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

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

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

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

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

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.

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

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.

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.

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, ¶¶ 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, ¶¶ 15-17.) The Court would retain discretion to take any necessary actions at any point, including review of any determinations made by the Department. (Proposed Order, ¶ 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, ¶ 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—all 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 the many implementation issues that will arise in the transition to competition in local exchange markets.

Development of the Proposal

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. 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"—i.e., local exchange service. Indeed, two CAPs—MFS and Teleport—have 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. Similarly, as cable television systems make greater use of fiber optics, those systems may also be able to provide both dialtone and access. 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.

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. At the heart of its request, however, was what it called its "Customers First Plan"—its 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. 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. 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—the existence of network externalities—requires 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 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 'first in the field' regulation, and . . . tears down economic barriers to competition by allowing full interconnection and resale." Id. at 40.

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 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 . . . .

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 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. The Department therefore concluded that number portability 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—through 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. 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.

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 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.

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"). Because those competitive conditions have not yet been achieved, the 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.

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—matters that are in the purview of 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.

Unbundling of Loops and Ports

As discussed in Section , 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—the loop connecting the customer premises to the main distribution frame in the central office—may 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 reliability of provisioning and repair. (See Section .) 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. 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, ¶ 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—or most of the other myriad and perhaps unforeseeable implementation issues—in advance.

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, ¶ 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, ¶ 11(d).) The Department can thus ensure that Ameritech actually implements dialing parity no later than the time it begins interexchange service.

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, ¶ 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 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.

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.

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 .)

Interconnection

Effective interconnection arrangements are among the most critical issues for facilities-based competitors. As explained above (Section ), competitors must be able to offer their customers the ability to make calls to and receive calls from anybody else who owns a phone—most 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—such as dialing extra digits—that 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). 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 competitor a veto power over Ameritech's ability to move forward with a trial. 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.

Number Portability

As discussed above in Section , an important element in local exchange competition is service provider number portability—the 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 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.

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 , at 110 [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—the 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 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.

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, ¶ 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 arrangements will be considered by the Department in making its determination under paragraph 11.

Actual Marketplace Facts Concerning the Emergence of Local Competition

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. 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, ¶ 11(a).) It may also take any other action reasonably necessary to make its decision, including conducting third-party discovery. (Id., ¶¶ 11(a), 49.)

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., ¶ 51.) If the Department approves commencement of the trial, such approval could not go into effect for at least 30 days (Proposed Order, ¶ 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, ¶ 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.

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, ¶ 11(b) (emphasis added).)

Thus, the standard has three parts—actual 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.

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.

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—actual competition, opportunities for additional competition, and post-entry safeguards—that 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.

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.

Actual Competition and Substantial Opportunities For Additional Competition

Competitive outcomes can generally be assured if there is a sufficient level of actual competition—multiple 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, § 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 ¶ 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 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 .) 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—more relevant here—use 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, § 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:

•	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).

The proposed order also emphasizes that there must be facilities-based competition in the Trial Territory. As discussed in Section , 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.

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 . 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, ¶ 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, ¶ 11(b)(iii).) The assurance against harm to competition must protect both business and residential customers in the Trial Territory. (Id.)

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.

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.

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, ¶ 26.) Second, in making its decision under paragraph 11, the Department may take into account the extent to 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, ¶ 11(c)(ii).)

The requirement in paragraph 26 is a matter of equal access putting other carriers in a position equal to Ameritech's interexchange subsidiary and 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.

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, ¶ 17.) The proposed order does not specifically 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, ¶ 18.)

The specific supervisory provisions and safeguards are as follows.

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, ¶ 16), subject to review by the Court (Proposed Order, ¶ 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, ¶ 10(j).) Such a plan might include, for example, a procedure for balloting customers or for reverting them to their previous 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, ¶ 16.)

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, ¶¶ 10(i), 15.)

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, ¶ 15.)

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.)

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—though still embryonic—is 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). (See Proposed Order, ¶ 17.) As with other determinations under the proposed order, the Court may, in its discretion, review any decision to expand the Trial Territory. (Id., ¶ 51.) If the Department approves expansion, such expansion could not go into effect for at least 30 days (Proposed Order, ¶ 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, ¶ 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)—or similar efforts underway or that may arise in the states in which other RBOCs operate—to 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—or other RBOCs—will be appropriately granted under Section VII or VIII(C), wholly apart from the proposed order now before the Court.

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 is selected by the party placing the call, Ameritech could provide interexchange service originating from the Trial Territory. (Proposed Order, ¶ 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, ¶ 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, ¶¶ 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, ¶ 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.

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.

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). 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.

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, ¶ 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 (¶¶ 21, 25); technical information, standards, collocation, and other terms of interconnection (¶¶ 22-24); availability of service order, maintenance, and other telecommunications support systems (¶ 26); billing services (¶ 27); location number portability (¶ 28); White Pages directory listings (¶ 29); and customer information (¶¶ 30-32).

Marketing Restrictions

The marketing provisions of the order (¶¶ 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 (¶¶ 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 (¶¶ 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.

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, ¶¶ 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.

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, ¶ 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, ¶¶ 10(a)-(d), (g).) It also provides the mechanism for determining the appropriate market and other conditions for Ameritech's offering of bundled pricing (¶¶ 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 (¶ 10(h)). The compliance plan also will include procedures for Ameritech to detect and self- report violations of the order or the compliance plan (¶ 10(i)) and for Ameritech's withdrawal from interexchange service should it be required to do so (¶ 10(j)).

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, ¶ 11(e).)

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

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.'"

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—perhaps 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.

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.

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 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—a 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.

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 telecommunications 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].

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.

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.

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