Wireline Regulation I TC 310 May 19, 2008

Wireline Infrastructure CPE Loops Circuit Switches Transport lines

Dividing Infrastructure Dual Jurisdiction  FCC  States Technological Distinction? Loops as Transport  Private Branch Exchanges (PBXs)‏ MSU example

Regulating a Natural Monopoly Methods Dual Jurisdiction Dance  split of shared facilities  State and subscriber line charge on local bill Switched vs. Special Access charges  Finishing or handing off calls  10% rule Filed Rate Doctrine

Universal Service Appealing to Regulators  Public Choice Theory Three primary cross-subsidizations  Geographic  Type  Distance Only works in monopoly situation  Arbitrage: where are vulnerabilities?

Antitrust Principles Essential Facilities Doctrine Control Duplicable Denial Providability Tying Arrangements Control of one market Other market could be dominated Makes sense to treat distinctly

Antitrust II Predatory Pricing When legitimate, when not  Transfer Pricing/Self Dealing In two markets, one regulated one not Abuse of Regulation  Primary jurisdiction  Filed Rate Doctrine  State Action (Sherman is Federal)‏  Domination is natural

Breaking Up Bell Bell justified in Kingsbury commitment Second antitrust action by government  CPE is at stake  Government wants equipment market competitive 1956 “Final Judgment” Consent Decree  Bell grants nonexclusive licenses for Bell patents  Fee based hand over for technical equipment  Bell system limited to common carrier communications.

Long Distance Competition Long distance vulnerable due to arbitrage Bell Labs refines microwave transmission MCI offers point-to-point voice/data transmissions over microwaves MCI interconnects one end to Bell LEC  Long distance for local rates! MCI interconnects on both ends  True LD competition

AT&T Responds Predatory Pricing Burden of Interconnection  Capacity limits  Discrimination on access (multi-dialing)‏ Distance subsidy lost, universal service suffers FCC quagmired in litigation DoJ steps in, time to bust Bell

1984 Modified Final Judgment Bell argues filed rate doctrine and state action Judge Greene oversees case  AT&T divests local service entirely 7 Local Access and Transport Areas (LATAs) created  BOCs required to interconnect to all LD carriers  BOCs retain monopolies of area, barred from anything but local service  AT&T freed from 1956 Final Judgment

Winners DoJ  Breaks up Bell, also drops parallel suit against IBM Long Distance customers  Prices plummet, quality increases AT&T  Enter new markets  Keeps Bell Labs FCC  Less regulatory mess; movement towards competition

Losers State Regulators  Limitation of their jurisdiction, not getting anything from AT&T  Implicit subsidies weakened Local Customers  BOCs raise prices, closer to at cost FCC  New policies for interconnections, subsidies. More entities to regulate

Why Important Problems with divestiture lead directly to 1996 Act Regulators weary of monopolies, high competition mind-set dominates public discourse Expansion of jurisdiction justified Repeating history? Conglomeration and Convergence