Opinion ID: 543181
Heading Depth: 2
Heading Rank: 3

Heading: The BOC Separation Order

Text: 63 In preparation for the January 1984 restructuring of the Bell System, the FCC opened a proceeding to determine whether and how the Computer II rules should be applied to the divested BOCs. 14 In its BOC Separation Order, the FCC stressed that the BOCs enjoyed the same monopoly power through their ownership of the local exchanges that AT & T had long enjoyed. The Commission noted that the seven regional BOCs, although smaller than AT & T, remained titans in the telecommunications industry. 15 The divestiture of AT & T did not eliminate the Bell System's control over local exchange facilities; it simply transferred that control from a single national company to seven regional BOC holding companies. Throughout its order, the FCC insisted that the BOCs' monopoly power and control over the local exchange bottlenecks would give them both the incentive and the ability to cross-subsidize and to provide inferior network access to enhanced services competitors. BOC Separation Order, 95 F.C.C.2d at 1125-39. 64 In the BOC Separation Order rulemaking proceeding, the BOCs argued that divestiture had eliminated the need for Computer II 's structural separation requirements. The FCC rejected this argument because the BOCs had inherited AT & T's monopoly power and control over access to the telecommunications network. In the Commission's view, the critical fact was that each BOC would retain ownership of the local exchange monopolies in the region in which it operated. As the Seventh Circuit observed in approving the FCC's order: 65 It is still the case, no less than before the divestiture, that if you want to have telephone service and are located in an area served by a Bell operating company you must get your access line from that company. Hence the operating companies have monopolies of basic telephone service in many important markets.... 66 .... 67 ... The basic source of AT & T's monopoly power was not the manufacture of telecommunications equipment or even the ownership of the nation's long-distance lines; it was the operating companies' control of access to the telecommunications network. The inheritors of the Bell monopoly are the [BOCs].... The worst bottlenecks in this industry are local. 68 Illinois Bell, 740 F.2d at 471, 473. Such bottleneck control, in the Commission's view, created the same danger of anticompetitive activity that existed before divestiture. BOC Separation Order, 95 F.C.C.2d at 1134-35. 69 The FCC also determined in its order that non-structural regulations on BOC cost-accounting and network-access practices would be ineffective safeguards against anticompetitive behavior by the BOCs. Absent a structural separation rule, the FCC found, the BOCs could install their own enhanced services equipment within the local networks, and would be free to market enhanced services through the same organizations used for basic telephone service. For example, the FCC found that 70 if joint marketing were permitted, the personnel who contact customers to market regulated services could be selling ... enhanced services at the same time. Difficult, sometimes impossible, problems of fairly allocating the costs of marketing between regulated and unregulated accounts would again occur. 71 BOC Separation Order, 95 F.C.C.2d at 1130. This integrated operation of regulated and unregulated activities would, in the FCC's words, be impossible to monitor for cross-subsidization. Id. The Commission found that accounting regulations were insufficient to ensure that the BOCs were properly allocating the costs of providing each service in the charges passed on to consumers. Because the services were so closely related, the Commission reasoned, the BOCs could easily reclassify enhanced services costs or joint costs as basic telephone service costs, without being detected by the FCC. See BOC Separation Order, 95 F.C.C.2d at 1130-31. For the same reason, the Commission rejected the BOCs' argument that state regulatory commissions, which set rates for intrastate basic telephone services, could effectively prevent improper cost-shifting to ratepayers. Because state ratemaking, like FCC ratemaking, is based on the cost of providing service, state regulators would encounter the same difficulties as the FCC in determining whether a BOC was properly allocating costs between enhanced services and basic telephone service. See id. at 1130-31. 72 Analogous enforcement problems, in the FCC's view, would beset efforts to use network-access rules to assure that the BOCs would not provide inferior access to competitors. Because of the BOCs' exclusive control over the connection and switching equipment of the local exchanges, it would be difficult for the Commission to know whether the BOCs were providing competitors with transmission services of comparable quality at comparable prices. By integrating their enhanced services equipment into the telephone network, the BOCs could favor their own enhanced services with superior signals and switching capacities without being detected. The BOCs could also engage in subtle tie-in practices in which they conditioned the availability of transmission services on the purchase of their own enhanced services or equipment. See id. at 1135. 73 In contrast, the FCC found that structural separation continued to be an effective means of preventing cost-shifting and discrimination. It viewed structural separation as essentially a prophylactic measure. The separate subsidiary requirement forces the BOCs to produce and market enhanced services independent of basic telephone services, and maintain different books, different staffs, and different equipment premises for each service. This separation eliminates the problem of determining the proper allocation of joint costs, and makes it difficult for the BOCs to masquerade enhanced services costs as basic telephone service costs. BOC Separation Order, 95 F.C.C.2d at 1131. It also reduces the chance of discrimination by putting a BOC's enhanced services subsidiary on substantially the same footing as the subsidiary's competitors. Like its competitors, the subsidiary must deal with the BOC at arm's length in purchasing transmission services, and must maintain its enhanced services equipment at a location separate from the BOC's local exchange facilities. The subsidiary thus receives its transmission services along the same telephone lines, and through the same switching systems, as its competitors. In the FCC's words, [i]f a BOC's separate entity is required to obtain access to the network in the same fashion as would a competing supplier, the provision of inferior access to a BOC rival would be much easier to detect. Id. at 1136. 74 In mandating structural separation, the Commission made clear that its regulations were designed to protect the integrity of two distinct markets--the unregulated market for enhanced services and the regulated market for basic telephone service. In part, the separation requirements were designed to benefit participants in the enhanced services market by creating an even playing field for the BOCs' competitors. If the BOCs were prevented from either cross-subsidizing their own enhanced services or discriminating against the enhanced service offerings of their competitors, then free and fair competition would flourish in the growing industry. BOC Separation Order, 95 F.C.C.2d at 1132-37. Structural separation also protected the basic telephone service market by preventing the BOCs from extracting, through cost-shifting, monopoly rents from captive telephone consumers. The ratepayers--that is, ordinary telephone customers--would not be forced to subsidize the BOCs' expansion into the data processing business. See id. at 1129.