Memorandum of the U.S. in Support of Its Motion for a Modification of the Decree to Permit a Limited Trial of Interexchange Service By Ameritech

Date: 
Monday, May 1, 1995
Document Type: 
Modification/Termination Papers

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Page 1      

                       IN THE UNITED STATES DISTRICT COURT
                       FOR THE DISTRICT OF COLUMBIA
 

UNITED STATES OF AMERICA,

Plaintiff,

v.

WESTERN ELECTRIC COMPANY, INC.,
et al., and

AMERICAN TELEPHONE & TELEGRAPH COMPANY,

Defendants.

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Civil Action No. 82-0192 (HHG)

 

 

               MEMORANDUM OF THE UNITED STATES IN SUPPORT OF
                ITS MOTION FOR A MODIFICATION OF THE DECREE
                       TO PERMIT A LIMITED TRIAL OF
                     INTEREXCHANGE SERVICE BY AMERITECH

 

                                 ANNE K. BINGAMAN
                                 Assistant Attorney General
                                 WILLARD K. TOM
                                 Counselor to the Assistant Attorney General
                                 DAVID S. TURETSKY
                                 Senior Counsel to the Assistant Attorney General
                                 JERRY S. FOWLER, JR.
                                 Special Counsel to the Assistant Attorney General
                                    U. S. Department of Justice
                                    Antitrust Division
                                    Washington, D.C. 20530
                                    202-616-0962
 

                                 DONALD J. RUSSELL
                                 Chief, Telecommunications Task Force
                                    U.S. Department of Justice
                                    555 4th Street, N.W.
                                    Washington, D.C. 20001
        MAY 1, 1995                        202-514-5621
.


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                             TABLE OF CONTENTS
 

 

        I.  Purpose and General Structure of the Proposed Modification.......................................... 2
 

        II.  Development of the Proposal............................................................................................ 4
 

             A.  Technological and Competitive Developments.................................................... 4
             B.   Ameritech's Original Proposal............................................................................. 5
             C.   Inadequacies of Ameritech's Original Proposal................................................... 8
             D.  Revision of Ameritech's Proposal...................................................................... 12
 

        III.  Detailed Explanation of the Competition-Based Criteria and Safeguards in
             the Proposed Modification.............................................................................................. 14
 

             A.  Steps to Foster the Emergence of Local Competition........................................ 15
 

                1.  Unbundling of Loops and Ports.............................................................. 16
                2.  IntraLATA Toll Dialing Parity............................................................... 18
                3.  Resale of Local Exchange Service.......................................................... 18
                4.  Pole Attachments and Conduit Space..................................................... 21
                5.  Interconnection....................................................................................... 21
                6.  Number Portability.................................................................................. 23
                7.  Number Assignment............................................................................... 26
 

             B.   Actual Marketplace Facts Concerning the Emergence of Local
                Competition......................................................................................................... 27
        -
                1.  Procedures for Department Approval..................................................... 27
                2.  Procedures for Court Review ................................................................. 27
                3.  Substantive Standard for Department Approval..................................... 28
 

                     a.  Actual Competition and Substantial Opportunities For
                          Additional Competition.............................................................. 31
 

                     b.  Determination That the State of the Market, Safeguards,
                          and Supervisory Provisions Make It Safe to Begin the Trial...... 34
 

                4.  Other Factors the Department May Consider......................................... 35
 

                     a.  Certification, Licensing, Franchising, and Similar
                          Requirements.............................................................................. 35
 

                     b.  Ordering, Provisioning, and Repair Systems.............................. 35
 


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             C.   Supervision and Safeguards................................................................................ 36
 

                1.  Terminability of the Trial........................................................................ 37
                2.  Self-reporting.......................................................................................... 38
                3.  Orders to Discontinue Conduct............................................................... 38
                4.  Civil Fines............................................................................................... 38
                5.  Limited Geographic Scope..................................................................... 38
                6.  Types of Services.................................................................................... 40
                7.  Ownership of Transport Facilities.......................................................... 41
                8.  Separate Subsidiary Requirements......................................................... 42
                9.  Equal Access Provisions......................................................................... 42
                10. Marketing Restrictions............................................................................ 43
                11. Compliance Plan..................................................................................... 45
                12. Other Conditions..................................................................................... 45
 

        IV.  The Proposed Modification Should Be Approved Because It Is in the
             Public Interest................................................................................................................. 45
 

             A.  The Public Interest Standard Applies to Entry of the Proposed
                Modification........................................................................................................ 45
 

             B.   The Proposed Modification Is In the Public Interest.......................................... 47
 

                1.  The Proposed Modification Is Structured to Avoid Harm to
                     Competition in the Interexchange Market.............................................. 47
 

                2.  The Trial Will Provide Affirmative Benefits to Competition................. 47
 

        CONCLUSION........................................................................................................................... 49

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                          TABLE OF AUTHORITIES
 

 

 

        CASES                                         Pages
 

        California v. FCC, 39 F.3d 919 (9th Cir. 1994),
         cert. denied, 63 U.S.L.W. 3721 (U.S. April 3, 1995) ........................................................... 42
 

        In re City Signal, Inc., Application for a License
         to Provide Basic Local Exchange Service in the
         Grand Rapids Exchange
, No. U-10555, 1994 Mich.
         PSC LEXIS 267 (Mich. Pub. Serv. Comm'n,
         Oct. 12, 1994) .......................................................................................................................... 4
 

        In re Illinois Bell Telephone Company Proposed
         Introduction of a Trial of Ameritech's Customers
         First Plan in Illinois
, Dkt. No. 94-0096, slip op.
         (Ill. Commerce Comm'n, April 7, 1995) ........................................................................ 9, 17, 24
 

        In the matter of the Application of City Signal,
         Inc., for an Order Establishing and Approving
         Interconnection Arrangements with Ameritech
         Michigan
, No. U-10647 (Mich. Pub. Serv. Comm'n,
         February 23, 1995) ................................................................................................................. 16
 

        United States v. Bechtel Corp., 648 F.2d 660,
         (9th Cir.), cert. denied,
         454 U.S. 1083 (1981) ............................................................................................................. 46
 

        United States v. Gillette Co., 406 F. Supp. 713
         (D. Mass. 1975) ...................................................................................................................... 46
 

        *United States v. Western Elec. Co., 993 F.2d 1572
         (D.C. Cir.), cert. denied, 114 S. Ct. 487 (1993)................................................................ 46, 49
 

        *United States v. Western Elec. Co., 900 F.2d 283
         (D.C. Cir.), cert. denied, 498 U.S. 911 (1990) ....................................................................... 46
 


Page iv      

        United States v. Western Elec. Co., 673 F. Supp.

        525 (D.D.C. 1987), aff'd in
         relevant part
, 900 F.2d 283 (D.C. Cir.),
         cert. denied, 498 U.S. 911 (1990) ............................................................................................ 6
 

        United States v. Western Elec. Co., 552 F. Supp.
         131 (D.D.C. 1982), aff'd sub nom.,
         Maryland v. United States, 460 U.S. 1001 (1983) ................................................................. 18
 

 

        MISCELLANEOUS
 

        Ameritech Memorandum in Support of Motions
         to Remove the Decree's Interexchange Restriction ............................................................ 5, 7, 8
 

        William J. Baumol & J. Gregory Sidak, Toward Competition
         In Local Telephony (1994) .................................................................................................. 4
 

        William J. Baumol, Affidavit submitted
         by AT&T with its Opposition to Original
         Proposal .................................................................................................................................... 4
 

        Dr. Mark T. Bryant, Testimony on behalf of MCI
         before the Illinois Commerce Commission,
         Dkt. No. 94-0048 (Aug. 8, 1994) ........................................................................................... 17
 

        Leslie Cauley, Tele-Communications, Motorola to Join
         Teleport for Venture in Chicago Area
, Wall Street J.,
         Oct. 12, 1994 ............................................................................................................................ 5
 

        Department of Justice and Federal Trade Commission
         Horizontal Merger Guidelines
         (April 2, 1992) .................................................................................................................. 31, 32
 

        Economics & Technology, Inc. & Hatfield Associates,
         Inc., The Enduring Local Bottleneck (February 1994) ................................................. 11
 

        Michael L. Katz & Carl Shapiro, Network Externalities,
         Competition and Compatibility, 75 Am. Econ. Rev.


Page v      

         424, (1985) ............................................................................................................................... 6
 

        MCI Corp., A Blueprint for Action: The Transition
         to Local Exchange Competition
(March 1995) .............................................................. 4, 11, 24
 

        Michigan PSC Staff, Revised Comments, March 22, 1995 ......................................................... 39
 

        Michigan PSC Staff, Comments on Draft Dated February 21, 1995 ........................................... 48
 

        Order, Dkt. No. 93-0409 (Ill. Commerce Comm'n,
         July 20, 1994) (MFS) ............................................................................................................... 4
 

        Order, Dkt. No. 94-0162 (Ill. Commerce Comm'n,
         Sept. 7, 1994) (Teleport) .......................................................................................................... 4
 

        Lawrence A. Sullivan, Affidavit submitted by
         AT&T with its Opposition to Original Proposal ................................................................... 17
 

        David A. Teece, Affidavit submitted by
         Ameritech with its Original Proposal .................................................................................... 31
 

        David A. Teece, Affidavit submitted by
         Ameritech with Reply Memorandum
         in Support of its Original Proposal ........................................................................................ 31
 

 


Page 1      

                     IN THE UNITED STATES DISTRICT COURT
                       FOR THE DISTRICT OF COLUMBIA
 

UNITED STATES OF AMERICA,

Plaintiff,

v.

WESTERN ELECTRIC COMPANY, INC.,
et al., and

AMERICAN TELEPHONE & TELEGRAPH COMPANY,

Defendants.

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

Civil Action No. 82-0192 (HHG)

 

 

               MEMORANDUM OF THE UNITED STATES IN SUPPORT OF
                ITS MOTION FOR A MODIFICATION OF THE DECREE
                       TO PERMIT A LIMITED TRIAL OF
                     INTEREXCHANGE SERVICE BY AMERITECH

 

         The United States has moved for a modification of the Decree in this case to permit a limited
        trial of interexchange service by Ameritech. As explained in the Preliminary Memorandum filed
        with that motion, the trial would begin only when Ameritech faces actual local exchange
        competition and there are substantial opportunities for more such competition; would be limited
        to certain geographic areas within the states of Illinois and Michigan; and could be terminated if
        Ameritech violates the order governing the trial or if it can no longer establish the absence of any
        substantial possibility that continuation of the trial would impede competition. The United
        States, Ameritech, and AT&T have stipulated that the proposed order filed with the motion is in
        the public interest and have consented to its entry under Section VII of the Decree.


Page 2 .       

         The Preliminary Memorandum outlined briefly the terms and conditions of the proposal.
        This Memorandum provides a more detailed explanation of the purpose, history, and structure of
        the proposed modification and the reasons why it should be approved.
I.         Purpose and General Structure of the Proposed Modification
         The proposed modification is both more limited and more profound than most requests for
        removal or modification of the Decree's line of business restrictions that have previously come
        before the Department of Justice and the Court: more limited because it proposes only a
        circumscribed trial of an otherwise prohibited service, not a permanent lifting of the restriction
        for some category of service; more profound because it would take affirmative steps toward
        understanding and achieving the conditions that might render unnecessary one of the most
        fundamental and important restrictions of the Decree.
         The proposal contemplates a three-stage process. First, the motion and proposed order
        present to the Court the rules under which the proposed trial would be conducted, and seek a
        determination that they are in the public interest. Second, before any interexchange service could
        actually begin, Ameritech would have to take certain steps to open local exchange service to
        competition, and the Department of Justice would have to determine that competitive conditions
        in the marketplace, in conjunction with the other safeguards in the order, ensure that there is no
        substantial possibility that commencement of the experiment could impede competition in
        interexchange service. (Proposed Order, カカ 9-11.) Third, after interexchange service begins,
        Ameritech would be subject to certain post-entry safeguards, including all existing equal access
        requirements, and the Department would supervise the trial and could terminate it if conditions
        required. (Proposed Order, カカ 15-17.) The Court would retain discretion to take any necessary


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        actions at any point, including review of any determinations made by the Department. (Proposed
        Order, カ 51.)
         This three-stage process recognizes that the transition to competition in local exchange
        services will be complex. No set of conditions for promoting such competition could hope to
        address in advance the dozens of complicated implementation issues that will have to be resolved
        before meaningful competition is a practical reality, rather than merely a theoretical possibility.
        As local competition develops, and as industry and regulators gain experience with ensuring the
        competitiveness of markets that depend on access to local exchange services when the principal
        local exchange carrier is a participant in those markets, it may be possible to relax some of the
        post-entry restrictions, and the proposed order makes provision for such modification. (Proposed
        Order, カ 17.)
         The process that the proposed modification would establish will help the Department, the
        Court, the telecommunications industry, and the public to gain practical experience and develop
        real marketplace facts about (1) the extent to which telecommunications markets can become
        fully competitive so that Decree restrictions might become unnecessary and (2) short of such
        fully competitive conditions, what combination of competition and safeguards might be
        sufficient to enable the Regional Bell Operating Companies ("RBOCs") to enter the market for
        interexchange services without harming competition in that market預ll in a setting that does not
        threaten substantial harm to competition in the interexchange market. Equally important, the
        Department believes that the same process will itself hasten the development of competition for
        local exchange services. It will encourage the states that are working to open up local exchange
        services to competition. And it will establish a mechanism to identify, understand, and address


Page 4 . . . . . . . .       

        the many implementation issues that will arise in the transition to competition in local exchange
        markets.
II.         Development of the Proposal
III.          Technological and Competitive Developments
         Technological changes in recent years have raised the possibility that the scope of the natural
        monopoly in local telephone service may be subject to erosion. 1 For example, in many densely
        populated urban areas, Competitive Access Providers ("CAPs") have laid their own fiber optic
        networks to serve large business customers. At present, those fiber networks are principally used
        to provide exchange access, either by supplying a direct link from the customer's premises to the
        point of presence ("POP") of the interexchange carrier ("IXC"), or by supplying only the
        transport from the central office or tandem switch of the local exchange carrier ("LEC") to the
        IXC's POP. Those same fiber networks, under the right circumstances, might be able to be used
        to provide "dialtone"擁.e., local exchange service. Indeed, two CAPs柚FS and
        Teleport揺ave already obtained certificates from the Illinois Commerce Commission to operate
        as local exchange carriers in Chicago, and another CAP, U.S. Signal (formerly known as City
        Signal), has obtained such authority to serve Grand Rapids. 2 Similarly, as cable television


Page 5 . . .       

        systems make greater use of fiber optics, those systems may also be able to provide both dialtone
        and access. 3 Although competition from CAPs has just begun to develop (and competition from
        cable companies remains largely a theoretical possibility), these technological developments
        raise important questions about the possible future extent of such competition.
IV.          Ameritech's Original Proposal
         Based in part on these technological changes, Ameritech filed with the Department and
        circulated for public comment a waiver request under Section VIII(C) of the Decree, seeking
        complete removal of the interexchange prohibition, or in the alternative, a waiver of the
        prohibition to conduct statewide trials of interexchange service in one or more states. It premised
        that request partly on the notion that the technological changes described above, plus
        developments in Federal Communications Commission ("FCC") regulatory tools and policies,
        were enough to constrain any possible anticompetitive conduct. 4 At the heart of its request,
        however, was what it called its "Customers First Plan"擁ts proposal that it would take certain
        steps and seek certain state regulatory changes that would open up the local exchange to
        competition.
         To understand the significance of the steps outlined in the Customers First Plan, it helps to
        consider some of the principal barriers facing potential entrants into local exchange service.


Page 6 . .       

        First, there are substantial legal barriers to entry in most markets. Until quite recently, the
        underlying assumption of telecommunications regulation was that local exchange service is a
        "natural monopoly" that should be provided by one entity, subject to government regulation.
        Thus, states strictly prohibited entry into local telephone service by competitors, often granting
        monopoly franchises to a single company in each market. 5 Even where states have taken steps to
        end prohibitions on entry by competitors, potential entrants have sometimes had difficulty
        obtaining required certification from state regulators.
         Second, even as legal and regulatory barriers come down, a substantial barrier remains if
        entrants must replicate the entire network of the LEC in order to provide local exchange service.
        See United States v. Western Elec. Co., 673 F. Supp. 525, 544-45 (D.D.C. 1987) ("The
        conditions that caused these monopolies to emerge in the first place . . . preclude any thought of a
        duplication of the local networks."), aff'd in relevant part, 900 F.2d 283 (D.C. Cir.), cert. denied,
        498 U.S. 911 (1990).
         Third, a fundamental characteristic of telephone markets葉he existence of network
        externalities 6 羊equires that any entrant be able to offer its customers the ability to make calls to
        and receive calls from the incumbent's customers. Because a large portion of the value of


Page 7 .       

        telephone service for a particular user depends on that user's ability to contact other users, the
        incumbent's ubiquity is an insurmountable barrier to competition, absent mechanisms for
        effective interconnection of networks.
         Ameritech's original Customers First Plan had three basic components. First, Ameritech
        promised not to oppose certification of local exchange competitors and to waive any exclusive
        franchise rights it had "if the interexchange restriction is removed, and if state and federal
        regulators adopt the other reforms proposed [by Ameritech]." Ameritech Memorandum in
        Support of Motions to Remove the Decree's Interexchange Restriction
("Ameritech's Customers
        First Memo
") at 36 (filed with the Justice Department on Dec. 7, 1993) [Appendix, Tab 6].
        Second, Ameritech offered what it characterized as "unprecedented interconnection at the local
        level," id. at 4, which would "enabl[e] [competitors'] customers to originate and terminate calls
        on the same basis as Ameritech customers, without dialing access codes or waiting for a second
        dial tone," id. at 37. Third, the Plan, Ameritech claimed, "thoroughly unbundle[d] Ameritech's
        network for resale." Id. at 38. This unbundling was designed to "enable competitors either to
        provide for themselves, or to procure from Ameritech, any facilities or functions they require,
        either one at a time or in any combination," thus obviating the need for competitors to replicate
        Ameritech's entire network. Id.
         In sum, Ameritech argued, the Customers First Plan "does away with legal barriers to entry
        by rejecting ç´ irst in the field' regulation, and . . . tears down economic barriers to competition by
        allowing full interconnection and resale." Id. at 40.


Page 8 . .       

. . . . . . . . . . . . . . . . . . . . . . . . .1.
        Inadequacies of Ameritech's Original Proposal
         The Customers First Plan as originally proposed represented an innovative and significant
        step in the right direction, because it acknowledged and sought to remove many of the barriers to
        local competition. But the Department recognized, and stressed in subsequent negotiations with
        Ameritech, that the plan neither resolved all the issues involved in breaking down those barriers,
        nor contained adequate safeguards against Ameritech's impeding competition in the
        interexchange market before those barriers were fully identified and eliminated. It thus fell short
        of Ameritech's claims in numerous respects, of which the following are illustrative.
         To begin with, the original proposal assumed that local competition would automatically
        flow from eliminating the legal bar to such competition and from the theoretical availability of
        interconnection and unbundling. "No more needs to be done to enable and encourage
        competition for local exchange service." Ameritech's Customers First Memo at 40 [Appendix,
        Tab 6]. The Department concluded otherwise, however. The terms and conditions of
        interconnection and unbundling are critical. For example, Ameritech argued that its unbundling
        proposal obviated the need for competitors to replicate the "loop" that connects the subscriber's
        premises to Ameritech's central offices. With unbundling, such competitors could connect
        Ameritech loops to their own "ports" (i.e., switches and other non-loop elements of local
        exchange service) by running trunks from their central offices to Ameritech's central offices.
        But if loops are priced too high in relation to the retail price of the bundled local exchange
        service, it will be uneconomic for even the most efficient competitor to connect Ameritech loops
        to the competitor's ports in order to offer service in competition with Ameritech. One therefore
        cannot simply assume that competition will occur; the Department must instead apply its


Page 9 .       

        traditional expertise, evaluating the competitive state of markets in light of actual market
        conditions and experience.
         Similarly, Ameritech argued that the network externality problem would be solved if
        Ameritech agreed to interconnect with other carriers, to terminate traffic originating from a
        competing carrier and destined for a customer on Ameritech's network, and to send traffic to
        other carriers when Ameritech subscribers wished to call competitors' subscribers. But the
        Department recognized that if Ameritech's prices to terminate calls from subscribers of
        competing networks to called parties on Ameritech's network are unreasonably high, competition
        could be seriously hindered. Indeed, in a decision rendered just last month, the Illinois
        Commerce Commission found that:
         . . . Illinois Bell's proposal to charge new LECs tariffed switched access rates
         to complete local traffic on its network would result in a situation in which
         wholesale compensation rates would be above retail market rates for a wide
         variety of calls. In other words, carriers would pay more in terminating
         compensation to Illinois Bell than it currently receives in revenues from its
         local usage customers. . . . [S]everal witnesses independently demonstrated
         that in most cases Illinois Bell would charge a new LEC more in access
         charges than it would charge its own local residential or business customer
         for the entire usage service, making it impossible for a new LEC to establish
         a competitive price . . . . 7
 

         Implementation issues of this kind are inevitable, and no one knows for certain whether, or
        how soon, entry into the local market will occur on a significant scale. Every scenario for the
        emergence of competition assumes continuing dependence upon Ameritech, at least for
        interconnnection and in many cases for loops and perhaps other network elements as well. This
        continuing dependence means that competition will involve complex business relationships and


Page 10      

        numerous pricing and technical issues, any one of which can make competition infeasible. The
        Department therefore concluded that Ameritech's original proposal that it be granted
        interexchange authority simultaneous with the formal lifting of legal entry barriers and adoption
        of regulatory reforms permitting unbundling and interconnection was unrealistic. That proposal
        offered no assurance that consumers would actually have alternatives available to them upon the
        adoption of such reforms, or that competitors would be able to enter sufficiently quickly or
        pervasively to prevent anticompetitive conduct by Ameritech. The potential harm to competition
        was particularly great in light of Ameritech's own argument that the ability to offer a full range
        of "one-stop shopping" services confers a great competitive advantage. If true, giving Ameritech
        such ability at a time when competitors cannot realistically offer local exchange services would
        tend to extend Ameritech's monopoly from local exchange services to the interexchange market.
        It is thus critical that actual marketplace conditions be examined to test the true economic
        feasibility of local competition before Ameritech is allowed to offer interexchange services.
         A second major flaw of the original proposal was its failure to address the issue of number
        portability. Customers are reluctant to switch to competing providers if it entails the
        inconvenience of losing their existing telephone numbers. For example, a Gallup poll of
        residential and business customers in 1994 found that 40-50% of residential customers and 70-
        80% of business customers who otherwise would consider switching local telephone service
        providers if alternatives existed were unlikely to consider such a switch if they had to change
        telephone numbers in order to so. 8 The Department therefore concluded that number portability


Page 11 . .       

        was an important issue that needed to be addressed if local competition were to play the role
        envisioned by Ameritech's plan.
         Third, the original Customers First Plan did not address competitors' access to poles,
        conduits, and rights of way. Entrants who wish to lay wire networks face formidable obstacles in
        obtaining rights of way, problems that the incumbents historically have avoided through use of
        public condemnation powers and that new entrants might be able to avoid by obtaining access to
        existing poles and conduits. Discussions between the Department and Ameritech led Ameritech
        to agree to make access available to the extent such access was in Ameritech's control, so as to
        provide the best possible opportunity for the Ameritech trial to succeed.
         Fourth, the original Customers First Plan gave Ameritech excessive latitude to market its
        interexchange service through its local exchange operations葉hrough which the overwhelming
        majority of existing customers get their local phone service and which is usually the first place
        that new customers call when they need to get phone service. The Department concluded that
        this latitude would have provided Ameritech's interexchange business a tremendous advantage
        over other interexchange carriers, attributable only to its position as the monopoly provider of
        local exchange service.
         Fifth, although the original proposal would have prohibited Ameritech from using the
        Customer Proprietary Network Information ("CPNI") gained in the course of providing access to
        competing interexchange carriers, it would have allowed Ameritech to use CPNI gained in
        providing local exchange and intraLATA toll service in marketing its own interexchange service.


Page 12 .       

         The Department concluded that this would give Ameritech a significant advantage based on its         current position as the monopoly provider of local exchange service.
         Sixth, the original proposal did not require that Ameritech provide interexchange services
        through a subsidiary separate from its local operations. Although separate subsidiary
        requirements are imperfect instruments, the Department believes they will nonetheless be useful,
        both to regulators trying to ensure that Ameritech does not cross-subsidize or discriminate, and to
        the Department in supervising the trial and evaluating its results.
         Seventh, Ameritech's original plan included departures from equal access. For example, it
        would have allowed Ameritech to put interexchange routing functions in its local switch for its
        own interexchange traffic but not for that of competing IXCs. The Department concluded that,
        in the absence of a truly competitive marketplace, this would make it virtually impossible to
        prevent cross-subsidization and discrimination.
V.          Revision of Ameritech's Proposal
         The proposed modification presented to this Court differs substantially from Ameritech's
        original proposal, suffers from none of the deficiencies identified in that proposal, and offers far
        more procompetitive potential and far fewer anticompetitive risks than that proposal. It is the
        product of thousands of hours of work over the past year by the Department as well as by
        Ameritech, state regulators, potential competitive local exchange carriers, long distance carriers,
        consumer groups, and others who filed several rounds of public comment on several versions of
        the proposal and engaged in intensive discussions with the Department. The Assistant Attorney
        General for Antitrust participated directly in many of these discussions and in the crafting of
        language for the proposed order, reflecting her strong personal commitment to the purposes of
        the 1982 Decree and to competition in telecommunications markets. Thus, although Ameritech's


Page 13      

        original proposal shares with the current proposal the important concept of taking steps to open
        the local exchange to competition as a predicate for removing the interexchange line of business
        restriction, the two proposals are otherwise far different. The current proposal is in every sense a
        joint product of the Department of Justice, Ameritech, and all of the parties that filed comments
        or participated in these discussions. The principles embodied in the current proposal have the
        support of AT&T, a decree party and major competitor in the interexchange market; Sprint, also
        a major interexchange competitor; CompTel, a trade association representing more than 150
        competitive interexchange carriers and their suppliers; America's Carriers Telecommunication
        Association ("ACTA"), a trade association of smaller interexchange carriers; MFS
        Communications, Time-Warner Communications, and Electric Lightwave, Inc., three providers
        of competing local exchange service in various parts of the country; the Association for Local
        Telecommunications Services, a trade association of competing providers of local exchange
        services; and the Consumer Federation of America and Consumers Union, two major consumer
        groups.
VI.         Detailed Explanation of the Competition-Based Criteria and Safeguards in the
        Proposed Modification

         At the heart of the proposed order is the premise that various steps are being taken by
        Ameritech and the state regulatory commissions in Illinois and Michigan, and that these steps
        will likely lead to competitive conditions that make it both safe and desirable to allow
        Ameritech, on a trial basis, to offer interexchange services in certain portions of those states (the
        "Trial Territory"). 9 Because those competitive conditions have not yet been achieved, the


Page 14 .       

        proposed order contemplates a multi-stage procedure, under which the actual trial of such
        services will not begin until Ameritech presents facts from which the Department can determine
        that such competitive conditions do, in fact, exist. The process by which that determination is to
        be made is set forth in paragraphs 9-11 of the proposed order. That process has two parts. First,
        Ameritech begins the process by certifying that certain required steps have, in fact, been taken to
        open local exchange service to competition, and by filing a compliance plan dealing with equal
        access, separate subsidiary provisions, and other post-entry safeguards. The Department will
        then investigate, take any necessary discovery, and make a determination, reviewable by the
        Court, as to whether there is sufficient competition and other sufficient assurances against harm
        to the interexchange market that the trial may safely begin.
         The proposed order also contains a number of post-entry safeguards and gives the
        Department the responsibility of supervising the course of the trial. If Ameritech violates the
        order or otherwise engages in anticompetitive conduct, the Department can require it to cease
        such conduct, ask the Court to impose civil fines, or terminate the trial.
         The required steps to foster local competition, the standard for the Department to determine
        that the interexchange trial should begin, the post-entry safeguards, and the Department's
        supervisory responsibilities are described below.
VII.          Steps to Foster the Emergence of Local Competition
 

         Paragraph 9 of the proposed order lists a number of developments with respect to local
        exchange competition that must occur before Ameritech can apply for authority to begin
        interexchange services. By design, the order does not specify in every detail the precise terms
        and conditions on which these developments must take place洋atters that are in the purview of


Page 15 .       

        the state regulators, and with which the regulators in the two trial states are already grappling in
        their efforts to foster competition. There are many issues that remain to be resolved, and it is for
        the states and the market participants, not the Department, to resolve them. On the other hand,
        the way in which those issues are resolved may have an extremely significant effect on
        competitive conditions, as may a variety of other technical and economic factors, some of which
        may be beyond the control of the regulators. The Department's traditional area of expertise, of
        course, is in evaluating the competitive structure and behavior of markets. Under the proposed
        order, therefore, the state regulators and the Department each discharge their traditional types of
        responsibilities: the states are already in the process of determining the terms and conditions
        under which the steps set forth in paragraph 9 will take place, and the Department, under
        paragraph 11 of the proposed order, will concern itself with the resulting competitive
        circumstances, and with whether those circumstances and other safeguards are sufficient to
        ensure that a trial of Ameritech interexchange entry will not harm interexchange competition.
         The specific steps required by paragraph 9 of the proposed order are as follows.

. . . . . . . . . . . . . . . . . . . . . . . . . . .1.
         Unbundling of Loops and Ports

         As discussed in Section II.B, unbundling of loops and ports is important to local competition
        because it obviates the need to replicate the LEC's entire network of distribution facilities.
        Outside of dense downtown areas, a portion of that network葉he loop connecting the customer
        premises to the main distribution frame in the central office洋ay well exhibit natural monopoly
        (or at best, duopoly) characteristics for some time to come. Unbundling is intended to address
        the natural monopoly problem, but whether it does so successfully or not depends heavily on the
        pricing of the unbundled loops and on other terms and conditions such as the speed and


Page 16 . .       

        reliability of provisioning and repair. (See Section II.C.) The proposed order recognizes this
        dependence and deals with it through a collaboration between the Department and the
        appropriate state regulatory authorities, whereby each entity acts within
        its sphere of expertise. Thus, the state regulatory authorities will regulate the pricing of loops
        and ports. 10 For Ameritech to be authorized to begin interexchange service, however, the
        Department will have to investigate and determine, among other things, that
         regulatory developments (including . . . the terms and conditions thereof) and
         market conditions offer substantial opportunities for additional local
         exchange competition . . . .
 

        (Proposed Order, カ 11(b)(ii).) Because the proposed order bases entry into interexchange service
        on an assessment of marketplace facts about competitive conditions at the time of decision, it is
        unnecessary to resolve the pricing issue熔r most of the other myriad and perhaps unforeseeable
        implementation issues擁n advance. 11


Page 17 . . .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .2.
         IntraLATA Toll Dialing Parity

         This Court recognized, at the time of the Decree, the importance of dialing parity to a
        competitive telecommunications marketplace. See United States v. Western Electric Co., 552 F.
        Supp. 131, 197 (D.D.C. 1982), aff'd sub nom., Maryland v. United States, 460 U.S. 1001 (1983).
        The proposed order requires that, before it applies to begin the interexchange trial, Ameritech
        must
 

         have made the necessary technical, operational, administrative and other
         changes to implement dialing parity for intraLATA toll telecommunications
         no later than 21 days prior to the effective date of Ameritech's authority
         . . . on terms approved by the appropriate state regulatory authority.
 

        (Proposed Order, カ 9(b).) Thus, to begin the application process, Ameritech must make the
        necessary changes to ensure that dialing parity can be implemented prior to Ameritech's
        interexchange authority. Before the Department can approve commencement of the trial, it must
        ensure that Ameritech has taken the further step of having installed and tested the capability for
        providing such parity. (Proposed Order, カ 11(d).) The Department can thus ensure that


Page 18 . . .       

        Ameritech actually implements dialing parity no later than the time it begins interexchange
        service. 12

. . . . . . . . . . . . . . . . . . . . . . . . . . .3.
         Resale of Local Exchange Service

         Another prerequisite before Ameritech can file its application with the Department is that
        steps have been taken to allow non-facilities-based (i.e., resale) competition for all classes of
        service, including residential service. (Proposed Order, カ 9(c).)
         Resale competition is not a replacement for facilities-based competition. Competition from
        exchange carriers that supply their own loops (e.g., cable systems) can help thwart discrimination
        in the pricing, provisioning, and maintenance of loop facilities, so long as adequate provisions
        are made to deal with the advantages that flow to the dominant carrier because of network
        externalities (e.g., the need to terminate calls on the dominant carrier's system, number
        portability, access to signalling resources and database information, etc.). Competition from
        exchange carriers that supply their own switching facilities but use Ameritech loops (e.g., CAPs
        connecting their switches to Ameritech loops to extend the geographic area they can serve) are
        dependent upon the appropriate pricing, provisioning, and maintenance of loop facilities. If
        those conditions are right, however, they can prevent discrimination in the provision of network
        features and functionality, excessive charges for exchange access, and so on. Pure resale
        competition, by itself, does none of these things. It brings competition only to the marketing of
        local exchange services, and it requires extensive regulation to ensure that the prices, terms, and


Page 19      

        conditions under which Ameritech offers the underlying service make resale meaningfully
        available.
         Nonetheless, resale competition is important for two reasons. First, Ameritech will be able to
        offer interexchange services very quickly and easily once it has the authority to do so, by
        reselling such services just as hundreds of other companies resell interexchange services. The
        availability of commercially feasible resale opportunities is one way to ensure that interexchange
        carriers that are not in a position to enter local exchange service quickly and easily on a facilities
        basis will have opportunities similar to Ameritech's to offer a full range of services.
         Second, the availability of resale will tend to reduce the barriers to facilities-based entry,
        because a company that already has a subscriber base as a reseller will be able to make
        investments in switches and other facilities with less risk. Just as unbundling of loops and ports
        makes it possible for competing exchange carriers to offer services outside the dense downtown
        areas where they can justify installing their own loops, so full resale of the entire local service
        (loops and ports) makes it possible to offer services before there is enough traffic to justify
        investment in a switch (or in trunks to connect more distant Ameritech central offices to an
        existing switch). Once a subscriber base is built, more investment may be justified. Such
        reductions in barriers to entry will enhance the prospects of the ultimate success of the trial.
         The requirement that there be adequate resale opportunities is thus directly tied to the
        requirement of paragraph 11 that competitive circumstances and the safeguards and supervisory
        provisions of the order ensure the absence of any substantial possibility that Ameritech could use
        its position in the local exchange market to harm competition in the interexchange market. The
        important point is that the ability of the interexchange market to function competitively not be
        harmed.


Page 20      

         As with the other provisions already discussed, it is left to the states whether non-facilities-
        based competition should be achieved by directly reselling Ameritech bundled services, or by
        renting Ameritech loops and Ameritech ports on their separate pricing schedules and selling the
        combined package as a service, or both.

. . . . . . . . . . . . . . . . . . . . . . . . . . .4.
         Pole Attachments and Conduit Space

         A fourth prerequisite is that Ameritech have implemented reasonable and nondiscriminatory
        arrangements for sharing of pole attachments and conduit space, and for competitors to secure
        access to entrance facilities, risers, and telephone closets, to the extent such arrangements are
        under the control of Ameritech. Inability to secure access to poles, conduits, entrance facilities,
        and so forth could be a significant barrier to a facilities-based competitor seeking to install its
        own loops. To the extent that this potential barrier is under Ameritech's control, Ameritech
        promises, by its consent to the proposed order, to eliminate it, thereby encouraging the
        competition that could serve as a predicate for Ameritech's entry into interexchange service. In
        many cases, of course, such barriers may not be in Ameritech's control. But whether they are or
        not, the ultimate question remains that set forth in paragraph 11: to what extent do competition,
        the potential for more competition, and the other provisions of the order constrain Ameritech's
        exercise of market power to harm competition in the interexchange market? (See Section III.B.)

. . . . . . . . . . . . . . . . . . . . . . . . . . .5.
         Interconnection

         Effective interconnection arrangements are among the most critical issues for facilities-based
        competitors. As explained above (Section II.B), competitors must be able to offer their
        customers the ability to make calls to and receive calls from anybody else who owns a


Page 21 . .       

        phone洋ost notably Ameritech's customers. Without such interconnection, the competitor's
        service essentially would be worthless. This basic need for interconnection gives rise to a host of
        complex issues, the resolution of which has important ramifications for competition. For
        example, arrangements must be made for networks to compensate each other for terminating
        calls that originate in another network. Unless properly structured, the reciprocal compensation
        arrangements can raise significant barriers to entry by potential local competitors.
         Likewise, the interconnection arrangements must be on terms that permit local dialing parity,
        so that customers of Ameritech's competitors can place local calls without suffering any
        inconvenience耀uch as dialing extra digits葉hat is not imposed on Ameritech customers.
        Local competitors must also have adequate access to various services necessary to the provision
        of local exchange service, such as unbundled signalling and 611, 911, E911, call completion, and
        TRS relay services, as well as data necessary to provide 411 (directory assistance) service.
         The proposed order does not attempt to dictate the precise resolution of each of these issues.
        Some of these issues might be resolved among the carriers without intervention by state
        regulators. If the terms are acceptable to the competitive exchange carriers, the arrangements
        will satisfy paragraph 9(e). 13 If the carriers cannot agree, regulatory approval will satisfy
        paragraph 9(e), because it would not further the public interest in competition to give each


Page 22      

        competitor a veto power over Ameritech's ability to move forward with a trial. 14 In either case,
        the ultimate question will be the competitive effects of the arrangements, which will necessarily
        be considered in connection with the assessment of competitive conditions required by paragraph
        11 of the proposed order.

. . . . . . . . . . . . . . . . . . . . . . . . . . .6.
         Number Portability

         As discussed above in Section II.C, an important element in local exchange competition is
        service provider number portability葉he ability of a subscriber to retain his telephone number
        when changing carriers. The proposed order distinguishes between two ways of achieving
        service provider number portability: true number portability and interim number portability.
        True number portability allows calls to be delivered directly to the subscriber's new exchange
        carrier without having to route traffic through the old exchange carrier and retains the full range
        of functionality (e.g., delivery of information necessary to provide caller ID functions) that
        would have been available to the subscriber in the absence of a change in service provider. Such
        true number portability is likely to involve some form of database look-up: for example, an IXC
        delivering a call into the Chicago area would use the signalling network to consult a database,
        which would supply to the service provider the information necessary to deliver the call to the
        correct exchange carrier.
         In the absence of true number portability, a variety of means exist to provide number
        portability on an interim basis. An example is remote call-forwarding. A subscriber changing
        from Ameritech to a new exchange carrier would receive a new telephone number, the first three


Page 23 .       

        digits ("NXX code") of which would be an NXX code assigned to the subscriber's new carrier.
        If a caller dialed the subscriber's old telephone number, the call would be routed to Ameritech's
        switch, since the old number would contain an NXX code assigned to Ameritech. Ameritech's
        switch would be programmed to complete the call by use of an additional circuit from its switch
        to the new exchange carrier's switch. Such interim forms of number portability may suffer
        certain drawbacks, e.g., the loss of data necessary to provide certain functions, such as caller ID;
        transmission delays as a result of the additional switching that may impair suitability for data
        transmission; and inability of the new exchange carrier to collect the access charge for
        terminating an interexchange or intraLATA toll call. 15
         The proposed order requires Ameritech to implement true number portability in the Trial
        Territory, except that if it is unable to do so as of the date 120 days before the anticipated
        implementation of intraLATA dialing parity, it may rely on interim number portability if it
        explains satisfactorily why it cannot implement true number portability as of that date and sets
        forth a plan acceptable to the Department for achieving true number portability.
         Achievement of true number portability is not totally in the control of Ameritech. It will
        require cooperation from vendors of hardware and software, such as AT&T, as well as from
        other industry participants, such as IXCs, who will be delivering traffic destined for ported
        numbers. Ameritech has already issued a Request for Proposal for the technology and
        administrative services necessary to implement true number portability. The Illinois Commerce
        Commission has ordered an industry task force to be created, under the supervision of the
        Commission staff, to deal with the issue of number portability. ICC Order, supra note 7, at 110


Page 24 . .       

        [Appendix, Tab 7]. This task force will hold workshops, at which industry participants can react
        to that RFP, propose alternative specifications, and attempt to arrive at a workable solution. The
        first of those workshops was held on April 21, 1995.
         As with many of the other steps in paragraph 9, the actual terms and conditions under which
        either true or interim number portability is offered are likely to have a major impact on whether
        there are substantial opportunities for other exchange carriers to compete. The proposed order
        requires that arrangements be made for allocating the costs of number portability that do not
        place an unreasonable burden upon competing exchange carriers, leaving to Ameritech, industry
        participants, and state regulators the task of working out the precise terms of such arrangements
        in the first instance.
         Separate from service provider number portability is the issue of location portability葉he
        ability to retain the same telephone number at a different location within a geographic area. It is
        not particularly significant for competition that location portability be available. If it is available,
        however, competition could be adversely affected if Ameritech's control over monopoly
        facilities allows it to offer such a feature while preventing its competitors from doing the same.
        The proposed order thus requires that, to the extent Ameritech is offering location portability to
        its own customers, and to the extent it is technically and practicably feasible, Ameritech make
        available to other exchange carriers, on nondiscriminatory terms and conditions, the capability to
        offer such portability.
         Nondiscrimination in this context would not mean that exchange carriers offering switching
        services in competition with Ameritech would necessarily be afforded access to features in
        Ameritech's switch. To the extent that switching facilities are competitive, and location
        portability is a service offered through such facilities, competition should encourage all


Page 25      

        competitors to differentiate their services by offering new and better features. Nondiscrimination
        would mean, however, that Ameritech could not hinder competitors offering such services
        through discrimination in the terms in which they connected to Ameritech's network or through
        other means. For example, if location portability is achieved through wiring changes at the
        central office rather than through software features in the switch, an exchange carrier competing
        with Ameritech by connecting its own switches to Ameritech loops would be placed at a
        significant disadvantage if Ameritech denied equal access to such wiring changes. Similarly, it
        would likely be discriminatory for Ameritech to refuse to offer to switchless resellers (i.e., those
        using both Ameritech loops and Ameritech ports, including switching services) the same location
        portability features it offers to its own subscribers; since Ameritech facilities are handling the
        entire call, there is no apparent reason why the same features could not be made available.

. . . . . . . . . . . . . . . . . . . . . . . . . . .7.
         Number Assignment

         Telephone numbers are the most fundamental means of interface between end users and the
        telephone network, as well as between one network and another. A competitive local telephone
        network must have fair and equal access to number resources as an essential element of
        developing telecommunications services and competing for customers. To ensure the
        competitively neutral administration of number resources, the proposed order requires Ameritech
        to have made reasonable efforts to transfer any duties it has in administering those resources to a
        neutral third party. (Proposed Order, カ 9(h).) If its efforts to transfer its duties are not successful
        by the time Ameritech applies for authorization to provide interexchange service, it must explain
        in writing why they have not been successful and what further steps it plans to take, and must
        implement a nondiscriminatory procedure for assigning numbers. The efficacy of such


Page 26 .       

        arrangements will be considered by the Department in making its determination under paragraph
        11.
VIII.          Actual Marketplace Facts Concerning the Emergence of Local Competition

. . . . . . . . . . . . . . . . . . . . . . . . . . .1.
         Procedures for Department Approval

         Completion of the above steps would not result in immediate commencement of the trial of
        interexchange service. Instead, at that point Ameritech will apply to begin the trial if it believes
        competitive circumstances in the local market warrant. Ameritech will report to the Department
        that it has taken the required steps with respect to unbundling, intraLATA toll dialing parity,
        resale of local services, pole attachments and conduit space, interconnection, number portability,
        and nondiscriminatory number assignment. In addition, Ameritech must file a compliance
        plan. 16 After Ameritech has filed both the report and compliance plan, the Department will have
        thirty days to determine whether it needs any additional information from Ameritech. Within
        sixty days after Ameritech has substantially complied with the Department's request for
        additional information or 120 days after the filing of both the report and the compliance plan,
        whichever is later, the Department will determine whether Ameritech may begin the trial. In
        making that decision, the Department will seek comments from the appropriate state regulatory
        authorities and interested persons. (Proposed Order, カ 11(a).) It may also take any other action
        reasonably necessary to make its decision, including conducting third-party discovery. (Id.,
        ï½¶ï½¶ 11(a), 49.)


Page 27 . . .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .2.
         Procedures for Court Review

         The Court may, in its discretion, review any decision of the Department, both with respect to
        commencement of the trial and otherwise. (Id., カ 51.) If the Department approves
        commencement of the trial, such approval could not go into effect for at least 30 days (Proposed
        Order, カ 13), thus allowing a period of time during which interested persons could seek a
        temporary restraining order from the Court. The Court could then establish such schedule and
        procedures for such review as it deemed appropriate under the circumstances. If the Department
        does not approve commencement of the trial upon a particular application by Ameritech,
        Ameritech does not have a right of review within the structure of the proposed order. (Proposed
        Order, カ 51.) It does, however, retain the right to seek Court action independent of the proposed
        order, under sections VII or VIII(C) of the Decree. (Id.). Ameritech is thus no worse off under
        the unreviewability provision than it would be in the absence of the proposed order. To avail
        itself of the benefits of the proposed order, however, it would have to work further toward
        creating conditions that meet the standard of paragraph 11 rather than involve the Court in
        reviewing the Department's decision. This provision gives Ameritech a strong incentive to apply
        to begin the interexchange trial only when the test for doing so is actually met. The judicial
        system is thus spared the burden of premature applications that could otherwise lead to extensive
        judicial review, and Ameritech is given a reason to provide information to the Department as
        quickly as possible, even in advance of its application where appropriate.


Page 28 .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .3.
         Substantive Standard for Department Approval

         The substantive standard for commencing the trial of interexchange service is set out in
        paragraph 11(b) of the proposed order:
                                                        To
         render an affirmative decision on Ameritech's application, the Department must find
         that
 

         (i) actual competition (including facilities-based competition) in local
         exchange telecommunications exists in the Trial Territory,
 

         (ii) the conditions specified in paragraph 9 have been substantially satisfied,
         and that regulatory developments (including but not limited to those
         developments set forth in Paragraph 9 and the terms and conditions thereof)
         and market conditions offer substantial opportunities for additional local
         exchange competition,
as evidenced by, among other things, the increasing
         availability of local exchange telecommunications alternatives for such
         customers,
 

         (iii) the conditions described in (i) and (ii) above, together with regulatory
         protections, the Department's right to terminate Ameritech's interexchange
         telecommunications authority under Paragraph 16, the transport facilities
         restrictions of Paragraph 19, the compliance plan, the limited geographic scope
         described in Exhibit A, and the other provisions of this Order, are sufficient to
         ensure that there is no substantial possibility that Ameritech could use its
         position in local exchange telecommunications to impede competition for the
         provision of interexchange telecommunications to business or residential
         customers in the Trial Territory.

 

        (Proposed Order, カ 11(b) (emphasis added).)
         Thus, the standard has three parts預ctual competition, substantial opportunities for
        additional competition, and a determination that such competition and competitive opportunities,
        together with regulation, post-entry safeguards, and the fact that Ameritech's interexchange
        service would only be on a trial basis, make it safe and desirable to begin the trial. These three
        parts of the standard are related both to each other and to the ultimate objectives of the trial.


Page 29      

         For the trial to be an ultimate success, it will have to help prove or disprove one or both of
        two propositions: (1) the competitive steps outlined above produce enough actual competition
        and opportunities for additional competition to ensure by themselves that there is no substantial
        possibility Ameritech could engage in anticompetitive conduct affecting the interexchange
        market, or (2) some combination of actual competition and opportunities for additional
        competition, together with regulation and post-entry safeguards, is sufficient to ensure the
        absence of such possibility. 17
         Paragraph 11 does not require that either of these propositions be proved before the trial
        begins; indeed, the purpose of the trial is to test these propositions. At the same time, it is
        important to ensure that the trial itself does not result in harm to competition in the interexchange
        market. Many of the same factors預ctual competition, opportunities for additional competition,
        and post-entry safeguards葉hat would protect competition in the event permanent relief were
        appropriate will also serve to protect competition during the trial. Since the premise of the trial
        is that these factors will not be known to be sufficient at the beginning of the trial, however, the
        proposed order also provides for very close supervision by the Department, including a provision
        for the Department to terminate the trial if necessary. Before beginning the trial, the Department
        is to make a determination that all of these factors, including the provision for termination,
        together will be sufficient to negate any substantial possibility that Ameritech could use market
        power in the local market to harm competition in the interexchange market.


Page 30      

         The three parts that make up that judgment are discussed in greater detail below. Because
        they are so closely related, actual competition and substantial opportunities for potential
        competition are discussed together.

. . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
         Actual Competition and Substantial Opportunities For Additional Competition

         Competitive outcomes can generally be assured if there is a sufficient level of actual
        competition洋ultiple competitors actually producing and selling the good or service. . Theoretically, some markets can produce competitive outcomes even if they do not contain multiple
        competitors actually producing and selling the good or service. One situation in which such
        outcomes may occur is where firms not currently producing or selling the relevant product in the
        relevant area would start doing so quickly, and without the expenditure of significant sunk costs,
        in response to a small but significant price increase. If these firms are sufficiently numerous that
        the incumbent firm cannot maintain prices above the competitive level, then the market will
        behave competitively. Cf. Department of Justice and Federal Trade Commission Horizontal
        Merger Guidelines,
ァ 1.32 (April 2, 1992) [hereinafter "1992 Merger Guidelines"]. Such a
        market is said to be "contestable."
         It is hard to think of a market less likely to be "contestable" than local exchange service.
        Sunk costs in this industry are, in a word, gigantic. Perhaps recognizing this, Ameritech's
        original waiver request was supported by an affidavit and a reply affidavit that spoke not of
        "contestability" but of something Ameritech's expert called "effective" or "as-if" contestability.
        Affidavit of David J. Teece カ 41 (Nov. 29, 1993) (filed with the Department of Justice in support
        of Ameritech's Original Proposal on Dec. 7, 1993) [Appendix, Tab 13]; Reply Affidavit of David
        J. Teece at 3-8 (Apr. 6, 1994) (filed with the Department of Justice on Apr. 12, 1994) [Appendix,
        Tab 14]. By this he meant that Ameritech's unbundling of loops and ports would allow


Page 31 . . . .       

        competitors to treat those assets as if they were not sunk costs, freely entering and exiting the
        industry in response to competitive conditions by renting only what they needed at a given
        moment in time from Ameritech.
         Such an argument, however, is highly speculative. It assumes that state regulators will get
        the prices of those loops and ports exactly right, precisely duplicating the prices that would
        obtain in a competitive market. (See Section II.C.) It further assumes that Ameritech could not
        discriminate in the provisioning or maintenance of loops or ports or in the terms and conditions
        of interconnection, and that competitors will not incur substantial sunk costs in other elements of
        their operation. In short, on the current state of the record, the Department regards the suggestion
        that unbundling would make local telephone markets behave "as-if" they were contestable as
        both unproven and implausible.
         A market with only one firm could also behave competitively if longer-term entry (i.e., with
        sunk costs) into the market is so easy that the incumbent firm could not profitably behave
        anticompetitively (e.g., maintain a price above competitive levels or洋ore relevant here蓉se a
        monopoly position in that market to adversely affect competition in an adjacent market). For
        entry to be that easy, it would have to be "timely, likely, and sufficient in its magnitude,
        character and scope to deter or counteract the competitive effects of concern." 1992 Merger
        Guidelines,
ァ 3.0. Ameritech argues that unbundling, interconnection, and the other steps it is
        taking pursuant to state regulatory action and paragraph 9 of the proposed order will make entry
        that easy.
         As a practical matter, however, it is impossible to evaluate that argument in the abstract,
        without the existence of some actual competition to guide the way. Once there are significant
        actual competitors, one can begin to ask questions such as:


Page 32 .       

              How were those competitors able to enter? What certification and other
                regulatory requirements did they have to meet, and how long did it take? Is
                there any reason other competitors would not be able to do the same?
 

              Is the availability of such competing service expanding? Are competitors
                encountering significant barriers to such expansion?
 

              To what extent are competitors entering by renting loops from Ameritech as
                opposed to building their own loop plant, either for the whole of their local
                exchange business or as a way of extending the reach of their network? To the
                extent that competitors have to build some of their own facilities, how long
                does that take, and how many other competitors could do the same?
 

              Are competitors able to serve a wide range of customers throughout the Trial
                Territory, or are they limited to niche markets?
 

              To the extent that not all customers have competitive alternatives available to
                them, could Ameritech discriminate against just those customers that have no
                alternatives, or would anticompetitive behavior against those customers
                necessarily cause it to lose so many other customers that Ameritech could not
                profitably persist in the anticompetitive behavior?
 

          The proposed order does not specifically state how much actual competition is necessary to
         satisfy paragraph 11(b). Nonetheless, the foregoing discussion suggests the implicit level: there
         must be enough actual competition to provide an empirical basis for answering these kinds of
         questions, and the answers must indicate that there are substantial additional opportunities for
         competition and that these opportunities will be sufficient, in combination with the safeguards
         and supervisory provisions of the order, to deter Ameritech from behaving anticompetitively. To
         provide such answers requires more than a single competitor serving niche markets but less than
         the level of actual competition that would suffice in and of itself to justify permanent removal of
         the interexchange restriction, without the safeguards and supervisory provisions that will
         accompany the trial (including the right of the Department to terminate the trial and the ability of
         the Court to review the Department's determinations).


Page 33      

          The proposed order also emphasizes that there must be facilities-based competition in the
         Trial Territory. As discussed in Section III.A.3, resale competition is not a perfect substitute for
         facilities-based competition. Facilities-based competition can discipline a wide range of
         anticompetitive conduct that would be left untouched by resale. Thus, the Department will look
         closely at the extent of facilities-based competition in determining whether the standards of
         paragraph 11 are met.
IX.              Determination That the State of the Market, Safeguards, and Supervisory Provisions
          Make It Safe to Begin the Trial

 

          In addition to actual competition and ease of entry, the proposed order relies on supervisory
         provisions and post-entry safeguards, as more fully described in Section III.C. For example, the
         Department may terminate Ameritech's interexchange authority if it no longer believes that there
         is no substantial possibility that continuation of the trial would impede competition. (Proposed
         Order, カ 16.) To authorize commencement of the trial, then, the Department must determine that
         actual competition, substantial opportunities for additional competition, and these other
         supervisory provisions and safeguards are sufficient to ensure that going forward with the trial
         will not create any "substantial possibility that Ameritech could use its position in local exchange
         telecommunications to impede competition for the provision of interexchange
         telecommunications." (Proposed Order, カ 11(b)(iii).) The assurance against harm to competition
         must protect both business and residential customers in the Trial Territory. (Id.)


Page 34 .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .1.
          Other Factors the Department May Consider

          The proposed order specifically highlights a number of additional factors that the Department
         may consider in making the determination under paragraph 11 to proceed with the trial.
X.           Certification, Licensing, Franchising, and Similar Requirements
 

          Implicit in the concept that there are substantial opportunities for additional local exchange
         competition is the premise that certification, licensing, franchising, and similar regulatory and
         legal requirements are not significantly impeding the development of such competition. State
         and local regulation serves important public policy objectives, such as protecting consumers
         from deception and ensuring that carriers have adequate financial backing. In states such as
         Illinois and Michigan, which have state policies favoring competition and in which there is
         already a recent history of granting certificates to competitors, it is the Department's expectation
         that such requirements would be narrowly tailored to achieve such public policy objectives
         without impeding competition significantly. Nonetheless, this factor is specifically mentioned in
         the proposed order as an issue for the Department to consider, because state and local
         government policies can have a major and even decisive impact on whether and how fast
         competition will develop.
XI.           Ordering, Provisioning, and Repair Systems
 

          There are two different provisions in the proposed order dealing with electronic access to
         ordering, provisioning, and repair systems. First, if Ameritech wishes to make such systems
         available to the Ameritech interexchange subsidiary, it must offer such access, on
         nondiscriminatory terms and rates, to unaffiliated carriers. (Proposed Order, カ 26.) Second, in
         making its decision under paragraph 11, the Department may take into account the extent to


Page 35 . . .       

         which Ameritech offers unaffiliated carriers access equivalent to that used in Ameritech's local
         exchange operations
(whether or not Ameritech's interexchange subsidiary is given access).
         (Proposed Order, カ 11(c)(ii).)
          The requirement in paragraph 26 is a matter of equal accessï½­putting other carriers in a
         position equal to Ameritech's interexchange subsidiaryï½­and is absolute. The requirement in
         paragraph 11 is more judgmental. It recognizes that there could be technical reasons why it
         would not be practicable for Ameritech to provide access to certain systems to anyone outside
         Ameritech's local exchange operations, including Ameritech's interexchange subsidiary. At the
         same time, it recognizes that lack of such access could have a considerable impact on the
         prospects for local competition, and thus specifically provides for the Department to consider the
         issue and take it into account.
XII.              Supervision and Safeguards
          When the interexchange trial begins, there will be actual local exchange competition and
         substantial opportunities for additional such competition, but no firm assurance that the competi
         tive state of the market will suffice by itself to thwart any anticompetitive conduct that          Ameritech might attempt in the interexchange market. Therefore, the proposed order contains
         supervisory provisions and post-entry safeguards, designed for use during the trial, to
         supplement such competition and ensure that there is no substantial possibility that Ameritech
         could use market power in the local market to harm competition in the interexchange market
         during the trial.
          As competition develops, many of the post-entry safeguards may become unnecessary to
         ensure the absence of any such substantial possibility, and the proposed order provides for their
         removal as appropriate. (Proposed Order, カ 17.) The proposed order does not specifically


Page 36 .       

         provide for Ameritech's interexchange authority to be made permanent and the Department's
         supervisory role to be terminated, because Sections VII and VIII(C) of the Decree already
         establish the appropriate mechanism and standard for permanent relief.
          The Department is required to conduct a comprehensive review of all aspects of the trial
         within three years of Ameritech's interexchange authority under the proposed order. (Proposed
         Order, カ 18.)
          The specific supervisory provisions and safeguards are as follows.

. . . . . . . . . . . . . . . . . . . . . . . . . . .1.
          Terminability of the Trial

          If Ameritech violates the order, or if the Department no longer believes that there is no
         substantial possibility that continuation of the trial would impede competition, Ameritech's
         interexchange authority can be terminated (Proposed Order, カ 16), subject to review by the Court
         (Proposed Order, カ 51). This termination provision ensures that, even if the opportunities for
         local exchange competition at the start of the trial and other safeguards turn out not to be
         sufficient to prevent Ameritech from taking actions that harm competition in the interexchange
         market, any such harm will be short-lived and insubstantial.
          During the comment process, a number of commenters suggested that it would be difficult
         for the Department to exercise this authority. In response to these concerns, a provision was
         included in the proposed order to require Ameritech's compliance plan to supply, prior to
         approval of its interexchange service, a credible plan for orderly withdrawal from the provision
         of interexchange telecommunications in the event Ameritech's authority to offer interexchange
         telecommunications is discontinued. (Proposed Order, カ 10(j).) Such a plan might include, for
         example, a procedure for balloting customers or for reverting them to their previous


Page 37 .       

         interexchange carrier. Moreover, the proposed order makes clear that financial hardship to
         Ameritech resulting from such discontinuance shall not be a ground for opposing such
         discontinuance. (Proposed Order, カ 16.)

. . . . . . . . . . . . . . . . . . . . . . . . . . .2.
          Self-reporting

          The proposed order requires Ameritech to develop a plan for detecting and reporting
         violations of the order or of the compliance plan, and to report any such violations and any
         corrective action taken. (Proposed Order, カカ 10(i), 15.)

. . . . . . . . . . . . . . . . . . . . . . . . . . .3.
          Orders to Discontinue Conduct

          If the Department determines (a) that Ameritech is violating any of the terms of the order, its
         compliance plan, or additional conditions imposed on Ameritech in connection with approval of
         its interexchange service, or (b) that other conduct by Ameritech may impede competition for
         interexchange telecommunications in the Trial Territory, the Department may require Ameritech
         to discontinue such violations or other conduct. Ameritech bears the burden of proof in resisting
         such a requirement. (Proposed Order, カ 15.)

. . . . . . . . . . . . . . . . . . . . . . . . . . .4.
          Civil Fines

          In the event of a violation by Ameritech, the proposed order gives the Department the
         authority to ask the Court to impose civil fines. (Id.)


Page 38 . . . .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .5.
          Limited Geographic Scope

          The proposed trial is limited initially to the portion of the Chicago LATA that is in the state
         of Illinois and to the Grand Rapids, Michigan, LATA. Focusing on the state of competitive
         conditions on a LATA-by-LATA basis ensures that the competitive analysis takes into account
         differences not just in state regulatory schemes, but also in demographic and other conditions.
         Chicago was chosen because there is widespread agreement that, of all the areas in the Ameritech
         service territory, the potential for competition葉hough still embryonic擁s most advanced there.
         Grand Rapids was chosen because the first competing exchange carrier in Michigan, U.S. Signal
         (formerly known as City Signal), has been certified to serve a portion of that territory and was
         the subject of a detailed interconnection order issued by the Michigan Public Service
         Commission. Thus, it seems appropriate for the Department to focus first on those two areas and
         to be prepared to act with respect to those areas within the period set forth in paragraph 11(a).
          The inclusion of these two areas in the Trial Territory does not mean that the trials in those
         two areas necessarily must proceed simultaneously. Competitive conditions in one of the areas
         may justify proceeding with an interexchange trial before such conditions have evolved in the
         other area. Further, explicit provision is made for expansion of the Trial Territory in those two
         states, and each area in the two states will stand on its own merits, governed by the standard in
         paragraph 11(b). 18 (See Proposed Order, カ 17.) As with other determinations under the proposed


Page 39 .       

         order, the Court may, in its discretion, review any decision to expand the Trial Territory. (Id.,
         ï½¶ 51.) If the Department approves expansion, such expansion could not go into effect for at least
         30 days (Proposed Order, カ 17), thus allowing a period of time during which interested persons
         could seek a temporary restraining order from the Court. A decision by the Department not to
         expand the Trial Territory would also be reviewable. (See Proposed Order, カ 51.)
          Most important, the designation of those two areas as comprising the initial Trial Territory,
         and of those two states as being eligible for expansion of the Trial Territory within the
         framework of the order, is not meant in any way to discourage the ongoing efforts of the other
         Ameritech states (Indiana, Ohio, and Wisconsin)熔r similar efforts underway or that may arise
         in the states in which other RBOCs operate葉o bring the benefits of local competition to the
         consumers in their states, completely independent of any interexchange entry by Ameritech in
         those states. Local competition promises benefits to consumers separate from any benefits they
         may get as a result of interexchange competition from Ameritech. Moreover, the development of
         such competition can only hasten the day when interexchange entry by Ameritech熔r other
         RBOCs謡ill be appropriately granted under Section VII or VIII(C), wholly apart from the
         proposed order now before the Court.

. . . . . . . . . . . . . . . . . . . . . . . . . . .6.
          Types of Services

          Paragraph 7 of the proposed order limits Ameritech to providing certain enumerated types of
         interexchange services that have a clear nexus to the Trial Territory, i.e., services as to which the
         fact that competition exists in the Trial Territory is relevant even if competition does not exist
         elsewhere in the country. Thus, for most switched services, as to which the interexchange carrier


Page 40 .       

         is selected by the party placing the call, Ameritech could provide interexchange service
         originating from the Trial Territory. (Proposed Order, カ 7(a).) For services such as inbound 800
         service, which is ordinarily carried by the interexchange carrier selected by the billed party at the
         terminating location, Ameritech could provide service terminating at subscribers' locations in the
         Trial Territory. (Proposed Order, カ 7(b).) Ameritech may also provide certain other types of
         services normally provided by interexchange carriers to their subscribers, such as calling card
         and private line services, with limitations to ensure an adequate nexus to the Trial Territory.
         (Proposed Order, カカ 7(c)-(d).) There may also be other types of services that Ameritech may
         wish to offer in the future in order to stay competitive with the offerings of other IXCs. Because
         these services may not yet exist, it is difficult to enumerate them, much less to determine in
         advance whether any potential harm to competition is adequately addressed by the proposed
         order. Hence, a mechanism is provided to allow Ameritech to provide such services, subject to
         disapproval by the Department. (Proposed Order, カ 7(e).) Under this provision, Ameritech
         would have to give at least 30 days notice of such services, and the Department, after soliciting
         comments from interested persons, could disapprove the offering of such services. A relatively
         short notification and objection period is provided because it is anticipated that this provision
         will principally be used to respond to competitive offerings in the marketplace; however, a
         decision not to disapprove the services would be without prejudice to later withdrawal of
         authority under paragraphs 15 or 16 of the order if necessary.


Page 41 .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .7.
          Ownership of Transport Facilities

          Paragraph 19 of the proposed order provides that Ameritech shall not own any of the
         transport facilities used to provide interexchange telecommunications. Instead it must contract
         for such facilities for a term not to exceed five years. This safeguard serves two purposes: to the
         extent Ameritech has not made substantial investments in facilities in the ground, it makes it
         easier to terminate the trial; and it reduces Ameritech's incentive to discriminate in favor of those
         facilities because it makes it harder for Ameritech to capture all of the benefits of such
         discrimination.
XIII.              Separate Subsidiary Requirements
          Paragraph 20 of the proposed order provides for the separation of the Ameritech subsidiary
         providing interexchange services from the Ameritech local exchange operations. The provisions
         generally track the more stringent approach taken by the Federal Communications Commission
         in its Computer Inquiry II proceedings and rules and in the requirement of separate subsidiaries
         for RBOC provision of commercial mobile radio services, rather than more lenient approaches
         relying on cost accounting instead of structural separation (such as the approach taken by the
         FCC in its Computer Inquiry III proceeding 19 ). The more stringent structural separation
         approach is more appropriate for a trial of interexchange services, at least in the early stages
         before competition is fully developed and before additional information about the need for
         separate subsidiary requirements is gained from the trial itself. 20


Page 42 . . .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .1.
          Equal Access Provisions

          Under the proposed order, the equal access provisions of the Decree would remain in full
         force; the order would grant Ameritech only a temporary and limited modification of the line of
         business restriction of Section II(D)(1) of the Decree and would not relieve Ameritech of any
         other restrictions. (Proposed Order, カ 4.) In addition, a number of provisions are added to adapt
         the equal access concept to a situation in which an Ameritech subsidiary is one of the
         interexchange carriers interconnecting with the Ameritech local exchange operations. These
         provisions deal with equality in the type, quality, and pricing of interconnection, exchange
         access, and local exchange telecommunications (カカ 21, 25); technical information, standards,
         collocation, and other terms of interconnection (カカ 22-24); availability of service order,
         maintenance, and other telecommunications support systems (カ 26); 21 billing services (カ 27);
         location number portability (カ 28); White Pages directory listings (カ 29); and customer
         information (カカ 30-32). 22


Page 43 .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .2.
          Marketing Restrictions

          The marketing provisions of the order (カカ 33-47) deal with two principal issues: (1) "equal
         access"-type obligations preventing Ameritech's local exchange operations from assisting the
         Ameritech interexchange subsidiary in its marketing efforts, and (2) the circumstances under
         which Ameritech can make one-stop shopping arrangements (i.e., the ability of customers to get
         their local and long distance calling from one, full-service carrier) available to business and
         residential customers, respectively. The "equal access" obligations (カカ 34, 36, 38-39, 44)
         embody the basic principles of existing obligations, with modifications to ensure that those
         principles will be effectuated when Ameritech competes in the provision of interexchange
         services. The provisions regarding one-stop shopping (カカ 35, 41-43, 45-47) are intended to avoid
         giving an inappropriate competitive advantage to, or imposing an unfair handicap on, any carrier.
         The order would allow Ameritech to offer one-stop shopping to business or residential          customers only when at least one other carrier is marketing services on a comparable basis. 23


Page 44      

          The proposed order does not set out specific conditions under which Ameritech can engage in
         "bundle-pricing" of its interexchange services with local exchange or intraLATA toll services
         (i.e., pricing whose availability is contingent upon the subscriber's selection of Ameritech for
         both such services). Whether such bundle-pricing is appropriate, and the types of conditions
         needed to prevent harm to competition in interexchange services, depends on the state of
         competition. The issue of "bundle-pricing" has therefore been made an element of Ameritech's
         compliance plan (Proposed Order, カカ 10(e)-(f)). Ameritech will tailor its proposal to the
         competitive circumstances then existing, and the Department will review it in light of those
         circumstances.

. . . . . . . . . . . . . . . . . . . . . . . . . . .3.
          Compliance Plan

          The proposed order requires Ameritech to file a compliance plan prior to obtaining approval
         to begin its trial of interexchange services. (Proposed Order, カ 10.) The compliance plan
         reinforces the separate subsidiary, equal access, and marketing provisions of the order by
         requiring Ameritech to spell out detailed plans for implementation of those requirements.
         (Proposed Order, カカ 10(a)-(d), (g).) It also provides the mechanism for determining the
         appropriate market and other conditions for Ameritech's offering of bundled pricing (カカ 10(e)-
         (f)) and for the Ameritech interexchange subsidiary's ownership, leasing, or control of any of the
         facilities it uses to provide local exchange telecommunications and exchange access services
         (カ 10(h)). The compliance plan also will include procedures for Ameritech to detect and self-
         report violations of the order or the compliance plan (カ 10(i)) and for Ameritech's withdrawal
         from interexchange service should it be required to do so (カ 10(j)).


Page 45 . . . .       

. . . . . . . . . . . . . . . . . . . . . . . . . . .4.
          Other Conditions

          Ameritech's entry into interexchange services may also be conditioned on any other terms
         that may be appropriate to further the purposes of the order. (Proposed Order, カ 11(e).)
XIV.          The Proposed Modification Should Be Approved Because It Is in the
          Public Interest.

 

I.          The Public Interest Standard Applies to Entry of the Proposed Modification.
          In reviewing the proposed modification, the Court should apply the "public interest"
         standard. The motion was filed by the United States under section VII of the decree, and
         Ameritech and AT&T have joined the United States in stipulating to the proposed order.
          The Court of Appeals has held that a proposed modification satisfies the public interest test
         "`so long as the resulting array of rights and obligations is within the zone of settlements
         consonant with the public interest today.'" United States v. Western Electric Co., 993 F.2d 1572,
         1576 (D.C. Cir.) (quoting United States v. Western Electric Co., 900 F.2d 283, 307 (D.C. Cir.),
         cert. denied, 498 U.S. 911 (1990)) (emphasis in original), cert. denied, 114 S. Ct. 487 (1993).
         The public interest test is "flexible," allowing the government to choose among various decree
         provisions that could further the public interest in competition. When the government and the
         party whose decree obligations are at issue agree on a decree modification proposal, as is the case
         here,
          the court's function is not to determine whether the resulting array of rights
          and liabilities "is one that will best serve society," but only to confirm that
          the resulting "settlement is `within the reaches of the public interest.'"
 


Page 46 . . . .       

         993 F.2d at 1576 (citing and quoting 900 F.2d at 309; United States v. Bechtel Corp., 648 F.2d
         660, 666 (9th Cir.), cert. denied, 454 U.S. 1083 (1981); and United States v. Gillette Co., 406 F.
         Supp. 713, 716 (D. Mass. 1975)) (emphasis in original). Therefore, a court is to approve a
         consensual decree modification under the public interest standard unless "it has exceptional
         confidence that adverse antitrust consequences will result用erhaps akin to the confidence that
         would justify a court in overturning the predictive judgments of an administrative agency." 993
         F.2d at 1577.
          The Department welcomes this Court's careful review of the proposed modification under
         this standard. We are confident that the text of the proposed order, the explanation that we are
         providing in this Memorandum, and the comments of other interested persons will give the Court
         ample reason for entering the proposed order.
II.           The Proposed Modification Is In the Public Interest.
          The proposed modification both avoids harm to competition in the interexchange market and
         yields affirmative benefits to competition. Accordingly, it is in the public interest and should be
         approved and entered by this Court.

. . . . . . . . . . . . . . . . . . . . . . . . .1.
          The Proposed Modification Is Structured to Avoid Harm to Competition in the Interexchange
          Market.

          Far from giving the Court "exceptional confidence that adverse antitrust consequences will
         result," the proposed modification gives the Court ample assurance that no adverse consequences
         will occur. As this Memorandum has explained, the order we ask the Court to enter would
         permit only a limited trial of Ameritech provision of interexchange services, and even that trial
         could not begin until the Department (and the Court if it reviews the Department's
         determination) is satisfied that local competition exists and will continue to develop in the Trial


Page 47 . . .       

         Territory. In addition, the interexchange services that the modification permits would remain
         subject to a variety of safeguards, including the power of the Court or the Department to
         terminate the trial at any time.
          The proposed order thus ensures that competition in the interexchange market will not be
         harmed by the modification預 fact underscored by AT&T's stipulation that the proposed
         modification is in the public interest and by the support of Sprint, CompTel, and ACTA.

. . . . . . . . . . . . . . . . . . . . . . . . . . .2.
          The Trial Will Provide Affirmative Benefits to Competition.

          Not only is the proposed order structured to prevent any harm to competition, but it also
         presents a valuable opportunity affirmatively to advance the public interest in competition.
          First, as a prerequisite to its offering of interexchange service pursuant to this modification,
         Ameritech must take specific actions to remove barriers to local competition, including those
         relating to terms of interconnection, unbundling of loops, dialing parity, and number portability.
         The proposed modification thus complements the efforts of the state regulatory commissions in
         the Ameritech region to lower such barriers, as reflected in the comments of the staff of the
         Michigan PSC on an earlier version of the proposal:
          [T]he Department of Justice (DOJ) and the Court should move forward in a
          measured fashion to permit more competition in the telecommunica- tions
          marketplace. That action, however[,] should be such that it recognizes the
          need to balance the interests of the Regional Bell Operating Companies
          (RBOC), their local and toll competitors, and residential and business
          customers in the telecommunications marketplace. That balance can be
          achieved through an approach which minimizes the potential for
          anticompetitive actions on the part of the RBOCs. This coupled with the
          coordination and recognition of appropriate State law and regulatory agency
          actions to remove barriers to entry to the State or local telecommunications
          markets should set the stage for a trial waiver of the interLATA restrictions
          currently in effect.
 

         Michigan PSC Staff Comments on Draft Dated February 21, 1995 [Appendix, Tab 16].


Page 48 .       

 

          Second, the trial will yield important information about RBOC provision of interexchange
         services. The Department, the Court, all segments of the telecommunications industry, and the
         public will be able to observe and analyze the effects of the stipulated conditions, and related
         regulatory and technological developments, on competition in local and interexchange
         telecommunications markets. We will learn much about whether local competition will develop
         to such an extent that harm to interexchange competition can be avoided, with or without other
         safeguards. We will also enhance our understanding of the importance of factors such as call set-
         up and transmission delays resulting from interim forms of number portability, consumer
         demand for one-stop shopping, the terms and conditions of interconnection, and the pricing of
         network elements in the development of such competition. If competition is not sufficient to be
         self-policing, we may learn how difficult and costly it is to monitor and prevent discrimination
         and cross-subsidization. We will also learn about what kinds of safeguards are effective and/or
         necessary.
          No trial, of course, could provide all the answers. Nonetheless, this trial should substantially
         assist in determining whether and on what terms the Decree's interexchange restriction should be
         retained, modified or removed.
          Third, the trial may yield important information about the possible benefits to interexchange
         competition from RBOC provision of interexchange services. The RBOCs have argued that the
         interexchange market, particularly for residential customers, is oligopolistic rather than
         competitive, and that RBOC entry will tend to disrupt that oligopolistic coordination, resulting in
         substantial benefits to consumers. While Ameritech has not yet presented sufficient evidence to
         substantiate this claim, actual experience may cast additional light on this argument.
 


Page 49 . .       

                                CONCLUSION
 

          The carefully crafted details of the proposed order grew out of intensive work by the
         Department and extensive consultation and negotiation with interested persons. We do not
         expect all commenters to be satisfied; in an arena filled with competing private interests, we can
         be assured that some will claim that the balance has not been struck precisely right. The issue,
         however, is whether the Department "reasonably regard[s]" the modification "as advancing the
         public interest," 993 F.2d at 1576. On that issue, the terms of the proposed order demonstrate,
         and we believe the comments of interested persons as a whole will confirm, that the proposed
         modification advances the public interest. The Court should therefore enter the proposed order
         and allow this important trial to proceed, subject to the preconditions, safeguards, and continuing
         review for which the order itself provides.
.


Page 50      

                                 Respectfully submitted,
 

 

 

 

                                 ANNE K. BINGAMAN
Assistant Attorney General

 

 

 

                                 WILLARD K. TOM
                                 Counselor to the Assistant Attorney General
 

 

 

 

                                 DAVID S. TURETSKY
                                 Senior Counsel to the Assistant Attorney General
 

 

 

 

                                 JERRY S. FOWLER, JR.
                                 Special Counsel to the Assistant Attorney General
 

                                  U. S. Department of Justice
                                  Antitrust Division
                                  Washington, D.C. 20530
202-616-0962

 

 

                                 DONALD J. RUSSELL
                                 Chief, Telecommunications Task Force
 

 

                                  U.S. Department of Justice
. . . . . . . . . . . . . . . . . . . . . . . . . .                                  555 4th Street, N.W.
                                  Washington, D.C. 20001
                                  202-514-5621
 

        MAY 1, 1995
.


FOOTNOTES

 

1 See, e.g., MCI Corp., A Blueprint for Action: The Transition to Local Exchange Competition, Tab 1 at 1 (March 1995) [Appendix, Tab 1]; William J. Baumol & J. Gregory Sidak, Toward Competition in Local Telephony 9 (1994); Affidavit of William J. Baumol at 5, submitted on behalf of AT&T as an attachment to AT&T's Opposition to Ameritech's Motions for "Permanent" and "Temporary" Waivers From the Interexchange Restrictions of the Decree (filed with the Department in opposition to Ameritech's original proposal on February 15, 1994) [that opposition cited hereinafter as "AT&T Opposition to Original Proposal"] [Appendix, Tab 2].

2 See Order, Dkt. No. 93-0409 (Ill. Commerce Comm'n, July 20, 1994) (MFS) [Appendix, Tab 3]; Order, Dkt. No. 94-0162 (Ill. Commerce Comm'n, Sept. 7, 1994) (Teleport) [Appendix, Tab 4]; In re City Signal, Inc., Application for a License to Provide Basic Local Exchange Service in the Grand Rapids Exchange, No. U-10555, 1994 Mich. PSC LEXIS 267 (Mich. Pub. Serv. Comm'n, Oct. 12, 1994) [Appendix, Tab 5].

3 Teleport is planning to test the use of cable facilities owned by Tele-Communications, Inc., ("TCI") to provide local exchange service to residential customers in the Chicago area. See Leslie Cauley, Tele-Communications, Motorola to Join Teleport for Venture in Chicago Area, Wall Street J., Oct. 12, 1994, at B5. Others are exploring similar possibilities.

4 Specifically, Ameritech asserted that "industry-wide developments . . . are themselves more than sufficient to warrant removal of the interexchange restriction." Ameritech Memorandum in Support of Motions to Remove the Decree's Interexchange Restriction at 3 (filed with the Department of Justice on Dec. 7, 1993) [Appendix, Tab 6]. The Department does not believe that the record is sufficient at this time to support this contention (either as to technological or regulatory developments), and does not base the present motion on any such contention.

5 These prohibitions were also justified as a way to promote universal service, by requiring high-margin services to subsidize below-cost services and prohibiting new entrants from "cream-skimming" those services. In recent years, progressive states have begun to explore alternative ways of ensuring universal service that would permit competition and allow consumers the benefit of the efficiencies and lower prices that competition brings.

6 Positive network externalities characterize those "products for which the utility that a user derives from consumption of the good increases with the number of other agents consuming the good. . . . [T]he utility that a given user derives from the good depends upon the number of other users who are in the same 創etwork' as he or she." Michael L. Katz & Carl Shapiro, Network Externalities, Competition and Compatibility, 75 Am. Econ. Rev. 424, 424 (1985). "The utility that a consumer derives from purchasing a telephone . . . clearly depends on the number of other households or businesses that have joined the telephone network." Id.

7 In re Illinois Bell Telephone Company Proposed Introduction of a Trial of Ameritech's Customers First Plan in Illinois, Dkt. No. 94-0096, slip op. at 97 (Ill. Commerce Comm'n, Apr. 7, 1995) [hereinafter "ICC Order"] [Appendix, Tab 7].

8 A Blueprint for Action, supra note 1, Tab 3 at 2 [Appendix, Tab 1]. A similar telephone survey was conducted in January 1994, by First Market Research Corporation, for a study sponsored by AT&T, MCI, and CompTel. That survey found that in the absence of number portability, the number of respondents interested in changing to a cable TV company for local telephone service in response to a 20% discount fell from 32.8% to 22.6%. Corresponding figures for a 10% discount and for no discount were a drop from 18% to 12.6% and from 8.7% to zero, respectively. Economics & Technology, Inc. & Hatfield Associates, Inc., The Enduring Local Bottleneck 108-10 (February 1994) [Appendix, Tab 8].

9 Initially, the Trial Territory would consist of the portion of the Chicago LATA that is located in the state of Illinois and the Grand Rapids LATA in the state of Michigan. The two LATAs could begin their interexchange trials at different times, and the Trial Territory could eventually be expanded to include other portions of those two states (but only those two states) if those portions met the competitive standard set out in the proposed order.

10 Regulatory consideration of such issues is already well underway in the trial states. In Michigan, the Michigan PSC adopted on an interim basis a pricing scheme for unbundled loops that was proposed by City Signal, a CAP which in 1994 was granted a license to provide local service in the Grand Rapids LATA. Under the interim scheme, Ameritech will charge City Signal $8 for a residential loop and $11 for a business loop. The Commission will further address these issues in an upcoming generic proceeding, to commence June 1, 1995, and to be completed no later than nine months thereafter. In the matter of the Application of City Signal, Inc., for an Order Establishing and Approving Interconnection Arrangements with Ameritech Michigan, Case No. U-10647, at 85-95 (Mich. Pub. Serv. Comm'n, Feb. 23, 1995) [hereinafter "City Signal Order"] [Appendix, Tab 9]. In Illinois, the Illinois Commerce Commission heard extensive testimony on Ameritech's proposed pricing of unbundled loops and ports, disapproved certain aspects of that pricing, and required that Ameritech file new tariffs to ensure that the sum of prices for unbundled network functions not exceed the price of bundled functions and to reduce and equalize the contribution that those prices would make to common costs. ICC Order, supra note 7, at 60-61 [Appendix, Tab 7].

11 The issue of "sub-loop unbundling" is dealt with in similar fashion. AT&T and others have contended that merely unbundling loops from ports does not go far enough. Instead, AT&T contends that local service should be unbundled into at least twelve basic network elements: distribution, concentration, feeding, end office switching, dedicated line transport, common transport, tandem switching, databases used in signaling, packet switching of signaling from the originating central office, packet switching of signaling at the destination, links from the packet switches to data processors and storage points, and operator services. Affidavit of Lawrence A. Sullivan, submitted by AT&T in its Opposition to Original Proposal, at 29-30 (filed with the Department of Justice on Feb. 15, 1994) [Appendix, Tab 10]. Advocates for this position argue, for example, that a provider of personal communications services ("PCS") might be able to provide a wireless connection from the home to a neighborhood node, and then use Ameritech facilities to get from the neighborhood node to the central office. Testimony of Dr. Mark T. Bryant on behalf of MCI before the Illinois Commerce Commission, at 10-11 (Dkt. No. 94-0048, Aug. 8, 1994) [Appendix, Tab 11]. Ameritech responds that such an approach could lead to the uneconomic stranding of significant amounts of its investment, to no real purpose since the facilities can be made available to competitors on a nondiscriminatory basis and since continued use of Ameritech facilities whose costs are already sunk would be in the interests of consumers. The proposed order does not require sub-loop unbundling, but makes clear that this resolution is without prejudice to the power of a state to require such further unbundling. (Proposed Order, カ 1(m).) Moreover, it makes clear that the Department may consider the competitive effects of such unbundling (or lack thereof). (Id.)

12 State law or regulatory requirements intended to benefit competition in the intraLATA toll market may require Ameritech to implement intraLATA toll dialing parity before Ameritech has met the conditions in カ 11 of the proposed order. In that case, intraLATA toll dialing parity would come into effect before Ameritech commences interexchange service.

13 The proposed order does not displace state regulation, however. (See Proposed Order, カ 3.) State regulators may choose to regulate arrangements even when consented to by the carriers involved. In allowing paragraph 9(e) to be satisfied by consent of the other exchange carriers, we recognize that unequal bargaining power may lead a competitive exchange carrier to agree to unsatisfactory terms. That is precisely why the provisions of paragraph 9 are not a checklist that will lead automatically to Ameritech's entry into interexchange service. The ultimate issue will always be the competitive results of the negotiated arrangements, as tested against actual marketplace facts. (See Section III.B.) Thus, because the proposed order requires that the Department analyze market facts and assess competitive circumstances, the proposed order gives Ameritech the incentive to negotiate in good faith and arrive at a procompetitive agreement with competitive exchange carriers.

14 Of course, the reasons advanced by a competing carrier as to why the proffered interconnection arrangements are inadequate may have a bearing on any assessment of competitive circumstances.

15 . . .See, e.g., A Blueprint for Action, supra note 1, Tab 3 at 5-10 (discussing shortcomings of interim number portability) [Appendix, Tab 1].

16 The compliance plan, which deals principally with post-entry safeguards, is discussed in more detail in Section III.C, below.

17 The Department is currently investigating claims that regulation and post-entry safeguards are sufficient to ensure that there is no substantial possibility that an RBOC could engage in anticompetitive conduct, without the market-opening measures contemplated in the proposed order, in connection with the Motion of Bell Atlantic Corporation, BellSouth Corporation, NYNEX Corporation, and Southwestern Bell Corporation to Vacate the Decree. (Bell Atlantic has since withdrawn from that motion.) Ameritech is not advancing that proposition at this time, however, and the proposed trial is not designed to test such claims.

18 The staff of the Michigan PSC, in its comments on an earlier version of the proposal, urged the Department to include the Detroit and Lansing LATAs in the Trial Territory. Revised Comments of the Staff of the Michigan Public Service Commission (Mar. 22, 1995) [Appendix, Tab 15]. The Department does not believe this change to be appropriate, because it is too early to tell how widely different areas of the state will vary in the availability of competitive alternatives and the ability of such alternatives to guard against harm to competition in the interexchange market. We stress, however, that the modification provisions of the proposed order establish sufficient flexibility to deal appropriately with whatever competitive conditions should arise.

19 The FCC's order removing structural separation requirements was vacated and remanded by the Ninth Circuit. California v. FCC, 39 F.3d 919 (9th Cir. 1994), cert. denied, 63 U.S.L.W. 3721 (U.S. April 3, 1995). Further proceedings on remand are pending at the FCC.

20 Even under the FCC's Computer Inquiry II approach, certain kinds of services can be shared between the interexchange subsidiary and other affiliates. These are enumerated in カ 20(g). To the extent that any such sharing is carried out in a way that harms competition, the Department and the Court retain the power to take corrective action under カカ 15-16, as well as to take that fact into account in evaluating the progress of the trial under カ 18.

21 The proposed order calls for "equivalent" rather than identical order, maintenance, and support systems, to account for the possibility that access to such systems may involve the use of different interfaces because of the different requirements of different carriers' computer systems and because of Ameritech's need to protect the security of its systems. The access must, however, be equivalently convenient; the provision would not be satisfied by providing electronic connections to Ameritech's interexchange subsidiary but only fax machines to its competitors.

22 Among the restrictions on access to customer information is a provision that the Ameritech interexchange subsidiary may not have access to customer proprietary network information ("CPNI") as defined by the FCC, except in the same manner that CPNI is available to unaffiliated carriers. This would mean, for example, that unlike the Ameritech local exchange operations, the Ameritech interexchange subsidiary would have to obtain the affirmative consent of the local exchange operations' customers in order to get local and intraLATA toll usage patterns of those customers. At one point, Ameritech expressed concern that this restriction would put it at a marketing disadvantage compared to AT&T, which could target the marketing of one-stop shopping services to its more lucrative interexchange customers, based on their long-distance usage patterns, which would be available to AT&T without such affirmative consent because they would relate to services as to which AT&T was the subscribers' provider. Ameritech concluded, however, that it could overcome this disadvantage if it could start seeking such affirmative consent from Ameritech local exchange customers as soon as possible. Since nothing in the existing Decree would appear to prohibit the seeking of such consent before the trial begins or even before the proposed order is entered, so long as customers are not misled as to the actual extent of Ameritech's authority to offer interexchange service, Ameritech withdrew this concern.

23 In some cases, such as the provision of interexchange and intraLATA toll services by the interexchange subsidiary (カカ 41, 45) and the provision of Centrex service to business customers (カ 43), the proposed order provides for the offering of such services immediately upon the commencement of Ameritech's authority to offer interexchange telecommunications, because other carriers are already offering such services on a "one-stop-shopping" basis.

Updated August 18, 2015