Wireline Competition Under the 1996 Act
E. Addressing monopoly leveraging concerns: section 271
As we noted in part I of this chapter, the political quid pro quo for saddling incumbents with the “local competition” obligations of sections 251 and 252 was liberation of the Bell companies from the line-of-business restric-tions of the AT&T consent decree. In section 271, Congress replaced the decree with statutoryline-of-business restrictions and created a mechanism for the Bell companies to apply to the FCC for authorization, on a state-by-state basis, to enter the wireline long distance market within their tra-ditional service regions. To win such authorization, the Bells needed, in effect, to demonstrate full compliance with the underlying local competi-tion requirements within the relevant state and also needed to set up a sep-arate long distance affiliate, as required by section 272.43
In 1996, the Bell companies served about 80% of U.S. lines. The only other incumbent of comparable size was GTE; the rest of the nation’s incumbents spanned the range from single-exchange family-owned carriers in remote towns to the “mid-sized” incumbents, such as Southern New England Telephone in Connecticut, and hybrid carriers such as Sprint, whose long distance operations tended to overshadow its nonetheless sig-nificant local exchange operations. Congress subjected the Bell companies alone to special regulatory restrictions on the provision of services in mar-kets adjacent to the local exchange marmar-kets that they dominated. These included not just the long distance market, but also the markets for telecommunications equipment manufacturing, “electronic publishing,”
and “alarm monitoring.”44These three additional line-of-business restric-tions were much less competitively significant than the primary restriction on entry into the long distance market, and we do not address them here.
The stated reason for treating the Bell companies more strictly than all other incumbents, including GTE, was the special nature of their local mar-kets: they served by far the greatest number of densely populated urban areas, and their “footprints” (service areas) were large and contiguous.
Conditioning long distance entry on satisfaction of the underlying local
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competition obligations was considered necessary to keep the Bell compa-nies from leveraging their traditional dominance in these key markets to win anticompetitive advantages in the market for long distance voice and data services.45The animating discrimination and cross-subsidization con-cerns were similar to those that had led to the Bell System’s break-up in 1984, although the cross-subsidization concern was largely allayed by the advent of price cap regulation (see chapter 2). Another reason for treating the Bells differently was maintenance of the industry status quo. They were already subject to comprehensive restrictions under the 1984 AT&T con-sent decree, and their immediate entry into the long distance market would have threatened the livelihoods of stand-alone long distance carriers like AT&T and MCI. Also, no one seriously suggested that Congress should have imposed important newrestrictions on the smaller ILECs (or GTE) just to bring them into regulatory parity with the Bell companies.
The Bells spent several years in the late 1990s arguing in various courts that this specially disadvantageous treatment violated, among other consti-tutional provisions, the ban on “bills of attainder”—i.e., legislative “pun-ishments” imposed against named entities. These arguments ultimately failed,46 although the Bells did manage to pick up some dissenting votes along the way. The notable weakness in their constitutional challenges was that, with trivial exceptions, section 271 and its companion provisions made the Bells better off than they would have been under continued enforcement of the AT&T consent decree, which Congress simultaneously lifted. The courts thus concluded that these provisions could hardly be characterized as “punitive.” Also, the Bell companies themselves had lob-bied hard for congressional enactment of the 1996 Act. Their subsequent attack on the constitutionality of section 271 thus struck some observers, including perhaps the reviewing courts, as disingenuous and at odds with common sense. As the Fifth Circuit remarked, section 271 gave the Bell companies “a clear delineation of what they needed to do to achieve a lift-ing of all the old [consent decree] restrictions in the future—certainly a step up, from the [Bell companies’] perspective, from being under [the consent decree court’s] perpetual supervision. It is perhaps for this reason that the [Bell companies] have apparently consistently represented, outside of liti-gation, that they were pleased with the Act.”47
Having failed in court to invalidate section 271 altogether, the Bell companies recommitted themselves to the hard work of earning section
271 authorization on a state-by-state basis. The essential challenge was to show the FCC (i) that competitors had in fact entered the local market in a given state, (ii) that the relevant Bell company would cooperate in per-mitting them to keep doing so, and (iii) that the Bell company had estab-lished a structurally separated long distance affiliate to make it more difficult to engage in (and easier to detect) anticompetitive conduct of the kind that had led to the AT&T break-up.48In most but not all cases, the most important disputes concerned the second of these showings. Section 271 sets up a 14-point checklist—the regulatory equivalent of an excep-tionally rigorous auto inspection—to judge the Bell companies’ compliance with their interconnection, network element, and resale obligations under sections 251 and 252. The central issues in most section 271 proceedings related, first, to the Bell companies’ demonstrated proficiency in processing and completing competitors’ orders for network elements (largely by means of automated systems) and, second, to the consistency of the Bell companies’ rates for those network elements with the FCC’s TELRIC methodology.
Before filing a section 271 application with the FCC, a Bell company typically spent several years improving its wholesale performance in a given state and earning the recommendation of the relevant state public utility commission.49 Theoretically, the Justice Department—which had developed an expertise in this area by helping to administer the AT&T con-sent decree—played an important role in the section 271 process by sub-mitting, for each application, a recommendation of its own, to which the FCC was required to give “substantial weight.”50 Starting in 1999, how-ever, the FCC ended up deferring much more to the state commissions than to the Justice Department.
By the end of 2003, the four Bell companies—Verizon, BellSouth, SBC, and Qwest—had all secured section 271 authority to offer long distance services for all states in their respective regions. Their success in this process now allows them to offer long distance services at very low incre-mental cost to their existing base of local exchange customers. Even more important, completion of the section 271 process entitles the Bell compa-nies to provide lucrative voice and data services to nation- and region-wide
“enterprise” customers: large businesses with far-flung branch offices.
AT&T, MCI, and (to a lesser extent) Sprint have traditionally led this mar-ket for essentially three reasons. First, the technological expertise required to provide complex telecommunications services to large businesses is quite
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sophisticated, and these carriers have spent years mastering it. Second, a carrier’s name recognition and perceived reliability count for a lot from the perspective of an enterprise customer’s chief technology officer, given the ruinous damage that a major service outage can do to its business. And, third, the line-of-business restrictions at issue—which prohibited the Bell companies from carrying either voice or data transmissions across pre-scribed regulatory boundaries—kept them from competing for the most profitable contracts with these enterprise customers. The Bell companies’
new ability to compete for that business is likely the greatest benefit to them of entering the long distance market.
Section 271 remains important to the industry, although far less so than in 1996, when the Bell companies had not yet received long distance authorization for their states. The FCC retains the authority to rescind sec-tion 271 approval from, halt future long distance marketing by, or (more realistically) impose substantial fines on any Bell company that falls out of compliance with the substantive standards of section 271.51The threat of such sanctions gives the Commission extra leverage in compelling the Bell companies to play fairly even after they have won section 271 approval.
Also, as discussed below and in chapter 5, the Commission has construed the section 271 checklist to impose on the Bell companies limited leasing obligations even for certain network elements that do not meet the
“impairment” standard for unbundling under section 251, which applies to incumbent local exchange carriers generally. Section 271 was chiefly designed to play a transitional role, however, and that transition has taken place.
III. UNEs and the “Impairment” Standard
Having summarized the key wireline provisions of the 1996 Act, we now turn to the specific policy disputes to which they apply. By far the most contentious and expensively litigated of these disputes relate to the scope of a competitor’s rights to lease an incumbent’s unbundled network ele-ments (UNEs) at regulated cost-based rates. Here we address the scope of a competitor’s right to lease components of the traditional telephone net-work.In chapter 5, we will address the distinct set of issues relating to leas-ing rights for next generation broadband facilities.