
F.C.C. 149. 155 (1963); accord In re Applications of Microwave Communications, Inc.
(MCl), 18 F.C.C.2d 953, 960 (1969).
90. See, e.g., In re Allocation of Frequencies in the Bands Above 890 Mc., 27 F.C.C.
359, 412 (1959) (finding no "adverse economic effects ... from the [proposed] licensing
of private point-to-point communications systems" and therefore declining to speculate on
the "possibility of future adverse effects"); cf. MCI, 18 F.C.C.2d at 92 (Hyde, Chairman,
dissenting) (arguing that the Commission had failed to show a "reasonable expectation
that competition may have some beneficial effect," as required by RCA, 346 U.S. at 97).
91. Daniel J. Gifford, The New Deal Regulatory Model: A History of Criticisms and
Refinements, 68 Minn. L. Rev. 299, 312 (1983).
92. See, e.g., Henry J. Friendly, The Federal Administrative Agencies 74-105 (1962)
(condemning Civil Aeronautics Board for failing to desigu a regulatory policy that
accommodated foreseeable changes in aircraft technology and economics of air carriage);
James M. Landis, Report on Regulatory Agencies to the President-Elect 48-52, 54-58
(1960) (describing managerial setbacks at Federal Trade Commission and Federal Power
Commission during 1950s).
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to broadcast licensing. 93 As the Commission matured, it approached telecommunications regulation with the aptly named strategy of "muddling
through."94 In completing the first of its congressionally mandated investigations of the telephone industry,95 the FCC developed a policy of "constant or continuing surveillance" of IX rates through "informal negotiation."96 Constant surveillance enabled the FCC to patrol long-distance
rates without interminable hearings or the adversarial atmosphere of
traditional command-and-control regulation, all the while gathering
more knowledge of telephony'S underlying market structure. 97 The FCC
thus anticipated the "modern" technique of negotiated rulemaking by
half a century.98
The very nature of the FCC's piecemeal approach shifted the burden
of sustaining the regulatory compact to franchised carriers and state regulators. As an institutional newcomer, the FCC bore comparatively little
responsibility for preserving the wealth transfers embedded within conventional regulation. When technological change exposed the plausibility of competition in the CPE and IX markets, the Commission's relative
inexperience allowed it to consider alternatives that had been ideologically unthinkable during the public utility era.
But FCC policy between the 1950s and 1970s contradicted itself. Efforts at opening the CPE and IX markets undermined the most important regulatory tool that the FCC did try to preserve. In 1970, a joint
board consisting of state PUCs and the FCC developed the "Ozark Plan"
for allocating the common, nontraffic-sensitive costs of facilities used to
provide both intrastate service (which consisted mostly of LX service) and
interstate service (which consisted almost exclusively of IX service) .99 In
93. See generally Jim Chen, The Last Picture Show (On the Twilight of Federal Mass
Communications Regulation), 80 Minn. L. Rev. 1415, 1431-54 (1996) (describing and
analyzing landmark decisions of early FCC era).
94. Charles E. Lindblom, The Science of "Muddling Through," 19 Pub. Admin. Rev.
79, 79 (1959); cf. Kenneth Culp Davis, A New Approach to Delegation, 36 U. Chi. L. Rev.
713, 733 (1969) (urging agencies to accumulate information over time about industries
they regulate and to follow a "common law" body of rules or precedents in formulating
policy).
95. Compare S. Res. 46, 74th Cong., 49 Stat. 43, 43-45 (1935) (appropriating
$750,000 for investigation of telephone industry) with Federal Communications Comm'n,
Investigation of the Telephone Industry 596 (1939) (concluding that "fundamental
problem" of regulating interstate telephony "consist[ed] largely of developing ways and
means ... for continuous acquisition of basic factual data" on industry).
96. Federal Communications Comm'n, Final Report of the Telephone Rate and
Research Department 68 (1938).
97. See Francis X. Welch, Constant Surveillance: A Modern Regulatory Tool, 8 ViII. L.
Rev. 340, 350-59 (1963).
98. See Negotiated Rulemaking Act of 1990, 5 U.S.C. §§ 561-570 (1994). See
generally Philip J. Harter, Negotiating Regulations: A Cure for Malaise, 71 Geo. LJ. 1
(1982) (laying foundation for regulatory negotiation).
99. See Prescription of Procedures for Separating and Allocating Plant Investment,
Operating Expenses, Taxes and Reserves Between the Intrastate and Interstate Operations
of Telephone Companies, 26 F.C.C.2d 248, 250-55 (1970). In stark contrast with the state
1997]
THE TELECOMMUNICATIONS PHOENIX
849
multiplying the percentage of time that equipment was used for longdistance rather than local service by a factor of 3.3, the Ozark Plan inflated the portion of common costs allocated to interstate traffic and
thereby preserved the IX-ta-LX subsidy.IOO Under the Ozark Plan, PUCs
could continue subsidizing certain services and transferring wealth to favored customers. In a testament to state regulators' enduring power,
predominantly rural states bore the nation's highest access charges.l OI
On the eve of Bell divestiture, the FCC's handling of access charges
under the Ozark Plan grossly eroded AT&T's grip on the long-distance
market. After Execunet, the FCC failed to adjust access charges in response to IX entry.102 Motivated by its desire to encourage IX competition, the FCC required AT&T's competitors to pay less than AT&T toward
the common costs of maintaining Bell's LX networks. 103 In some
instances, MCI and Sprint paid as little as 45 percent of the access charge
burden borne by AT&T.104 Access charges under the Ozark Plan thus
became the principal source of competitive leverage in the battle to wrest
IX market share away from AT&T.105 In the pre-divestiture era, most of
MCl's price advantage over AT&T was attributable solely to the FCC's
differential treatment of the two firms in matters of accounting. 106
Yet the FCC on its own could not crush the Belljuggemaut. As the
case of access charges illustrates, the Commission's reach proved too
short to contain the unintended consequences of its CPE and IX decisions. Concurrent state and federal jurisdiction over telecommunications
repeatedly created "unsatisfactory" conflicts akin to "one [s] in which two
PUGs' broad discretion under Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 146-49 (1930),
the Communications Act of 1934 and modem regulatory practice give the FCC fulI formal
authority over jurisdictional separation of costs. See 47 U.S.C. § 410(c) (1994) (requiring
FCC to refer cost separation questions to Federal-5tate Joint Board, but not granting state
regulators power to alter FCC's decisions); S. Rep. No. 92-362, at 6 (1971); cf. State Corp.
Comm'n v. FCC, 787 F.2d 1421, 1428 (lOth Cir. 1986) (noting that state authority over cost
allocation questions would "encroach upon core federal authority over interstate
communications") .
100. See Brock, supra note 58, at 68; Paul W. MacAvoy, The Failure of Antitrust and
Regulation to Establish Competition in Long-Distance Telephone Services 10 n.12 (1996).
101. See Ingo Vogelsang & Bridger M. Mitchell, Telecommunications Competition:
The Last Ten Miles 112 (1996); cf. Telecommunications Act of 1996 § 101(a), 47 U.S.CA
§ 254(g) (West Supp. 1997) (commanding FCC to "adopt rules to require that the rates
charged by providers of interexchange telecommunications services ... be no higher than
the rates charged by each such provider to its subscribers in urban areas"); Policy and
Rules Concerning the Interstate, Interexchange Marketplace, 11 FCC Rcd. 9564 (1996)
(implementing Commission's duties under § 254(g».
102. See MacAvoy, supra note 100, at 13.
103. See Exchange Network Facilities for Interstate Access, 71 F.C.C.2d 440, 443
(1979).
104. See Paul W. MacAvoy & Kenneth Robinson, Winning hy Losing: The AT&T
Settlement and Its Impact on Telecommunications, 1 YaleJ. on Reg. 1, 34 (1983).
105. See Paul W. MacAvoy & Kenneth Robinson, Losing by Judicial PoJicymaking:
The First Year of the AT&T Divestiture, 2 YaleJ. on Reg. 225, 251 (1985).
106. See Brock, supra note 58, at 208.
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different persons seek to drive one car."I07 The FCC's lack of direct
authority to enforce the antitrust laws lOB would allow the Justice
Department and the federal courts gradually to displace the FCC as the
leading agent of telecommunications reform.
C. Antitrust
The telecommunications industry was rapidly diverging into two
tiers: a competitive tier crowded with contestants vying for shares of the
IX and CPE markets, and a monopolized tier dominated by local Bell
affiliates and other LECs. A new long-distance technology, fiber optics,
promised high capacity IX conduits at nearly zero marginal cost per additional conversation. I09 At the same time, faith in conventional regulation
was evaporating. In 1971 alone, Alfred Kahn,llo George Stigler,lll and
Richard Posner1l 2 published three of the seminal works on deregulation.
Meanwhile, even the staunchest defenders of the old-time regulatory religion complained that "[t]he Supreme Power who conceived gravity, supply and demand, and the double helix must have been absorbed elsewhere when public utility regulation was invented."113
Through it all the local exchange remained the one segment of the
market that was monopolized and regulated as a public utility. In 1974,
though, the Justice Department renewed its antitrust suit against AT&T,
alleging that it had used its grip on the LX "bottleneck" as an "essential
facility" to obstruct or destroy competition in the structurally competitive
IX, CPE, and data processing markets.114 Some seventy private antitrust
107. Louisiana Pub. Servo Comm'n v. FCC, 476 U.S. 355, 364 (1986); cf. Carter v.
AT&T Co., 365 F.2d 486, 498-500 (5th Cir. 1966) (deferring to FCC's primary jurisdiction
over CPE disputes); Hush-A-Phone Corp. v. United States, 238 F.2d 266, 268 n.9 (D.C. Cir.
1956) (declining to reach "questions under the antitrust laws" raised by the Hush-A-Phone
decision).
108. See United States v. RCA, 358 U.S. 334, 350-51 (1959).
109. See Geodesic Network n, supra note 57, at 3.4.
1l0. See 2 Alfred E. Kahn, The Economics of Regulation (1971). The first volume of
Kahn's treatise appeared in 1970.
llI. See George J. Stigler, The Theory of Economic Regulation, 2 Bell]. Econ. &
Mgmt. Sci. 3 (1971).
112. See Richard A Posner, Taxation by Regulation, 2 Bell]. Econ. & Mgmt. Sci. 22
(1971). Stigler and Posner, of course, had already established themselves as giants in this
field. See, e.g., George]. Stigler, The Organization ofIndustry (1968); Richard A Posner,
Natural Monopoly and Its Regulation, 21 Stan. L. Rev. 548 (1969).
113. F.M. Scherer, Industrial Market Structure and Economic Performance 537 (1st
ed.1970).
114. See United States v. AT&T Co., 427 F. Supp. 57 (D.D.C. 1976). For cases that
support antitrust law's "essential facilities" doctrine, see Otter Tail Power Co. v. United
States, 410 U.S. 366 (1973); United States v. Terminal RR Ass'n, 224 U.S. 383 (1912). But
c£ Aspen Skiing Co. v. Aspen Highland Skiing Corp., 472 U.S. 585, 611 n.44 (1985)
(declining to "consider the possible relevance of the 'essential facilities' doctrine").
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THE TELECOMMUNICATIONS PHOENIX
851
actions, pressed by Sprint, MCI, and CPE manufacturers great and small,
rode the government's coattails. 1I5
A single line of reasoning motivated this body of litigation. The Bell
system dominated three distinct segments of the telecommunications
market: LX service, IX service, and CPE manufacturing. Bell-affiliated
LECs systematically favored Western Electric in equipment procurement.116 Nondiscriminatory IX interconnection, in theory guaranteed
after Execunet, eluded easy enforcement in practice; its sheer technical
complexity allowed a LEC to shift costs without fear of regulatory detection. 117 Cross-subsidies from monopolized LX markets would finance
predatory raids against IX and CPE challengers. The historically unreliable PUCs could not be trusted to counteract these anticompetitive practices. Compounding the PUCs' impotence was the Bell system's ferocious
defense of its monopoly. Two of the period's leading private antitrust
cases alleged that AT&T abused regulatory processes by repeatedly
and unreasonably relitigating issues that had been settled under
Hush-A-Phone, Carterjone, and Specialized Common Camer Services. I IS As the
Supreme Court had anticipated in crafting antitrust law's Noerr-Pennington
doctrine,1I9 a dominant firm's abuse of regulatory process was impairing
competition. In light of this institutional failure, some new agent of reform would have to rescue the FCC and the state PUCs.
115. See, e.g., Southern Pac. Communications Co. v. AT&T Co., 740 F.2d 980 (D.C.
Cir. 1984); MCI Communications Corp. v. AT&T Co., 708 F.2d 1081 (7th Cir. 1983); Litton
Sys., Inc. v. AT&T Co., 700 F.2d 785 (2d Cir. 1983). See generally Mark C. Rosenblum, The
Antitrust Rationale for the MFJ's Line-of-Business Restrictions and a Policy Proposal for
Removing Them, 25 Sw. U. L. Rev. 605, 609-10 (1996) (describing private antitrust actions
that presaged Bell divestiture).
116. See, e.g., AT&T Co., 64 F.C.C.2d 1, 41 (1977).
117. See Rosenblum, supra note 115, at 616-17 (making this observation in context
of today's LX technology); Lawrence A Sullivan, Elusive Goals Under the
Telecommunications Act: Preserving Long Distance Competition upon Baby Bell Entry
and Attaining Local Exchange Competition: We'll Not Preserve the One Unless We Attain
the Other, 25 Sw. U. L. Rev. 487, 520-21 (1996) (same).
118. See MCI Communications Corp., 708 F.2d at 1153-60 (discussing sham state PUC
proceedings); Litton, 700 F.2d at 804-14 (discussing sham FCC proceedings).
119. Under the Noerr-Pennington doctrine, private parties are not subject to federal
antitrust liability merely for seeking government action that harms competition, unless
such petitioning activity is a sham, a fraudulent disguise for direct efforts to injure a
competitor. See, e. g., Otter Tail Power Co. v. United States, 410 U.S. 366, 380 (1973);
California Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 512 (1972); Eastern
R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 144 (1961); see also
City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. 365, 379-80 (1991) (describing
antitrUSt immunity); United Mine Workers v. Pennington, 381 U.S. 657, 669 (1965)
(adopting antitrust immunity doctrine recognized in Noerr); cf. Professional Real Estate
Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 56-60 (1993) (describing
sham exception to Nom-Pennington immunity); City of Columbia, 499 U.S. at 380-84 (same).
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With the denial O'f AT&T's request fO'r summary judgment120 and
AT&T's stunning decisiO'n to' accept divestiture,121 the MO'dified Final
Judgment (MFJ) in United States v. AT&T became the natiO'n's leading
sO'urce O'f telecO'mmunicatiO'ns law. As a fO'rmal matter, the MFJ tO'O'k effect January 1, 1984, and lasted until it was extinguished by the
TelecO'mmunicatiO'ns Act O'f 1996.122 As a matter O'f cO'mparative institutiO'nal analysis,Judge HarO'ld Greene's O'versight O'f the divestiture decree
relegated the FCC to' a supPO'rting rO'le and all but displaced the state
PUGs,123 Under the MFJ, AT&T WO'uld becO'me primarily a IO'ng-distance
carrier and WO'uld divest its LX interests to' seven new RegiO'nal Bell
Operating CO'mpanies (RBOGs).124 The MFJ O'verturned a previO'usly imPO'sed barrier to' AT&T's participatiO'n in the data-prO'cessing industry, but
slapped a new seven-year mO'ratO'rium O'n AT&T's entry intO' "electrO'nic
publishing."125 The RBOGs, as heirs to' Bell's LX mO'nO'PO'lies, were
barred in tum frO'm prO'viding in-regiO'n IX services, prO'viding infO'rmatiO'n services, and manufacturing CPE.126 The cO'ntempO'raneO'us Cable
CO'mmunicatiO'ns PO'licy Act O'f 1984 added a fO'urth line-O'f.business restrictiO'n O'n all LEGs: videO' prO'gramming,127 Like the MFJ's firewalls,
this limitatiO'n O'riginated in the transitiO'nal PO'licies that the FCC fO'rmulated during the late 1960s and early 1970s. 128
The MFJ represented the crO'wning achievement O'f American telecO'mmunicatiO'ns law's first century. It "accO'mplished precisely what [earlier effO'rts] had failed to' dO'-impO'se structural changes in the Bell
System that impaired AT&T's ability to' stifle cO'mpetitiO'n."129 FrO'm its
inceptiO'n, however, the MFJ was riddled with internal cO'ntradictiO'ns. It
represented an O'dd, incO'herent blend O'f ChicagO' schO'O'I ecO'nO'mics and
120. See United States v. AT&T Co., 524 F. Supp. 1336, 1381 (D.D.C. 1981).
121. See United States v. AT&T Co., 552 F. Supp. 131, 140-43 (D.D.C. 1982), affd
memo sub nom. Maryland v. United States, 460 U.S. 1001 (1983).
122. Pub. L. No. 104-104, § 601, 110 Stat. 56, 143-44 (to be codified at 47 U.S.C. § 152
note).
123. Cf.Jim Chen, Titanic Telecommunications, 25 Sw. U. L. Rev. 535, 556-57 (1996)
(treating any comparison ofMFJ with the 1996 Act as a comparison offederal antitrust law
with competing sources of telecommunications law).
124. See AT&T, 552 F. Supp. at 140-43 & n.41.
125. See id. at 178-86.
126. See id. at 188-91. See generally Rosenblum, supra note 115, at 606-11
(describing succinctly MFJ's line-of.business restrictions and antitrust rationales that
justified them).
127. See Cable Communications Policy Act of 1984, Pub. L. No. 98-549, § 613, 98 Stat.
2779, 2785 (codified at 47 U.S.C. § 533 (1994)), repealed by Telecommunications Act of
1996, Pub. L. No. 104-104, § 302(b)(l), 110 Stat. 56, 124.
128. See Applications of Telephone Companies for Section 214 Certificates for
Channel Facilities Furnished to Affiliated Community Antenna Television System, 21
F.C.C.2d 307 (1970) (codified at 47 C.F.R. § 64.601 (1970), as amended, 47 C.F.R. § 63.54
(1995», affd sub nom. General Tel. CO. V. United States, 449 F.2d 846 (5th Cir. 1971),
repealed, 61 Fed. Reg. 10,476 (1996).
129. Robert B. Friedrich, Note, Regulatory and Antitrust Implications of Emerging
Competition in Local Access Telecommunications, 80 Cornell L. Rev. 646, 659 (1995).
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a populist vision of antitrust as political nostrum. On the one hand,
Judge Greene extolled competition in more than "purely academic"
terms, as the engine generating "'the best allocation of our economic
resources, the lowest prices, the highest quality and the greatest material
progress. "'130 On the other, he described the urgency of combating
Bell's ability "to gain an undue influence ... over political decisions."131
Judge Greene invoked an antitrustjurispruqence that is concerned with
"private as well as government power, the coercion and exclusion of the
weak by the powerful, and the distribution of power and opportunity,"
that rests its "best hope for a dynamic and progressive economy" in "a
pluralistic marketplace. "132
In hindsight, the line-of-business restrictions rested on flawed premises. Even without IX and CPE holdings, non-Bell LECs also resisted interconnection and CPE competition. 133 Despite lacking Bell's opportunity to cross-subsidize related businesses, the non-Bell LECs faced a
similar loss of regulatory subsidies from IX to LX. service. 134 Even GTE,
which was permitted to combine its extensive LX. operations with Sprint's
long distance business,135 could not cross~ubsidize profitably. Unable to
sustain its CPE operations, GTE ultimately divested these interests to
companies without LX. operations. 136 In a similar spirit of defeat, GTE
eventually sold Sprint and quit the IX market. 1S7
Beuveen 1984 and 1996, the leading pressure for telecommunications reform came through petitions to relax the MFJ's line-of-business
restrictions. Judge Greene had explicitly promised to lift these quarantines "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"138 By and large, however, the MFJ's firewalls
held. During its uvelve-year ascendancy, the MFJ allowed the RBOCs into
exactly one of the formerly restricted lines of business: information services. 139 Although the MFJ court in 1987 liberated the RBOCs from hav130. AT&T, 552 F. Supp. at 149 (quoting Northern Pac. Ry. Co. v. United States, 356
U.S. 1,4 (1958».
131. Id. at 164.
132. Eleanor M. Fox, The Battle for the Soul of Antitrust, 75 Cal. L. Rev. 917, 918
(1987).
133. See, e.g., lllinois Bell Tel. Co. v. FCC, 740 F.2d 465,476 (7th Cir. 1984); United
States v. GTE Corp., 1985-1 Trade Cas. (CCH) t 66,354, at 64,756 n.23 (D.D.C. 1984).
134. See MacAvoy, supra note 100, at 15.
135. See United States v. GTE Corp., 603 F. Supp. 730, 733-37 (D.D.C. 1984)
(reasoning that GTE lacked AT&T's comprehensive dominance of multiple
telecommunications markets).
136. See Kenneth J. Arrow et aI., The Competitive Effects of Line-ofcBusiness
Restrictions in Telecommunications, 16 Managerial & Decision Econ. 301, 309 (1995).
137. See Kellogg et aI., supra note 9, § 8.6, at 420; Chen, supra note 123, at 565-66.
138. United States v. AT&T Co., 552 F. Supp. 131, 195 (D.D.C. 1982), afi'd memo sub
nom. Maryland v. United States, 460 U.S. 1001 (1983).
139. See United States v. Western Elec. Co., 993 F.2d 1572, 1575-76, 1582 (D.C. Cir.
1993).
<
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ing to maintain separate subsidiaries for unregulated lines ofbusiness,14o
a parallel series of FCC orders on RBOC provision of enhanced services
such as call forwarding and voice messaging stalled when a reviewing
court insisted that RBOCs continue to provide such services through separate subsidiaries. 141 Restrictions on RBOC involvement in CPE manufacturing proved surprisingly durable;142 full relief awaited the 1996 Act.
The MFJ theoretically excluded the RBOCs from the long-distance
market. Judge Greene and the D.C. Circuit consistently rejected RBOC
bids to lift the MFJ's long-distance quarantine. 143 The RBOCs were supposed to focus on "providing telephone service among parties within
each local exchange and granting access" to independent "long-distance
carriers."l44 But the MFJ never barred the RBOCs from providing IX service outside their LX service regions. l45 Indeed, the MFJ gave the RBOCs
a significant chunk of the long-distance market: short-haul carriage of
toll calls within an LEC's service area. 146 Judge Greene had defined the
ban on RBOC involvement in the IX market as a ban on interlATA service, or carriage between geographically based but largely arbitrary local
access and transport areas (lATAs).147 Toll calls within a lATA would
remain fair game for the RBOCS.148 As a result, the definition of lATAs
significantly affected RBOC revenues and IX competition; Judge Greene
tolerated larger lATAs partly to allow the RBOCs to "augment[] their
financial viability" with intralATA revenues. 149 The intralATA/
interlATA distinction ironically installed the very sort of horizontal terri140. See United States v. Western Elec. Co., 673 F. Supp. 525, 599 (D.D.C. 1987), affd
in relevant part, 900 F.2d 283 (D.C. Cir. 1990).
141. See California v. FCC, 39 F.3d 919, 929-30 (9th Cir. 1994).
142. See United States v. Western Elec. Co., 900 F.2d 283, 301-05 (D.C. Cir. 1990); cf.
United States v. Western Elec. Co., 894 F.2d 1387, 1390-94 (D.C. Cir. 1990) (defining
"manufacturing" as used in MFJ to include design and development of
telecommunications equipment as well as mere fabrication).
143. See, e.g., Wt:I'temElee. Co., 900 F.2d at 294, 300, affg in relevant part 673 F. Supp.
525, 550 (D.D.C. 1987).
144. Illinois Bell Tel. Co. v. FCC, 988 F.2d 1254, 1257 (D.C. Cir. 1993).
145. See United States v. Western Elec. Co., 797 F.2d 1082, 1084-85 (D.C. Cir. 1986).
146. Earnings from intraIATA toll carriage are among the RBOCs' "most significant
revenue streams,"]. Gregory Sidak & Daniel F. Spulber, Deregulatory Takings and Breach
of the Regulatory Contract, 71 N.Y.U. L Rev. 851, 859 (1996), largely because of
supracompetitive pricing. GTE, for example, derived 44% of its total revenues for its
California operations in 1994 from intraIATA toll traffic. See Peter Siembab, Opening the
IntraIATA Market in California: Tolls Drop but Casualties Rise, 28 Loy. LA. L. Rev. 1453,
1471 n.154 (1995).
147. See United States v. Western Elec. Co., 569 F. Supp. 990, 993-95 (D.D.C. 1983);
see also 47 U.S.CA. § 153(25) (WestSupp. 1997) (coditying]udge Greene's definition ofa
lATA).
148. See United States v. Western Elec. Co., 569 F. Supp. 1057, ll08 (D.D.C. 1983)
(declining to require RBOCs to permit "1+" direct dial access to competing providers of
intraIATA toll service).
149. See Wt:I'tem Elee. Co., 569 F. Supp. 990, 995 & n.23.
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THE TELECOMMUNICATIONS PHOENIX
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torial restraint that antitrust law ordinarily condemns.150 Insofar as
intraLATA and interLATA carriage are technologically similar and share
many common economies of scope,I51 the MFJ's distinction between
intraLATA and interLATA seems to have stemmed solely from excessive
judicial solicitude for preserving RBOC revenues.
Meanwhile, local telephony remained almost wholly unreformed.
Although divestiture had snapped the corporate link between AT&T and
its former affiliates, LX service continued to operate much as it had
under the traditional regulatory compact. RBOCs and other incumbent
LECs by and large retained the mysterious blend of costly universal service obligations and common-cost subsidies cloaked in the fog of state
PUCs' regulatory accounting. I52 As the MFJ's promise to relax the lineo£.business restrictions gradually faded, it became increasingly apparent
that federal antitrust law was no quicker or more responsive than the FCC
rulings that the MFJ displaced.
As had previous regimes of telecommunications law, the MFJ fell victim to technological change. Judge Greene's decree was roughly contemporaneous with the FCC's decision to authorize commercial use of cellular telephony by licensing two providers in every cellular service area, ~53
In a deliberate departure from traditional assumptions regarding the "ruinous" nature of competition in telecommunications, the FCC decided to
deploy cellular on competitive terms. 1M Wireless telephony would eventually expose a yawning gap in the MFJ. AT&T's acquisition of McCaw
Cellular Communications, a merger valued at $66 billion as of its 1992
announcement,I55 terrorized the RBOCs by threatening to recreate '''the
only facilities based national and local end-to-end service in the country
since divestiture."'156 The AT&T-McCaw merger, one of the most significant developments in telecommunications during the MFJ era, tantalizingly promises full-service telecommunications based on wireless local ex150. See United States v. Topco Assocs., Inc., 405 U.S. 596, 608 (1972).
151. See MacAvoy, supra note 100, at 195; Paul S. Brandon & Richard L.
Schmalensee, The Benefits of Releasing the Bell Companies from the Interexchange
Restrictions, 16 Managerial & Decision Econ. 349, 353 (1995).
152. See Daniel F. Spulber, Deregulating Telecommunications, 12 Yale]. on Reg. 25,
50-52 (1995).
153. See Inquiry into the Use of Bands 825-845 MHZ & 870-890 MHZ for Cellular
Communications System, 86 F.C.C.2d 469, 478 (1981).
154. See Amendment of the Commission's Rules to Allow the Selection from Among
Mutually Exclusive Competing Cellular Applications Using Random Selection or Lotteries
Instead of Comparative Hearings, 98 F.C.C.2d 175, 196 (1984); cf. Amendment of Parts 21,
89,91 & 93 of the Commission's Rules, 30 F.C.C.2d 221,234 (1971) (explicitly rejecting
argument that open entry into land mobile radio services would result in "ruinous
competition").
155. See William J. Baumol & J. Gregory Sidak, Toward Competition in Local
Telephony 16 (1994).
156. SBC Communications, Inc. v. FCC, 56 F.3d 1484, 1490 (D.C. Cir. 1995) (quoting
comments of BellSouth in opposition to FCC's approval of AT&T-McCaw merger).
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changes and fiber optic IX transmission-the technological mirror image
of the copper-and-microwave combinations of bygone days.157
The MFJ was all but irrelevant to the AT&T-McCaw merger. 158
Though stripped of its ,vireline LEC empire, AT&T now stands on the
verge of rebuilding a full-service network grounded in wireless local service. 159 A comparable combination may emerge from the merger of a
,vireless giant such as AirTouch Communications ,vith either of AT&T's
leading IX competitors (MCI or Sprint).160 Pacific Telesis's decision to
divest AirTouch contradicted the assumption that RBOCs would use LX
revenues to cross-subsidize cellular operations. 161 The diminished likelihood of cross-subsidy justified the MFJ court's 1995 decision to allow
RBOCs to offer interLATA services to their cellular customers. 162
Although the MFJ originally characterized incumbent LECs as ruthless
cross-subsidizers, the RBOCs are in fact the more vulnerable players in
any competitive scenario combining ,vireless LX service ,vith fiber optic
IX transmission. 163
Far from abdicating its role as a reformer, the FCC pursued its deregulatory agenda throughout the MFJ era. Congress gave the agency
some moral backing in 1983 by placing the regulatory burden of proof on
any opponent of "new technologies and services to the public."164 Indeed, the FCC arguably outperformed the MFJ court in telecommunications reform. Neither Bell divestiture 165 nor an independent action filed
157. See id. at 1497 (upholding FCC's approval of AT&T-McCaw merger), terminated
by Telecommunications Act of1996, Pub. L. No. 104-104, § 601, 110 Stat. 56,143-44 (to be
codified at 147 U.S.C. § 152 note); United States v. Western Elec. Co., 46 F.3d 1198,
1201-02 (D.C. Cir. 1995) (tracing legal history of AT&T-McCaw merger); Craig O. McCaw
& AT&T Co., 10 FCC Rcd. 11,786 (1995) (modifying McCaw decree before its termination
by 1996 Act).
158. Cf. SEC Communications, 56 F.3d at 1490-91 (holding that FCC did consider Mfj
as a "special circumstance" affecting legality of AT&T-McCaw merger).
159. AT&T recendy announced plans to launch a comprehensive, wireless local
service network. See John J. Keller, AT&T Unveils New Wireless System Linking Home
Phones to Its Network, Wall St.J., Feb. 26, 1997, at B4.
160. See Baumol & Sidak, supra note 155, at 19; MacAvoy, supra note 100, at 197.
161. See Arrow et al., supra note 136, at 306, 310-11 (suggesting that Pacific Telesis's
divestiture of AirTouch may have been motivated by local regulators' increasing willingness
to assign common costs of LX. and cellular operations to the RBOC's unregnlated cellular
business); Sam Ginn, Restructuring the Wireless Industry and the Information Skyway, 4J.
Econ. & Mgmt. Strategy 139,142 (1995) (confirming that AirTouch divestiture Was driven
by desire to evade Mfj's line-of.business restrictions).
162. See United States v. Western Elec. Co., 890 F. Supp. I, 6, 8 (D.D.C. 1995).
163. See MacAvoy, supra note 100, at 96 (arguing that extent of AT&T, MCI, and
Sprint's fiber optic network, coupled with emergence of such technologies as wave division
multiplexing, gives these incumbent IXCs an overwhelming advantage vis-a.-vis IX
entrants). See generally Robert W. Crandall & Leonard Waverman, Talk Is Cheap: The
Promise of Regulatory Reform in North American Telecommunications 222-50 (1995)
(describing wireless and wireIine technological alternatives to existing LX. networks).
164. Pub. L. No. 98-214, § 12(a), 97 Stat. 1467, 1471 (1983) (codified at 47 U.S.C.
§ 147(a) (1994».
165. See United States v. Western Elec. Co., 569 F. Supp. 990, 996-99 (D.D.C. 1983).
1997]
THE TELECOMMUNICATIONS PHOENIX
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by state regulators I66 could derail the FCC's 1982 effort to begin reforming the system of discriminatory access charges. I67 The Commission
eventually replaced the unbalanced Ozark Plan with a system based on
subscriber line charges, a commitment to the principle of "equal access"
among all IXCs, and a commitment to carrier-neutral means for financing universal service. 168 One of the FCC's finest moments came when it
approved price-cap regulation for dominant IX carriersI69 (read:
"AT&T").170 This technique freed the FCC from bothersome and inef,fective techniques for computing the rate base and guarding against
cross-subsidies to unregulated affiliates. I7l (The Commission later applied price caps to LECs,I72 a maneuver that evidently has helped tame
IX access charges. I73 )
The FCC's further efforts at IX deregulation met stiff judicial resistance. Having been rebuffed in its 1985 bid to deregulate nondominant
IXCs altogether,I74 the FCC reverted to a policy, first announced in 1983,
of allowing nondominant carriers to forgo tariff filings. I75 Under this
166. See National Ass'n of Regulated UtiI. Comm'rs (NARUC) v. FCC, 737 F.2d 1095,
1095 (D.C. Cir. 1984).
167. See Amendment of Part 67 of the Commission's Rules, 89 F.C.C.2d 1, 4-5
(1982).
168. See, e.g., 47 C.F.R §§ 69.116-117 (1996); Transport Rate Structure & Pricing
Petition for Waiver of the Transport Rules, 7 FCC Rcd. 6006 (1992); Policy & Rules
Concerning Rates for Dominant Carriers, 4 FCC Rcd. 2873, 3132-33 (1989); Assessment of
Charges for the Universal Service Fund & Lifeline Assistance, 4 FCC Rcd. 2041, 2041-44
(1988). See generally NARUC, 737 F.2d at 1130 (describing subscriher line charge system).
169. See Policy & Rules Concerning Rates for Dominant Carriers, 4 FCC Rcd. 2873,
2955 (1989); see also Revisions to Price Cap Rules for AT&T Co., 10 FCC Rcd. 3009, 3016
(1995) (lifting price cap rules that had been imposed on AT&T); Price Cap Performance
Review for AT&T, 8 FCC Rcd. 6968 (1993) (applying price cap rule for dominant carriers
to AT&T).
170. See MCI Telecomm. Corp. v. AT&T Co., 512 U.S. 218,221 (1994) (noting that
distinction "between dominant carriers .•. and nondominant carriers ... in the long
distance market •.. amounted to a distinction between AT&T and everyone else"); First
Report & Order, 85 F.C.C.2d 1, 20-21 (1980) (defining dominant and nondominant IX
carriers according to their power over output or price); MacAvoy, supra note 100, at 62
(noting that FCC's tariff decisions literally "left AT&T in a class ... by itselF).
171. See Rates 1M Dominant Carriers, 4 FCC Rcd. at 2924; Policy & Rules Concerning
Rates for Dominant Carriers, 2 FCC Rcd. 5208, 5214, 5220 (1987). See generally National
Rural TelecomAss'n v. FCC, 988 F.2d 174, 178 (D.C. Cir. 1993) (articulating basic case for
price-cap regulation as an alternative to cost-of-service ratemaking).
172. See In re Policy and Rules Concerning Rates for Dominant Carriers, 5 FCC Rcd.
6786,6792-6827 (1990), affd sub nom. National Rural Telecom Ass'n, 988 F.2d 174.
173. See Price Cap Performance Review for Local Exchange Carriers, 9 FCC Rcd.
1687, 1691 (1994); MacAvoy, supra note 100, at 59. Compare]ordanJ. HiIIman & Ronald
R Braeutigam, Price Level Regulation for Diversified Public Utilities: An Assessment
(1989) with Richard]. Pierce, ]r., Price Level Regulation Based on Inflation Is Not an
Attractive Alternative to Profit Level Regulation, 84 Nw. U. L. Rev. 665 (1990).
174. See MCI Telecomm. Corp. v. FCC, 765 F.2d 1186, 1192 (D.C. Cir. 1985) (RB.
Ginsburg,].), rev'g Sixth Report & Order, 99 F.C.C.2d 1020 (1985).
175. See Fourth Report & Order, 95 F.C.C.2d 554 (1983) (eliminating tariff filing
requirement for resellers of wireline common carriage and for specialized common
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policy, nondominant carriers such as MCI could offer unfiled rates to
selected AT&T customers and then prevent AT&T from matching that
offer by opposing the tariffs that AT&T as a dominant carrier was required to fileP6 The D.C. Circuit177 and the Supreme Court178 invalidated the FCC's permissive detariffing policy as an unlawful extension of
the agency's authority to "modify" filing requirements. 179 The collapse of
the FCC's final effort to relax tariff filing requirements expressed the institutional tension perfectly:180 the Commission had overstepped statutory bounds in its efforts to keep up with a rapidly evolving-market.
Indeed, there is compelling reason to believe that the combination
of the FCC's price cap initiative and the Supreme Court's reversal of the
permissive detariffing policy severely crippled IX competition. 18l In
practice, AT&T's price caps became implicit pricing floors for MCI and
Sprint. 182 Meanwhile, the Court's rejection of permissive detariffing
turned the FCC into an unwitting facilitator of collusion within America's
three-way IX oligopoly.I83 In effect, MCI and Sprint were using AT&T's
filed tariffs as signals to set their own prices. 184 This insight demystifies
what the Supreme Court later perceived as the mild irony of MCl's decision during the 1980s to attack the FCC's mandatory de tariffing pOlicy;185
MCI was protecting the regulatory scheme under which it could cut
prices to a leve1just low enough to lure AT&T customers without cutting
its own revenues. True to the caveat it had expressed in an earlier telecommunications decision, the Court made no effort to "assess the wisdom
of the asserted federal policy of encouraging competition within the telecommunications industry" in resolving a putatively straightfonvard problem of statutory interpretation. 186
Both the MFJ court and the FCC had reached the limits of their legal
authority and institutional competence. I'Telecommunications markets
[were] larger, more diverse, and more competitive than ... public policycarriers, including MCI); cf. Fifth Report & Order, 98 F.C.C.2d 1191 (1984) (extending
permissive detariffing policy to all other nondominant carriers).
176. See AT&T Communications, Inc. v. MCI Telecomm. Corp., 7 FCC Rcd. 807,
807-09 (1992), rev'd sub nom. AT&T Co. v. FCC, 978 F.2d 727 (D.C. Cir. 1992).
177. See AT&T Co., 978 F.2d at 726-37.
178. See MCI Telecomm. Corp. v. AT&T Co., 512 U.S. 218, 227-28 (1994).
179. See 47 U.S.C. § 203(b)(2) (1994).
180. See Southwestern Bell Corp. v. FCC, 43 F.3d 1515 (D.C. Cir. 1995).
181. See MacAvoy, supra note 100, at 69-77.
182. Cf. Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 348 (1982) (arguing
that maximum-pricing agreement may operate as clandestine minimum price-fixing
arrangement) .
183. For antitrust cases illustrating the "facilitating practices" doctrine, see generally
United States v. Container Corp. of Am., 393 U.S. 333 (1969); FTC v. Cement Inst., 333
U.S. 683 (1948); Maple Flooring Mfrs. Ass'n v. United States, 268 U.S. 563 (1925);
American Column & Lumber Co. v. United States, 257 U.S. 377 (1921).
184. See MacAvoy, supra note 100, at 70-72.
185. See MCI Telecomm. Corp. v. AT&T Co., 512 U.S. 218, 221 (1994).
186. Louisiana Pub. Servo Comm'n V. FCC, 476 U.S. 355, 359 (1986).
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THE TELECOMMUNICATIONS PHOENIX
859
makers, realize[d]" during the MFJ era. lS7 The task of "introduc[ing] ...
a whole new regime of regulation (or of free-market competition)" would
fall upon Congress. lSS
D. Anticipation
The MFJ was never meant to last forever. lS9 Given the division of
regulatory authority under the Communications Act of 1934 and
the United States Constitution,190 neither the FCC nor the state PUCs
could unilaterally reform American telecommunications. Enter the
Telecommunications Act of 1996. The Act touts itself as "[a]n Act to promote competition and reduce regulation," in the evident belief that regulatory reform will "secure lower prices and higher quality services ... and
encourage the rapid deployment of new telecommunications technologies."19l Whether or not the Act in practice will fulfill these objectives,
the Act as written has already proved an ironclad law onega! process: No
observer can predict the precise sequence by which anyone of numerous
plausible legal solutions will emerge from the recesses of the political
system. 192
Far from heralding "the end of government intervention," the 1996
Act marks "a new beginning, with new rules, new players, and new opportunities to capture decision-making rents."193 Its telephony provisions fall
into three broad categories: the end of the LX franchise, the end of lineof-business quarantines, and a comprehensive reinvention of "cradle-tograve regulation."194 The Act reconfigures the institutional balance of
power in telecommunications. By preempting state and local laws that
"prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service,"195 Congress
187. Ben M. Enis & E. Thomas Sullivan, The AT&T Settlement: Legal Summary,
Economic Analysis, and Marketing Implications, 49 J. Marketing 127. 135 (1985).
188. MCI Telecomm. Corp., 512 U.S. at 234.
189. See Chen, supra note 123, at 544.
190. See generally Haring & Levitz, supra note 50, at 290-97 (describing the
Constitution and the 1934 Act as the foundational sources of American
telecommunications law).
191. Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, 56
(preamble).
192. See generally John W. Kingdon, Agendas, Alternatives, and Public Policies 84-89
(2d eel 1995) (describing this theory oflawmaking as "garbage can" model oflegislation);
Michael D. Cohen et al., A Garbage Can Model of Organizational Choice, 17 Admin. Sci.
Q. 1 (1972) (same).
193. Montanye, supra note 44, at 277.
194. See Peter W. Huber et al., The Telecommunications Act of 1996: Special Report,
§§ 1.1-1.3 (1996) (quoted language at 51); see also id. § 1.1, at 3-4 (describing "the old
paradigm of telecommunications regulation" as resting on these "three basic pillars").
195. 47 U.S.CA. § 253(a) (West Supp. 1997).
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in a single stroke has extinguished state franchising laws. 196 "Special provisions Concerning Bell Operating Companies" have supplanted the MFJ
as the principal source of rules on LEC entry into markets beyond local
carriage. 197 Congress has entrusted the FCC with the power to implement other measures for facilitating the "[d]evelopment of [c]ompetitive
[m]arkets."198 Other provisions grant enormous power to state PUCs,
the Justice Department's Antitrust Division, and the federal courts as antitrust tribunals. So much for returning the Justice Department and the
FCC "to their proper roles."199
Congress has commanded competition, but it remains to be seen
whether all the other players in telecommunications will comply. The
Act orders every carrier "to interconnect directly or indirectly with the
facilities and equipment of other telecommunications carriers" and "not
to install network features, functions, or capabilities" that frustrate interconnection. 200 Every LEC must guarantee resale, number portability, dialing parity, telephone pole access, and reciprocal compensation arrangements to its competitors and their customers. 201 Incumbent LECs bear
additional burdens, including the duty to offer interconnection and nondiscriminatory access to basic network functions,202 through physical or
virtual co-location of facilities ifnecessary.203 The Act permits incumbent
LECs to enter negotiated or arbitrated agreements regarding "interconnection, services, or network elements" that supersede the Act's list of
duties generally binding LECs and specifically binding incumbent
LECS.204
The Act promises what the MFJ never delivered: RBOC entry into
the lucrative interLATA market. 205 Any RBOC may immediately offer
196. See generally FERC v. Mississippi, 456 U.S. 742, 759 (1982) (affirming power of
"the Federal Government [to] displace state regulation" and "pre-empt conflicting state
enactments" in fields affecting interstate commerce).
197. 47 U.S.C.A. ch. 5(1), pt. ill (West Supp. 1997).
198. 47 U.S.C.A. ch. 5(1), pt. II (West Supp. 1997).
199. H.R. Gonf. Rep. No. 104-458, at 201 (1996), reprinted in 1996 U.S.C.C.A.N. 124,
215.
200. 47 U.S.C.A. § 251 (a) (West Supp. 1997).
201. See id. § 251 (b).
202. See id. § 251(c).
203. See id. § 251 (c)(6); cf. Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441, 1446-47
(D.C. Cir. 1994) (r~ecting pre-1996 co-location rules on grounds that FCC lacked
authority under unamended 1934 Act to condemn LEC property and reassign it to a
competitor).
'
204. 47 U.S.C.A. § 252(a)(l) (West Supp. 1997); see also id. § 251(c)(l) (requiring
incumbent LECs "to negotiate in good faith in accordance with section 252 of this title the
particular terms and conditions of agreements to fulfill",their new interconnection duties).
205. The Act also enables RBOCs to enter the previously restricted markets for CPE
manufacturing, see id. § 273, electronic publishing, see id. § 274, and video programming,
see id. §§ 651-653. See generally Implementation of the Non-Accounting Safeguards of
Sections 271 & 272 of the Communications Act of 1934, as amended, 62 Fed. Reg. 2927
(1997) (to be codified at 47 C.F.R. pt. 53). These are nice new cash cows for the RBOCs,
"but access to the lucrative IX market always was and still remains the big prize." Chen,
1997]
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861
"interlATA services originating outside its in-region States."206 Demonstrating persistent concerns over cross-subsidies and self-preference, the
Act conditions full RBOC entry into IX carriage upon a showing of significant competition in the RBOCs' home LX markets. An RBOC may carry
interlATA calls originating from an in-region state upon a showing
(1) that there is a facilities-based competitor for LX services in that state
or (2) in the absence of an extant facilities-based competitor, that the
RBOC stands ready to offer nondiscriminatory access and interconnection. 207 The latter option requires the RBOC to file "a statement of the
terms and conditions" by which the RBOC "generally offers to provide ...
access and interconnection" to its LX network. 208 The RBOC must then
satisfy a fourteen-part "[c]ompetitive checklist."209
Current law bars other ways of showing that the RBOCs face significant LX competition. LX competition offered merely through resale of
an incumbent RBOC's LX services or based solely on cellular facilities
"does not suffice to meet the requirement" of facilities-based competition. 210 Rather, an RBOC may not offer interlATA service within an inregion state until some competitor stands ready to provide LX services
"either exclusively over [its] own telephone exchange service facilities or
predominantly over [its] own ... facilities in combination with the resale
of the telecommunications services of another carrier."211 Practically
speaking, the long-awaited release of the RBOCs into the IX market
hinges on incumbent LECs' negotiations with their competitors and the
pricing of unbundled network elements.212 Without unbundling and interconnection arrangements, there can be no LX entry except via the
supra note 123, at 541. Thus passes the "amorphous risk that the [Bell companies], in
their zeal to diversity, will neglect relatively pedestrian ... operations" in favor of "more
glamorous, albeit more speculative, business[es]." United States v. Western Elec. Co., 673
F. Supp. 525, 599 n.324 (D.D.C. 1987), aff'd in part, rev'd in part, 900 F.2d 283 (D.C. Cir.
1990).
206. 47 U.S.CA § 271 (b)(2) (West Supp. 1997); cf. United States v. Western Elec.
Co., 797 F.2d 1082, 1085 (D.C. Cir. 1986) (noting that Mfj did not bar RBOCs from
offering interLATA carriage outside their LX service regions).
207. See 47 U.S.CA § 271 (c) (1) (West Supp. 1997).
208. rd. § 271 (c)(l)(B).
209. rd. § 271(c)(2)(B) (including "[n]ondiscriminatory access to ... poles, ducts,
conduits, and rights-ot:way"; "[l]ocal loop transmission from the central office to the
customer's premises, unbundled from local switching or other services"; nondiscriminatory
access to 911, directory assistance, and operator call completion services; and
nondiscriminatory assignment of phone numbers within the "[c]ompetitive checklist").
210. H.R. Conf. Rep. No. 104-458, at 147 (1996), reprinted in 1996 U.S.C.CAN. 124,
160.
211. 47 U.S.c.A. § 271 (c)(l)(A); see also H.R. Conf. Rep. No. 104-458, at 147-48,
reprinted in 1996 U.S.C.CAN. 124, 160 ("The competitor must offer telephone exchange
service either exclusively over its own facilities or predominantly over its own facilities in
combination with the resale of another carrier's service.").
212. See H.R. Conf. Rep. No. 104-458, at 148-49, reprinted in 1996 U.S.C.CAN. 124,
161.
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COLUMBIA LAW REVIEW
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prohibitively expensive all~r-nothing strategy of building an entirely new
LX netvvork.
At the moment, this path to LX competition-and, by extension, to
RBOC entry into interLATA carriage-is blocked. The FCC's effort to
implement the Act's unbundling and interconnection provisions has
stalled in court. 213 The Eighth Circuit has strongly suggested that the
Commission lacks authority under the Act to order state PUCs to adopt
the "total element long-run incremental cost" (TELRIC) method for pricing an incumbent LEC's unbundled basic netvvork elements. 214 The
Eighth Circuit stands on the verge of ruling that Congress has
"preserv[ed] what historically has been the States' role" of setting rates
for local telephone service, in this instance "by approving or disapproving" interconnection agreements that emerge from consensual negotiations or compulsory arbitration. 215 The TELRIC rules have been stayed
by the Eighth Circuit and remain in legaIlimbo.
Even if the federal courts swiftly resolve the TELRIC dispute, the Act
will preserve, at least momentarily, one of the last vestiges of the MFJ's
t\vo-tiered telecommunications market. The Act generally requires all incumbent LECs to provide dialing parity for all calls: local calls, intraLATA toll calls, and interLATA calls. 216 ("Dialing parity means the
ability to dial the same number of digits in calling another number, regardless of who provides the service. . .. [F] or toll or 'short haul' longdistance service, it is known as ... '1+' dialing."217) Because the continuing restraints on RBOC entry into interLATA carriage would prevent an
incumbent RBOC from offering "1+" access for all toll calls, immediate
dialing parity would give established IXCs "a dramatic advantage ... insofar as they could provide 1+ dialing for all toll calls regardless of LATA
boundaries. "218 The Act thus grants RBOCs a specific three-year reprieve
from intraLATA toll dialing parity, unless the RBOC in question has received permission to enter the interLATA market. 219 True to this mandate, the FCC's most recent effort to implement dialing parity declined to
consider the interplay bet\veen RBOCs' efforts to guarantee toll dialing
parity within their LX service areas and the RBOCs' access to the in213. See Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996,61 Fed. Reg. 45,475, 45,476 (1996) (to be codified at 47
C.F.R. pts. 1, 20, 51 & 90).
214. See Iowa Utils. Bd. v. FCC, 1996-2 Trade Cas. (CCH) t 71,598, at 78,209-11 (8th
Cir.), motion to vacate denied, 117 S. Ct. 429 (1996). See generally WilliamJ. Baumol &J.
Gregory Sidak, The Pricing ofInputs Sold to Competitors, 11 Yale J. on Reg. 171, 178-89
(1994) (formally oudining "efficient component-pricing rule" as alternative to TELRIC
rule).
215. Iowa Utils. Ed., 1996-2 Trade Cas. (CCH) at 78,210.
216. See 47 U.S.CA §§ 153(39), 251(b)(3) (West Supp. 1997).
217. H.R. Rep. No. 104-204, at 72 (1995), reprinted in 1996 U.S.C.CAN. 10,38; see
also Implementation of the Local Competition Provisions of the Telecommunications Act
of 1996,61 Fed. Reg. 47,284, 47,287 (1996) (to be codified at 47 C.F.R. pts. 51-52) (same).
218. Huber et aI., supra note 194, § 1.1.5, at 16.
219. See 47 U.S.CA § 271 (e)(2)(B) (West Supp. 1997).
1997]
THE TELECOMMUNICATIONS PHOENIX
863
terLATA market. 220 This temporary measure inflicts a substantial welfare
loss. One-stop shopping for all "1+" calls, without regard to artificial
LATA boundaries, would represent one of the most dramatically pro competitive reforms of American telecommunications. 221
The 1996 Act leaves significant roles for the competing institutions
that have dominated the previous ages of telecommunications law. Federal antitrust law rides again, despite the Act's terminatibn222 of the antitrust consent decrees binding AT&T,223 GTE,224 and the AT&T-McCaw
merger. 225 The Act repeals the FCC's authority to immunize telephone
company mergers from antitrust scrutiny.226 This provision gnarantees
Hart-Scott-Rodino Act review227 of the Bell Adantic-NYNEX and SBCPacific Telesis mergers and may prove even handier as mergers, joint ventures, and other business changes alter the definitio.n of a "telephone
company."228 Finally, in the evident hope that the forcible separation of
LECs and cable operators will keep each group as a potential competitive
check on the other,229 the Act bans most mergers between cable and telephone companies. 230 This portion of the Act effectively directs enforcers
220. See Implementation of the Local Competition Provisions, 61 Fed. Reg. at 47,288
&n.20.
221. See Huber et al., supra note 194, § 1.1.5, at 16-17 ("Requiring all consumers to
choose, in a single balloting period, between the RBOC and their current interexchange
carrier for all 1+ calls, rather than splitting traffic between them, could shake up the long
distance business more thoroughly than any single development since the breakup of the
Bell System in 1984."); MacAvoy, supra note 100, at 182 n.10.
222. See Telecommunications Act of 1996, Pub. L. No. 104-104, § 601, 110 Stat. 56,
14~, reprinted in 47 U.S.CA § 152 note (West Supp. 1997).
223. See United States v. AT&T Co., 552 F. Supp. 131 (D.D.C. 1982), affd memo sub
nom. Maryland V. United States, 460 U.S. 1001 (1983).
224. See United States V. GTE Corp., 603 F. Supp. 730 (D.D.C. 1984).
225. See SBC Communications, Inc. V. FCC, 56 F.3d 1484 (D.C. Cir. 1995).
226. See Telecommunications Act § 601 (b)(2), 110 Stat. at 143, reprinted in 47
U.S.CA § 152 note (West Supp. 1997).
227. See 15 U.S.C. § 18a (1994).
228. See Huber et al., supra note 194, § 1.2.11, at 50.
229. See H.R Conf. Rep. 104-458, at 148 (1996), reprinted in 1996 U.S.C.C.A.N. 124,
160 (expressing hope that cable companies, with a market penetration reaching "more
than 95 percent of United States homes," will offer "meaningful facilities-based
competition" against incumbent LEGs); cf., e.g., FTC V. Proctor & Gamble Co., 386 U.S.
568, 580 (1967) (justifying invalidation of merger between United States' largest soap and
detergent manufacturer and country's largest bleach manufacturer partly on evidence that
soap and detergent manufacturer "was the most likely entrant" into bleach
manufacturing); United States V. EI Paso Natural Gas Co., 376 U.S. 651, 661 (1964)
("Unsuccessful bidders are no less competitors than the successful one.").
230. Specifically, a telephone company may not acquire "more than a 10 percent
financial interest, or any management interest, in any cable operator providing cable
seIVice" in the same seIVice area. 47 U.S.CA § 572(a} (West Supp. 1997). The reverse is
also true: No cable operator may acquire a comparable stake in a telephone company
within its franchise area. See id. § 572(b). Furthermore, the Act bans cable-te1co joint
ventures. See id. § 572(c}. Cable-te1co mergers and joint ventures are legal, inter alia, in
rural areas and in putatively "competitive" markets. See id. § 572(d) (also providing
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COLUMBIA LAW REVIEW
[Vol. 97:835
of federal antitrust laws to presume that cable-telco combinations are anticompetitive until proven otherwise. 231
The Act also invigorates the FCC's deregulatory powers. It grants the
FCC the authority to forbear from enforcing specific portions of its statutory mandate,232 a power that the Supreme Court in 1994 refused to recognize. 233 (Meanwhile, the FCC had resolved the specific problem of
IXC tariff filings by granting AT&T its long-awaited reclassification as
a' nondominant long-distance carrier. 234) In settings where the
Commission does identify dominant carriers, the Act blesses the use of
price capS.235 Furthermore, the Act strengthens the FCC's power to
preempt state laws that explicitly or effectively bar entry in
telecommunications.236
Finally, one of the Act's most important and most intriguing provisions will require active cooperation between the FCC and state PUCs.
The Act designates a new Federal-State Joint Board to oversee a comprehensive overhaul of universal service guarantees. 237 The Act's sponsors
intended "that any support mechanisms continued or created under new
section 254 should be explicit, rather than implicit as many support
mechanisms are today."238 The sheer breadth of the Act's universal service mandate, however, all but puts this goal out of reach. Constituents
named in section 254 include "low-income consumers," residents of "rural, insular, and high cost areas," and "[e]lementary and secondary
schools and classrooms, health care providers, and libraries"; the last
exceptions for small cable systems in non urban areas and whenever the FCC waives the
general prohibition against cable-telco mergers and joint ventures).
231. See Michael H. Botein, Cable/Telco Mergers and Acquisitions: An Antitrust
Analysis, 25 Sw. U. L. Rev. 569, 570 (1996).
232. See 47 U.S.CA § 160 (West Supp. 1997).
233. See MCI Telecomm. Co. v. AT&T Co., 512 U.S. 218, 224-27 (1994) (holding that
FC;C's limited powers to "modify" requirements of the Communications Act of 1934 do not
permit it to forbear enforcement because doing so would constitute a "basic and
fundamental" change in the regulatory scheme).
234. See Reclassification of AT&T Corp. as a Nondominant Interexchange Carrier, 11
FCC Rcd. 3271, 3292, 3356 (1995); see also In re Revisions to Price Cap Rules for AT&T
Corp., 10 FCC Rcd. 3009, 3014 (1995) (finding sufficient competition among providers to
justify reclassification).
235. See Telecommunications Act of 1996, Pub. L. No. 104-104, § 402(c), 110 Stat.
56, 130 (directing. FCC to "adjust the revenue requirements to account for inflation"
according to the price cap methodology identified in such orders as In re Policy and Rules
Concerning Rates for Dominant Carriers, 5 FCC Rcd. 6786 (1990), affd sub nom. National
Rural Telecomm. Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), and In re Expanded
Interconnection with Local Telephone Company Facilities, 6 FCC Rcd. 3259 (1991».
236. See 47 U.S.CA § 253(d) (WestSupp.1997). On the decline of FCC preemption
during the MFJ era, see Louisiana Pub. Servo Comm'n V. FCC, 476 U.S. 355, 379 (1986)
(barring "federal pre-emption of state regulation over depreciation of dual jurisdiction
property"); Michael]. Zpevak, FCC Preemption After Louisiana PSC, 45 Fed. Comm. LJ.
185 (1993).
237. 47 U.S.CA §254(a) (1) (West Supp. 1997).
238. H.R. Conf. Rep. 104-458, at 131 (1996), reprinted in 1996 U.S.C.CAN. 124,
142.
1997]
THE TELECOMMUNICATIONS PHOENIX
865
group has been designated the beneficiaries of "advanced telecommunications services."239
State regulators are allowed to extend federal universal service gnarantees,240 apparently even when the Act's commitment to preempting
state-law barriers to entry and to opening telecommunications markets
might dictate otherwise. 241 To ensure that changes in technology do not
dilute this guarantee of universal service, Congress has directed the FCC
to redefine universal service "periodically ... , taking into account advances in telecommunications and information technologies and services."242 With its first report, the Joint Board has already begun dropping
potential bombshells. 243 In particular, the Joint Board has exhorted the
FCC to adopt a policy of "competitive neutrality," a principle that "encompasses the concept of technological neutrality by allowing the marketplace to direct the development and growth of technology and avoiding
endorsement of potentially obsolete services."244
The Act's final paragraph on universal service vividly illustrates the
legislation's internal contradictions. The Act demands that a "telecommunications carrier may not use services that are not competitive to subsidize services that are subject to competition."245 At the same time, the
Act lets the FCC "exempt a carrier or class of carrier" from " [e]very telecommunications carrier['s]" general duty to "contribute, on an equitable
and nondiscriminatory basis, to the specific, predictable, and sufficient
mechanisms established by the Commission to preserve and advance universal service."246 If the FCC follows the historic regulatory practice of
favoring non dominant "upstarts" at the expense of incumbents,247 any
239. 47 U.S.CoA § 254(b).
240. See id. § 254(f).
241. See id. § 253 (b) (expressly preserving "the ability of a State to impose . . .
requirements necessary to preserve and advance universal service"); Chen, supra note.123,
at 565.
242. Id. § 254(c)(I).
243. See Universal Service, 61 Fed. Reg. 63,778 (1996) (recommended decision).
244. Id. at 63,779.
245. 47 U.S.CoA § 254(k).
246. Id. § 254(d) (demanding that such exemptions be granted only insofar as any
exempted "carrier's contribution to ... universal service would be de minimis").
247. Cf., e.g., Public Servo Comm'n v. Mid-Louisiana Gas Co., 463 U.S. 319, 334
(1983) (describing "new statutory rates" for natural gas as "intended to provide investors
with adequate incentives to develop new sources of supply"); American Paper Inst., Inc. v.
American Elec. Power Servo Corp., 461 U.S. 402,404 (1983) (describing "full avoided cost"
rule of § 210 of the Public Utility Regulatory Policies Act of 1978, as codified at 16 U.S.C.
§ 824a-3 (1994), which required incumbent electric utilities to purchase electricity "from
cogenerators and small power producers at a rate equal to ... the cost the utility would
have incurred had it generated the electricity itself or purchased the electricity from
another source"); Mobil Oil Exploration & Prod. S.E., Inc. v. FERC, 885 F.2d 209, 214-15
(5th Cir. 1989) (describing how Natural Gas Policy Act of 1978, Pub. L. No. 95-621, 92 Stat.
3352 (codified as amended at 15 U.S.C. §§ 3301-3432 (1994» created contradictory
incentives to conserve low-cost "old gas" and to produce high-cost "new gas"), rev'd, 498
U.S. 211 (1991).
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new competition unleashed thereby will make the subsidy "ruinous" for
incumbent carriers.248 After all, it was the chain of IX decisions from
Above 890 to Execunet that rendered the Ozark Plan unsustainable. 249
Thus, despite the fanfare and the statutory barrage, the 1996 Act leaves
intact one of the oldest concerns of public utility law: how to preserve the
regulators' favored bundle of internal cross-subsidies without conceding
the regulated firms a similar degree of freedom to exploit their own
cross-subsidies. The same redistributive issues that haunted the PUCdominated Age of Accommodation-universal service and subsidies for
residential LX service-linger despite drastic technological change and
multiple cycles of legal evolution. The regulatory compact is dead; long
live the regulatory compact.
II.
DYNAMISM AND DEADLOCK IN TELECOMMUNICATIONS REFORM
The ages of American telecommunications law present an eclectic
blend of legal process, political economy, imperfect competition, and
technological evolution. This Article's impressionistic survey of telecommunications law seems to invert conventional chronologies: Whereas
"the history of public utility regulation" is usually thought to "consist[ ] of
three major phases-legislative, judicial and administrative,"25o state
PUCs, the FCC, and the federal courts emerged and faded in turn as
dominant institutions in telecommunications before 1996.
Telecommunications law in practice has often departed from its
stated objectives. Although the allure of the public utility model has
faded, the entrenched political economy of telecommunications law has
undermined much of the progress attributable to economic and technological evolution. The MFJ court misunderstood what it perceived as the
"obvious conceptual similarity between competition in commerce as the
foundation of our economic system and competition in ideas as the basis
of our political system."251 In fact, economic and political competition
are inversely rather than directly related. The salutary growth in the
number of entrants and contestants in telecommunications has been offset by an equal and economically debilitating expansion in the number
and leverage of political stakeholders. Whereas economic entry pressures
incumbents to reduce prices and deploy new technology, political entry
invites all competitors-incumbents, entrants, and contestants-to continue manipulating regulators to buffer their own failures in the market248. Huber et aI., supra note 194, § 1.3.5, at 56; see also Paul A. MacAvoy et aI., Is
Competitive Entry Free? Bypass and Partial Deregulation in Natural Gas Markets, 6 Yale].
on Reg. 209, 210 (1989) (describing "incumbent burdens" that regulators press on
dominant firms); Sidak & Spulber, supra note 146, at 858 (same); Spulber, supra note 152,
at 50 (same).
'
249. See supra text accompanying notes 102-106, 165-168.
250. Phillips, supra note 18, at 180.
251. United States v. AT&T Co., 552 F. Supp. 131, 150 n.78 (D.D.C. 1982), aff'd memo
sub nom. Maryland v. United States, 460 U.S. 1001 (1983).
1997]
THE TELECOMMUNICATIONS PHOENIX
867
place. 252 At best, the regulatory process impedes an othenvise free-wheeling market; at worst, successful lobbying yields officially enforced barriers
against entire classes of competitors. 253 The political strife can only
worsen in the foreseeable future. Regulated firms that had occupied
carefully defined and separate niches before the 1996 Act-IXCs,
RBOCs, other incumbent LECs, midsized LECs, rural LECs, and ,vireless
carriers-now find themselves battling each other on unmarked economic and political terrain.
The rise of a single regulatory actor-and of that institution's economic raison d'etre-defines each of the four ages of telecommunications
law. In the days when most telephonic carriage was local and the tax base
was no broader than a franchised LEC's rate base,254 state PUCs systematically extracted wealth from interstate and commercial callers. As CPE
innovations and microwave transmission eroded the premises of the regulatory compact, the FCC emerged as the ideal incremental regulator, the
institution best suited to making marginal improvements in telecommunications law mthout abandoning the regulatory compact. The FCC's
slow success invited a more impatient response via federal antitrust enforcement. Ironically, the divestiture remedy at the heart of the MFJ
doomed the decree as a source of comprehensive legal solutions. Combined ,vith the ongoing decentralization of technology and economic
decisionmaking in telecommunications, divestiture undermined any legal
strategy focusing exclusively on the heirs of the Bell empire.
Although, I have used parables of institutional rivalry and reconciliation to define the ages of telecommunications law, these stories may be
retold in terms of the regulated firms' behavior. Telecommunications
firms have acted both as competitors and as lobbyists, both as profit-seekers and as rent-seekers. For some insights on studying the political economy and the microeconomics of telecommunications as related rather
than separate phenomena, let us return to the 1971 debate that George
Stigler and Richard Posner waged, of all places, in an academic journal
funded by the Bell system.255 The Telecommunications Act of 1996
marks the silver anniversary of the Stigler-Posner debate by proving both
sides right. According to the "interest group," or "capture," theory that
Stigler outlined in The Theory ofEconomic Regulation,256 regulation reflects
the regulated firms' own lobbying efforts to minimize competition and
252. See, e.g., Roben Bork, The Antitrust Paradox: A Policy at War with Itself 347-64
(1978); Arthur D. Austin, Negative Effects of Treble Damage Actions: Reflections on the
New Antitrust Strategy, 1978 Duke LJ. 1353, 1360-66; William J. Baumol & Janusz A.
Ordover, Use of Antitrust to Subven Competition, 28 J.L. & Econ. 247, 256-59 (1985).
253. See Janusz A. Ordover & Garth Saloner, Predation, Monopolization, and
Antitrust, in 1 Handbook of Industrial Organization 537, 573 (Richard Scbmalensee &
Robert D. Willig eds., 1989).
254. See supra note 43 (listing sources).
255. See F. Mark Garlinghouse, About This Journal, 1 Bell J. Econ. & Mgmt. Sci. 3
(1970).
256. See Stigler, supra note 111, at 3.
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preserve their sunk investments. Although this model best describes
Bell's efforts to maintain its exclusive LX. franchises, it bears remembering that the FCC originally sided with AT&T on the issue of "foreign attachments" and accepted MCl's Execunet tariff only at the insistence of a
reviewing court.
By contrast, in Taxation by Regulation,257 Richard Posner described
regulation as an internal system of taxation that imposes above-cost prices
on certain customers in order to finance other interests. The taxation
theory explains the persistence of the RBOCs' intralATA toll monopoly.
It also exposes the true purpose of universal service obligations and IX
"access fees," two notorious schemes of internal subsidization. Despite
the procompetitive rhetoric, the 1996 Act disturbs neither tradition of
regulatory taxation. Indeed, the Act dictates an ever-increasing level of
universal service in local telephony. The number and diversity of interests protected under the Act's universal service provisions testify to the
proliferation of newly empowered "stakeholders" in contemporary telecommunications law. 258 By"delegat[ing] the actual pricing of ... services" within the universal service package "to the FCC and state
regulators," the new Act continues to resolve "'tax and spend' policies ...
behind a veil of public utility regulation," only with a different blend of
institutional actors. 259
If legal process portrays telecommunications law as the product of
institutional evolution, staguation, and transition, then political economy
insists upon accounting for the distorting effect of client politics. Neither
description can be complete without due consideration of market structure and industrial organization in telecommunications. The early and
continuous presence of a single, all-encompassing monopolist distinguishes American telecommunications law from many other bodies of
economic regulation. Unlike the old Federal Power Commission,260 for
instance, the FCC and other telecommunications regulators never ran
ashore in a vain effort to "de concentrate" a naturally oligopolistic industry. In this sense, telecommunications law escaped the most devastating
critique delivered by contemporary "contestability" theory: that "regula257. See Posner, Taxation by Regulation, supra note 112, at 22.
258. As an illustration of the sheer number of contestants in telecommunications
law's new political struggles, consider the number of firms covered by the FCC's
obligations under the Regulatory Flexibility Act, 5 U.S.C. §§ 601-612 (1994). As required
by 5 U.S.C. § 603, the Commission was required to prepare an Initial Regulatory Flexibility
Analysis of the recommendations of the Federal-StateJoint Board on Universal Service. In
its first report on the universal service provisions of the 1996 Act, theJoint Board estimated
that there are as many as 3497 small telephone companies in the United States, ranging
from small LECs and IXCs to "pay telephone operators, PCS providers, covered SMR
providers, and resellers." Universal Service, 61 Fed. Reg. 63,778, 63,796 (1996)
(recommended decision).
259. Montanye, supra note 44, at 272.
260. See generally Stephen G. Breyer & Paul W. MacAvoy, Energy Regulation by the
Federal Power Commission (1974) (criticizing the poor performance of the Federal Power
Commission in natural gas regulation during the 1960s).
1997]
THE TELECOMMUNICATIONS PHOENIX
869
tory attempts to influence the structure of an industry," especially those
that "seek[] to increase the number of firms," are "doomed to
failure. "261
Instead, the industry's monopolistic structure imposed a different set
of political constraints on telecommunications reform. As the FCC battled the regulatory grip of the state PUCs, a unified Bell system could
portray "each attempt to promote competition in telecommunications ...
as a threat to stable local rates or the integrity of the network."262 The
reflexive regulatory response to monopoly also tainted the MFJ. In a perversion of antitrust law's "incipiency" theory,263 the Bell divestiture decree "reified the belief that it was better to reduce the probability of bottleneck leveraging to zero and thereby prevent any competition" by
LECS.264 The MFJ's fixation with monopoly thus obscured the hard lessons -learned through incremental FCC deregulation: CPE manufacturing, IX carriage, information services, and even LX carriage may be relatively contestable (in the sense that a failed competitor may exit without a
crushing loss of sunk investments)265 in an era of continually improving
technology and continually expanding demand. 266
Indeed, the imperfectly competitive t~lecommunications market has
witnessed virtually every regulatory technique within and beyond the public utility paradigm. Bell divestiture alone ran the gamut, including the
simple tactic of inviting entry from an adjoining geographic region. 267
Efforts to encourage intermodal LX competition by cable operators, wireless carriers, competitive access providers (CAPs), and IXCs predated the
261. Elizabeth E. Bailey & William]. Baumol, Deregulation and the Theory of
Contestable Markets, 1 Yale]. on Reg. 111, 121 (1984). See generally Elizabeth E. Bailey,
Contestability and the Design of Regulatory and Antitrust Policy, 71 Am. Econ. Rev. 178
(1981) (outlining the theory of contestable markets as a descriptive and normative
alternative to the standard model of perfectly competitive markets that underlies most
regulatory and antitrust policies in the United States).
262. Crandall & Waverman, supra note 163, at 105.
263. See supra note 21.
264. MacAvoy, supra note .100, at 186.
265. See id. at 190; Susan Gates et al., Deterring Predation in Telecommunications:
Are Line-of-Business Restraints Need~d?, 16 Managerial & Decision Econ. 427, 435 (1995).
But cf. MacAvoy, supra note 100, at 180 (describing incumbent IXCs' fiber optic networks
as "largely sunk" investments). Peter Huber, Micbael Kellogg, and] ohn Thome agree that
the economics of scale in fiber-optic transmission' make IX carriage more susceptible than
other segments of the telecommunications markets to single-fi~ dominations. See
Geodesic Network II, supra note 57, at 6.45.
266. Cf. United States v. El Paso Natural Gas Co., 376 U.S. 651, 660 (1964) (taking
account, for purposes of antitrust analysis, of "new increments of demand that may emerge
[in] an expanding population" and an increasingly sophisticated market).
267. See United States v. Pabst Brewing Co., 384 U.S. 546, 548-50 (1966); El Paso
Natural Gas, 376 U.S. at 651; cf. United States v. Topco Assocs., 405 U.S. 596, 608 (1972)
(declaring horizontal territorial agreements per se illegal under section 1 of the Sherman
Act, 15 U.S.C. § 1 (1994), on reasoning that such agreements reduce price and service
pressure from out-ofregion competitors).
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1996 Act. 268 The Eighth Circuit's stay of the TELRIC rule has derailed
the principal deregulatory strategy contemplated by the FCC,269 that of
enabling LX contestants to gain a foothold through pick-and-choose access to unbundled network elements while building new LX facilities. 27o
On the other hand, if]. Gregory Sidak and Daniel F. Spulber correctly
predict that TELRIC pricing will lead to a "tragedy of the telecommons,"
the regulatory strategies in telecommunications might even come to include public ownership of essential LX facilities. 271 (Which is not to say
that disaster awaits, for the deregulated, structurally competitive
American trucking industry operates under this very model. 272)
It is nevertheless premature to lament the passing of free enterprise
in American telephony. Existing legal and economic conditions favor the
deregulatory solution that the MFJ only remotely promised and the 1996
Act refused to endorse: immediate, unfettered RBOC entry into IX carriage. The assumptions that justified the MFJ's line-of-business restrictions no longer hold (if ever they did). Despite their reputation as regulatory reactionaries, state PUCs have been routinely abandoning
conventional profit-level regulation in favor of price caps.273 The diffusion of price-cap regulation throughout the states is dissipating the faint
threat that RBOCs will use LX profits to finance predatory forays into IX
268. See, e.g., In re Telephone Co.-Cable Television Cross-Ownership Rules, 7 FCC
Rcd. 300, 322-23 (1991) (authorizing cross-ownership of cable companies and !Xes);
Repon & Order in Implementation of the Provisions of the Cable Communications Policy
Act of 1984, 50 Fed. Reg. 18,637, 18,644 & n.34 (1985) (authorizing cross-ownership of
cable companies and cellular service providers), aff'd sub nom. ACLU v. FCC, 823 F.2d
1554 (D.C. Cir. 1987); AT&T Communications, No. 95-0197, 1995 m. PUC LEXIS 823 (III.
Commerce Comm'n Dec. 6, 1995) (opening an LX market to competition); Re MFS
Intelenet of Md., Inc., 152 P.U.R.4th 102 (Md. Pub. Servo Comm'n 1994) (same); Re
Rochester Tel. Corp., 160 P.U.R.4th 554 (N.Y. Pub. Servo Comm'n 1994) (same). It is
wonh noting that the size of the pending merger between Worldcom and MFS, Inc., a
merger of CAPs, rivals that of the two RBOC mergers announced in 1996. See Steve Lipin,
Gorillas in Our Midst: Megadeals Smash Records as Firms Take Advantage of Favorable
Climate, Wall St. J., Jan. 2, 1997, at R8.
269. See Iowa Utils. Bd. V. FCC, 1996-2 Trade Cas. (CCH) t 71,598,172 P.U.R.4th 645
(8th Cir.), motion to vacate denied, 117 S. Ct. 429 (1996).
270. See generally Harold Demsetz, Why Regulate Utilities?, 11J.L. & Econ. 55 (1968)
(arguing that even "natural" monopolies may be tempered to extent that customers can
conduct competitive bidding for right to serve a market).
271. See J. Cregory Sidak & Daniel F. Spulber, The Tragedy of the Telecommons:
Government Pricing of Unbundled Network Elements Under the Telecommunications Act
of 1996,97 Colum. L. Rev. 1081, 1159 (1997).
272. See Thomas D. Morgan et aI., Economic Regulation of Business: Cases and
Materials 105 (2d ed. 1985); cf. Ashutosh Bhagwat, Of Markets and Media: The First
Amendment, the New Mass Media, and the Political Components of Culture, 74 N.C. L.
Rev. 141, 215 (1995) (advocating public ownership of "a backbone broadband network" to
facilitate access by a variety of speakers).
273. See, e.g., MacAvoy, supra note 100, at 188; Arrow et al., supra note 136, at 304,
315-17. See generally David E.M. Sappington & Dennis Weisman, Designing Incentive
Regulation for the Telecommunications Industry 80-88 (1996) (describing price caps
under state law).
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markets. 274 Improvements in accounting and digital technology may already be exposing the proper cost of IX-to-LX interconnection and further eroding the practice of subsidizing LX service through IX access
charges. 275
Even in the intraLATA long-distance markets that the MFJ conceded
to the RBOCs, there has been no actual evidence of predatory behavior.276 Nor have other LECs, most notably GTE, displayed any propensity
to extract cross-subsidies from their LX operations.277 The aggregate effect of emerging LX competition from CAPs, cable system operators,
IXCs, and wireless carriers will likely keep incumbent LECs busy defending their home turf, much less contemplating predatory raids on the IX
market. 278 Furthermore, experience accumulated under the MFJ does
have its value. After twelve years of patrolling LX prices charged by GTE
and the RBOCs, regulators and incumbent IXCs alike have a benchmark
by which to detect potential predation.279 "The ... independent BOCs
are not the old AT&T,"280 and telecommunications law should no longer
resemble the compact by which the Bell system was regulated.
Changed market conditions demand new regulatory strategies. The
potential gains in consumer welfare outw'eigh whatever anticompetitive
consequences might flow from premature RBOC entry into this market.
Like all other LECs, the newly freed RBOCs would be able to exploit
274. See Gates et ai., supra note 265, at 435.
275. Compare California v. FCC, 39 F.3d 919, 926 (9th Cir. 1994) (recognizing
efficacy of "strengthen [ed] ... cost accounting rules" in detection and elimination of crosssubsidies), cert. denied, 115 S. Ct. 1427 (1995) with David Gabel & Mark D. Kennet,
Pricing of Telecommunications Sernces, 8 Rev. Indus. Org. 1 (1993) (arguing that
conversion to digital LX technology has allowed local regulators to adopt usage-sensitive
charges for IX interconnection in place of arbitrary and unrealistic access fees). See also
Southwestern Bell Corp. v. FCC, 896 F.2d 1378, 1380 (D.C. Cir. 1990) (upholding FCC
accounting "rules governing the transfer of assets he tween a regulated telephone company
and its nonregulated affiliates").
276. See Jerry A. Hausman, Competition in Long-distance and Telecommunications
Equipment Markets: Effects of the MFJ, 16 Managerial & Decision Econ. 365, 373-74
(1995).
277. See Arrow et ai., supra note 136, at 305, 307-09; supra text accompanying notes
134-137. Compare Federal Trade Commission Authorization: Hearings Before the
Subcomm. on the Consumer of the Senate Comm. on Commerce, Science and
Transportation, 100th Congo 29 (1987) (statement of Commissioner Mary Azcuenaga)
(describing predatory pricing as a "white tiger," a much feared but exceedingly rare
animal) with id. at 12, 23 (statement of Commissioner Terry Calvani) (describing
predation as a "unicorn," a widely discussed but never observed mythical beast).
278. See Chen, supra note 123, at 560-64.
279. See United States v. Western Elec. Co., 900 F.2d 283, 299 (D.C. Cir. 1990);
MacAvoy, supra note 100, at 189; Brandon & Schmalensee, supra note 151, at 357; c£
Bluefield Water Works & Improvement Co. v. Public Servo Comm'n, 262 U.S. 679, 692
(1923) ("A public utility is entitled to such rates as will permit it to earn a return ... equal
to that generally being made at the same time and in the same general pan of the country
on . . . business undertakings which are attended by corresponding risks and
uncertainties.") .
280. United States v. Western Elec. Co., 993 F.2d 1572, 1580 (D.C. Cir. 1993).
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substantial economies of scope between LX service and other lines of
telecommunications business. 281 Many of these gains would be lost if the
RBOCs were forced to confine their IX operations to structurally separate
subsidiaries. 282 And we have yet to consider the beneficial impact of
RBOC entry on the "oligopolistic, 'live and let live'" IX market. 283 From
this perspective, the TELRIC controversy is splitting hairs over the terms
of LX entry, when a more appropriate solution calls for all-out LX and IX
entry by as many firms as the market will bear. "The resulting price cuts
from granting interLATA entry rights to operating companies likely
would be substantial. So would the gains for subscribers .... "284 In sum,
it is high time to unleash the last of public utility law's pampered wards,
to end "regulation's rendition of Waitingfor Godot."285
Other solutions, alas, elude easy detection and prescription. This is
especially true in the crucial relationship between regulation, market
structure, and the rate of innovation. Although it is impossible to quantify the technological impact on telecommunications reform, it would be
remiss in a study of this "unusually dynamic" industry to overlook technological change. 286 At the other extreme lies the temptation to treat
"[n]ew technology [as] the easy answer to everything,"287 to engage in
the "trivial ritual" of noting "that telecommunications technologies and
media are converging. "288 Although there is no easy solution to the
ongoing debate over "innovation markets,"289 the story of telecommunications reform-from empire-building to divestiture to a hopeful future
of open networks-suggests that the threat of entry acts as a greater spur
to invention than does monopoly. The gold-plating of the Bell system,
after all, inspired the Averch:Johnson hypothesis on public utilities' inefficient investments. 29o By contrast, Bell divestiture and its aftermath have
sparked "an unprecedented flowering of innovation."291
281. See Arrow et al .• supra note 136. at 302. 310.
282. See generally California v. FCC. 905 F.2d 1217. 1232-38 (9th Cir. 1990)
(explaining why and how structural separation destroys most economies of scope between
regulated and non regulated lines of business).
283. Sullivan. supra note 117. at 493.
284. MacAvoy. supra note 100. at 182.
285. 1d. at 176.
286. See MCI Telecomm. Corp. v. AT&T Co.• 512 U.S. 218.235 (1994) (Stevens.].•
dissenting); see also FCC v. Pottsville Broad. Co.• 309 U.S. 134. 138 (1940) (stressing
"rapidly fluctuating" and "dynamic aspects of radio transmission" as justification for
expansive interpretation of the FCC'sjurisdiction).
287. Thomas W. Hazlett, Predation in Local Cable 1V Markets. 40 Antitrust Bull. 609.
643 (1995).
288. Thomas G. Krattenmaker & LA. Powe. ]r.• Converging First Amendment
Principles for Converging Communications Media. 104 Yale LJ. 1719. 1719 (1995).
289. See. e.g.• Richard]. Gilbert & Steven C. Sunshine. Incorporating Dynamic
Efficiency Concerns in Merger Analysis: The Use ofInnovation Markets. 63 Antitrust LJ.
569. 594-97 (1995).
290. See Hruvey Averch & Leland L.Johnson. Behavior of the Firm Under Regulatory
Constraint, 52 Am. Econ. Rev. 1052. 1059-67 (1962).
291. United States v. Western Elec. Co.• 890 F. Supp. I. 9 (D.D.C. 1995).
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873
Some observations nevertheless seem beyond dispute. Technological improvement has enhanced contestability throughout telecommunications, including LX carriage, by deepening the "pool of potential entrants able to respond quickly to . . . entry opportunit[ies]."292 The
seemingly unquenchable thirst for bandwidth has fueled the rise of such
new conduits as direct broadcast satellite, personal communications services, advanced television, digitalized multipoint distribution service, and
hybrid fiber coax. 293 Third-party CPE can displace all but a minimal core
of LEC services. For decades corporate customers have installed private
branch exchanges instead of buying LEC services, and even residential
customers can use fancy phones, answering machines, and high-speed
modems and faxes as substitutes for LEC offerings. 294 Telecommunications shop talk about POTS and PANS-"plain old telephone service" versus "pretty amazing new services"-often misses the point; the real action
lately is in the computer industry.
Where will it all lead? Prophecies in telecommunications are as
treacherous as they are foolish. "Economic analysis and market predictions" are nowhere "an exact science," least of all on telephony's unstable
terrain. 295 Perhaps the only sure bet is surprise. Accelerating technolOgical change has shortened the transitions between ages of telecommunications law. The urgency of revisiting and revamping obsolete law has become all the greater. Throughout each of these ages, "[t]he appeal of
jurisprudential systems ... is psychological and time bound .... We can
never be sure that the process of legal change has come to an end, for
every era has its own intellectual mood."296 To recognize that we routinely "wager our salvation upon some prophecy based upon imperfect
knowledge,"297 to recognize that "the body of the law" regulating telecommunications, "at any time or place, is an unstable mass in precarious
equilibrium"-that is but "the beginning ofwisdom."298
292. Bailey & Baumol, supra note 261, at 120.
293. See Leland Johnson, Toward Competition in Cable Television 38-49 (1994)
(describing technical and economic facets of "last mile" switched broadband carriage for
technologies such as video dialtone delivered via hybrid fiber coax cable); Daniel Minoli,
Video Dialtone Technology 138-43, 339-415 (1995) (same).
294. Cf. Kellogg et al., supra note 9, § 1.8, at 49-57; de Sola Pool, supra note 14, at
26-27 (describing the pro competitive effects of technological convergence).
295. United States v. Western Elec. Co., 900 F.2d 283, 297 (D.C. Cir. 1990).
296. Daniel Farber, The Ages of American Formalism, 90 Nw. U. L. Rev. 89, 94
(1995).
297. Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes,J., dissenting).
298. Gilmore, supra note 4, at 110.