IWeek Twelve: Telephone Regulation II
a. Breakup of Ma Bell
i. 1956 Consent Decree
1. Enjoined from engaging in any business other than common carrier service.
2. Prohibited from manufacturing equipment other than that used by the Bell System.
3. Required to license Bell patents to outsiders.
ii. GTE Hawaii case (1972)
1. “In 1972, the federal district court in Hawaii ruled against General Telephone (GTE), the largest of the independent telephone companies, in a suit brought by ITT under the Clayton Act. The court ordered GTE to divest itself of its manufacturing subsidiaries.”
iii. 1974 Antitrust issues
1. “The AT&T case was brought under the Sherman Act. The government claimed that AT&T had engaged in a course of illegal conduct for which the only effective remedy was divestiture from the AT&T holding company of the telephone operating companies.”
2. What is a prima facie case?
a. “a pervasive showing has been made that defendants have monopoly power (wholly apart from FCC orders with respect to interconnection) through various barriers to entry, such as bottlenecks, entrenched customer preferences, the regulatory process, … The testimony … adduced by the government, demonstrated that the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time.”
iv. Modified Final Judgment (1982)
1. Divestiture of operating companies
2. Local access by operating companies
a. A requirement that the divested operating companies provide equal access to all interexchange carriers.
3. AT&T retains long-distance toll, Yellow Pages, CPE, and all new competitive services
a. Permission for AT&T to keep Long Lines, Western Electric, and Bell Labs.
4. Unclear on cellular (eventually went to Operating Companies)
5. A prohibition on AT&T entry into electronic publishing for seven years.
6. Remove restrictions of 1956 Consent Decree
a. January 8, 1982: AT&T and DOJ agree to divestiture.
b. February 19, 1982: AT&T proposes plan for divestiture.
c. August 1982: Judge Greene modifies plan for divestiture.
d. July 8, 1983: Judge Greene approves the final blueprint.
e. December 1983: Supreme Court affirms ruling.
f. January 1, 1984: Divestiture takes place.
1. Rate regulation – Price Caps
a. A Price Cap is, simply put, a method of regulation where the cost to the consumer is the target as opposed to profit.
b. Commonly, the regulator delineates a maximum for the development of prices over a set limited time frame.
c. Operators can increase prices as they see fit (often in accordance to inflation), but within the realm of the limit of the price cap.
d. However, also built into the formula is a function for prices to decrease relative to lowered cost of production.
2. Line-of-business restrictions
a. RBOCs to provide local and limited long distance services
b. Denied from providing interexchange or information services
c. Manufacture/provide tcomm products
d. Cannot provide services or products that are not a natural monopoly service – other than tcomm and exchange access services
3. Universal service
a. There was concern that Divestiture would present universal service issues – not the case.
vi. Era of Deregulation
1. Marketplace philosophy
a. Former Boundaries Irrelevant
b. Antitrust Constraints Relaxed
d. Global Competition
2. Impact on innovation – capital affects this; monopolies = more capital and thus more investment. However competition forces innovation b/c that innovation offers pricing and market edges. Innovation concerns are twofold:
a. Process innovation - Innovations that reduce the costs of existing products and services.
b. Product innovation - Innovations that rely on development of new products and services to reduce costs. Note. This was the preference of BOCs. However, rapid, uncontrolled technological innovation could render obsolete any equipment whose useful life was not over.
3. Economic inefficiency
a. New products typically had the same function as the old; they just did the job better and cheaper.
vii. Case Study: US West
1. As a result of the MFJ, U.S. West’s roots spring from three telephone companies, which were part of the old AT&T Bell System – Northwestern Bell, Mountain Bell, and Pacific Northwest Bell.
viii. Contempt Power / Criminal Contempt
a. “Intentional disobedience of, or disdain for, a known order from a court or legislative body.”
2. Contempt Power
a. The Judiciary Act of 1789 conferred power on federal courts to punish contempt, and they retain that power today.
3. Civil Contempt
a. “Refusal to obey an order of the court in a civil case, for example an order to testify or produce a document.”
4. Criminal Contempt
a. A criminal contempt is an act that cannot be purged and for which punishment is imposed to vindicate the authority of the court. A person may be charged under separate statute, or summarily held in contempt without the rights afforded a criminal defendant.