Court Opinion

ID: 4127821
Source: CourtListenerOpinion
Date Created: 2017-02-18 00:33:29.758597+00
Date Added: 2024-06-11T14:31:38.608051
License: Public Domain

TO BE PUBLISHED IN THE OFFICIAL REPORTS

                               ATTORNEY GENERAL'S OPINION

                                        Opinion No. 94-209
                                         February 9, 1994

Requested by: PUBLIC UTILITIES COMMISSION

Opinion by:     DANIEL E. LUNGREN, Attorney General

                David Stirling, Chief Deputy Attorney

                           General 

                Roderick E. Walston, Chief Assistant

                           Attorney General

                Thomas Greene, Assistant Attorney

                           General

                Thomas P. Dove, Supervising Deputy

                           Attorney General

                Lindsay Bower, Deputy Attorney General

        THE PUBLIC UTILITIES COMMISSION has requested an advisory opinion, pursuant to
Public Utilities Code section 854, on the competitive effects of the proposed acquisition of McCaw
Cellular Communications, Inc. by American Telephone and Telegraph.
                                         CONCLUSIONS

        (1)	 The proposed acquisition should not by itself adversely affect competition in the markets
             for telephone long distance or cellular local or regional services.

        (2)	 The potential benefits to the public of the merger would be enhanced if the Bell
             Operating Companies were permitted to provide cellular long distance services in
             competition with the merged entity.

Accordingly, we have concluded that the acquisition will not adversely affect competition within the
meaning of section 854(b)(2).
                                    OUTLINE OF ANALYSIS

                                                                                      PAGE

INTRODUCTION	                                                                              1

I.	         PRIOR PROCEEDINGS AND THE NATURE OF THIS OPINION                               3

        A.	 Prior Proceedings                                                              3

        B.	 This Advisory Opinion                                                          4

        C.	 Evidentiary Basis of This Opinion                                              5

II.	          THE MERGER                                                                   5

        A.	   AT&T and McCaw Long Distance Telephone Sevices                               7

        B.    McCaw Local Cellular Services	                                              11

        C.    Regional Cellular and Cellular Long Distance Services	                      12

        D.    AT&T Wireless Equipment Manufacturing	                                      15

III.	      THE RELEVANT MARKETS                                                           16

        A. The Relevant Interexchange Service Markets	                                    18

        B. The Relevant Markets for Local Cellular Services	                              19

        C. The Relevant Markets for Regional Cellular Services	                           20

IV.	          THE MFJ, REGIONAL CELLULAR COMPETITION, AND CELLULAR

              BYPASS                                                                      23

V.	         THE NATURE AND COMPETITIVE EFFECTS OF THE MERGER                              30

        A.	 The Vertical Integration of McCaw Cellular and AT&T Long Distance Operations

                                                                                          31

            1.	 The Efficiencies                                                          32

            2.	 The Merger, the MFJ, and Barriers to Entry                                35

            3.	 AT&T Opposition to the Generic Wireless Motion and the Noerr Pennington

                Doctrine                                                                  37

        B. The Horizontal Consolidation of the Long Distance Operations	                  38

        C.	 AT&T as a Potential Competitor in the Relevant Markets for Cellular

            Services                                                                      40

VI.	          CONCLUSION                                                                  41

                                         INTRODUCTION

        Pursuant to Public Utilities Code section 854, the American Telephone and Telegraph
Corporation ("AT&T"), Ridge Merger Corporation ("Ridge"), and McCaw Cellular Communications,
Inc. ("McCaw") have applied for authorization from the California Public Utilities Commission
("PUC" or "Commission") to transfer to AT&T indirect control of certain telecommunications utilities
currently owned by McCaw. On November 30, 1993, the PUC requested that this office render an
opinion on the "effects this proposed merger could have on competition." This memorandum is
submitted in response to that request.

         Various federal and state agencies are also reviewing the merger, which the applicants hope
to culminate before the May 1994 auction of PCS licenses by the Federal Communications
Commission ("FCC"). The merger has been contested both in California and at the federal level. The
Division of Ratepayer Advocates ("DRA"), Pacific Telesis Group and its affiliates ("Pacific Telesis"
or "PacTel"), the Cellular Reseller Association and other groups protested the merger in the instant
proceedings on competitive and other grounds. As of this date, the applicants have successfully settled
with all of the California protestants, except for Pacific Telesis and the Cellular Agents Association.

        In parallel proceedings before the District Court and the FCC, Pacific Telesis and the other
Bell Operating Companies challenged the merger primarily on the grounds that the merged entity
would be able to provide "clustered," cellular long distance, and other integrated services more
economically than the Bell Operating Company ("BOC") cellular affiliates.1 AT&T is the leading
supplier of long distance telephone services and one of the largest manufacturers of wireless network
equipment in the United States, while McCaw is the nation's largest provider of cellular services.
Competition between AT&T and McCaw is not significant, and the services and operations of the two
companies are highly complementary. Thus, AT&T long distance facilities, its network expertise, and
equipment manufacturing operations will significantly enhance the ability of the cellular operation to
provide cellular services. For that reason, the BOCs have proposed that conditions be imposed upon
AT&T to ensure competitive parity between the parties.2
        We conclude that the benefits to the public of this merger will depend upon the extent to
which the consolidated entity will be subjected to competition. The merger of AT&T long distance
operations with McCaw will not by itself adversely affect competition within this state. However,
competition for cellular services within regional markets encompassing California -- which the merged

    1. BellSouth Corporation has also moved the District Court for a declaratory ruling that the
merger would violate Section I(D) of the MFJ and cannot be consummated without a modification
of that decree. Motion of BellSouth Corporation for a Declaratory Ruling that AT&T's Proposed
Acquisition of McCaw Cellular Communications, Inc. Would Violate Section I(D) of the AT&T
Consent Decree and Cannot Be Consummated without a Modification of the Decree, United States
v. Western Elec. Co., No. 82-0192 HHG (D.D.C. Dec. 2, 1993). DOJ supports the BellSouth
motion. See Response of the United States to Motion of BellSouth for a Declaratory Ruling,
United States v. Western Elec. Co., No. 82-0192 HHG (D.D.C. Jan. 5, 1994).

  2. See Affidavit of John T. Stupka, attached to Petition of Southwestern Bell Corporation to
Impose Conditions or, in the Alternative, to Deny, In re American Telephone and Telegraph and
Craig O. McCaw, No. ENF 93-44 (F.C.C. Oct. 28, 1993) ("Stupka Affidavit").
entity is clearly designed to serve -- would be enhanced if the BOCs were permitted to provide long
distance services to their wireless customers. Accordingly, we recommend that the PUC support the
pending petition of the BOCs before DOJ to lift wireless services from the restrictions of Section II
of the Modified Final Judgment ("MFJ"3). Finally, we understand that the United States Department
of Justice is reviewing the effect of the merger of the AT&T wireless equipment division with McCaw
and we defer to the judgment of that agency on that national issue.

I.      PRIOR PROCEEDINGS AND THE NATURE OF THIS OPINION

 A.     Prior Proceedings

         Like the recently completed merger between GTE and Contel, this transaction is to be
accomplished by merging Ridge, a wholly-owned subsidiary of AT&T, with and into McCaw. Upon
completion of the merger, Ridge will cease to exist as an independent entity, control of McCaw will
transfer from Craig McCaw to AT&T, and McCaw will become a wholly-owned subsidiary of AT&T.
The merger will also indirectly transfer control of various California utilities currently owned or
controlled by McCaw.

          Although they view this acquisition as a mere "transfer of indirect control" of McCaw's
operations, and not as an acquisition of or by a public utility within the meaning of California Public
Utilities Code section 854,4 the applicants submitted the transaction to PUC review under the criteria
set forth in that provision.5 Under the terms of the settlement agreement entered into with DRA on
December 8, 1993,6 AT&T also agreed to provide "equal access" to all customers within six months

   3. U.S. v. American Tel. & Tel. Co., 552 F. Supp. 131 (D.D.C. 1982), aff'd. sub nom Maryland
v. United States, 460 U.S. 1001 (1983).

   4. Thus, the applicants contend that, "It is far from clear whether subsections (b) and (c) of
section 854 are triggered by the proposed transaction since it involves no utility making an
acquisition and no utility is being acquired." Applicants' Pre-Hearing Conference Statement at 11
n. 10, In re Joint Application of the American Telephone and Telegraph Company, et al. (P.U.C.,
October 6, 1993).

   5. See Settlement Agreement at 3, In re Joint Application of the American Telephone and
Telegraph Company, et al., (P.U.C. Dec. 8, 1993) ("The implementation of this Agreement is
contingent upon final and complete approval of the Transaction under Section 854 by the
Commission and consummation of the Transaction by the applicants."). See also Transcript at 28­
40, In re Joint Application of the American Telephone and Telegraph Company, et al., (P.U.C.
Nov. 8, 1993).

  6. Settlement Agreement, In re Joint Application of the American Telephone and Telegraph
Company, et al., (P.U.C. Dec. 8, 1993) ("Settlement Agreement").

                                                  2

of the effective date of the merger,7 to treat McCaw as a separate entity for two years, and to comply
with existing restrictions on the "bundling" of long distance and cellular services and products.8 The
Cellular Reseller Association and Public Advocates subsequently joined the agreement, which Pacific
Telesis and the Cellular Agents Association have opposed. The applicants now contend there is no
material issue of fact warranting a hearing and request that the Commission adopt the settlement
agreement in its current form. The United States Department of Justice ("DOJ"), the FCC, and Judge
Harold Greene (who presided over the divestiture of AT&T) have not completed their review of this
transaction.
 B.     This Advisory Opinion

         This opinion letter is the fourth letter submitted by this office under the 1989 amendments to
Section 854.9 Public Utility Code section 854 characterizes the opinion as advisory. Consequently
this document does not control the PUC's finding under section 854, subdivision (b)(2). However, the
Attorney General's advice is entitled to the weight commonly accorded an Attorney General's opinion
(see, e.g., Moore v. Panish (1982) 32 Cal. 3d 535, 544 ("Attorney General opinions are generally
accorded 3 great weight"); Farron v. City and County of San Francisco, (1989) 216 Cal. App. 3d 1071).
 C.     Evidentiary Basis of This Opinion

         The opinion we reach here is based upon substantial evidence, although we obviously do not
have access to the full record that will be ultimately developed during the PUC's hearings. As
requested, we render this opinion before commencement of those hearings. During the course of our
review, we held numerous discussions with the parties and PUC staff and obtained substantial
materials from them pertaining to the issues discussed. Additional conversations were held with other
members of the industry and with staff of other regulatory and governmental agencies. We have also
relied upon an industry expert, Mr. Charles P. Mason, to obtain further background information and
an understanding of the workings of the industry.

II.     THE MERGER

   7. PacTel contends that "AT&T's equal access commitment is . . . hollow" and "is not the same
as the BOCs' equal access obligations." Comments on the Proposed Settlement between
Applicants AT&T and McCaw and the Division of Ratepayer Advocates, In re Joint Application of
the American Telephone and Telegraph Company et al., at 8, 10 (P.U.C., Jan. 3, 1994).

   8. In its Comments, PacTel argued that: "[I]n many circumstances bundling is pro-consumer.
But in the context of this merger . . ., bundling by AT&T/MCCI before full competition could be
harmful to consumers." Id. at 13.

   9. See Opinion of the Attorney General on Competitive Effects of Proposed Merger of GTE
and Contel Corporations, Submitted Pursuant to PU Code Section 854(b)(2); Opinion of the
Attorney General on the Proposed Acquisition of San Diego Gas and Electric Company by
SCEcorp, the Parent of Southern California Edison Co., 73 Cal.Ops.Atty.Gen. 366 (1990).

                                                  3

         This merger is motivated by the applicants' hope to combine AT&T's long distance telephone
network, expertise and capital with McCaw's existing cellular system.10 AT&T businesses are
concentrated in five groups,11 but the "core" of the company's business is still related to its long
distance operations. In 1992, AT&T generated revenues of $40 billion from sales of long distance
services. The company is also a leading equipment manufacturer, with $8 billion in 1992 sales coming
from telecommunications network products and $3 billion from computer products.

         McCaw, which resells AT&T long distance services to its cellular customers and purchases
much of its equipment from AT&T, is already the leading operator of conventional local and regional
cellular services in the United States. See Application, supra, at 6. The company also owns various
broadcast operations and is a significant provider of other wireless services, such as paging,12 air-to­
ground, and satellite communications.13 In 1992, McCaw revenues exceeded $1.7 billion and
company debt totalled approximately $5 billion.14 The financial and operational synergies15 between
the AT&T and McCaw operations will allow the surviving entity to create the country's leading
national cellular system.

        Both companies do a substantial amount of business in California, although neither of the
parent corporations is regulated as a public utility in this state.16 AT&T provides telecommunications
services in California through a regulated subsidiary, AT&T Communications of California, Inc.
Additional California revenues are generated through AT&T's unregulated operations. Application,
supra, at 5.

          McCaw affiliates which provide local cellular services and which are California public
utilities include Alpine CA-3, Cagal Cellular Communications Corp., Fresno Cellular Telephone

   10. See Application at 21, In re Joint Application of the American Telephone and Telegraph
Company et al. (P.U.C., Aug. 24, 1993) ("Application"); AT&T's and McCaw's Opposition to
Petitions to Deny and Reply to Comments at 39, In re American Telephone and Telegraph Co. and
McCaw Cellular Communications, Inc., ENF 93-44 (F.C.C. Dec. 2, 1993) ("AT&T FCC
Opposition").

   11. See Application, supra, at 5.
   12. McCaw is the fifth largest paging service in the United States with over 500,000
subscribers throughout the country. Affidavit of James L. Barksdale at ¶11, attached to AT&T
FCC Opposition, supra ("Barksdale Affidavit").

   13. See Petition of Southwestern Bell Corporation to Impose Conditions or, in the Alternative,
to Deny at 12, In re American Telephone and Telegraph and Craig O. McCaw, No. ENF 93-44
(F.C.C. Oct. 28, 1993) ("Southwestern Bell Petition").

   14. See Barksdale Affidavit, supra, at ¶ 13.

   15. See Barksdale Affidavit, supra, at ¶¶ 24-26.

   16. Applicants' Pre-Hearing Conference Statement, supra, at 2, n. 1.

                                                   4

Company, Napa Cellular Telephone Company, Redding Cellular Telephone Company, Sacramento
Cellular Telephone Company, Salinas Cellular Telephone Company, Santa Barbara Cellular Systems,
Inc., Stockton Cellular Telephone Company, and Ventura Cellular Telephone Company. McCaw has
combined all of these franchises in its "California/Nevada cluster." McCaw also has substantial
indirect interests in Bay Area Cellular Telephone Company and Los Angeles Cellular Telephone
Company. McCaw affiliates authorized to resell long distance services, including resale to cellular
providers, include California Intercall and Cellular Long Distance Co. In addition, Airsignal of
California, Inc. is authorized to operate radio telephone utility systems in various parts of this state.
A.      AT&T and McCaw Long Distance Telephone Services

         Both AT&T and, to a relatively limited extent, McCaw offer long distance services to their
customers. AT&T is unquestionably the leading provider of long distance services routed over
landline facilities in the United States. However, much of the long distance services McCaw provides
are actually purchased in "bulk" from AT&T and other long distance carriers and "resold" to cellular
customers. McCaw also completes over its own network a significant portion of the long distance
calls which are placed within integrated clusters of McCaw operations. See Southwestern Bell
Petition, supra, at 24.

         Long distance telephone services include both "interLATA"17 and "intraLATA"
communications, as those terms were defined under the MFJ.18 For most conventional landline calls,
the local telephone companies, or "local exchange carriers" ("LECs"),19 provide the wires or the "local

  17. "LATA" is an acronym for "Local Access and Transport Area." U.S. v. Western Electric
Co., Inc., 569 F. Supp. 990, 993 n. 9 (D.D.C.1983) (the "LATA" Decision")].

   18. Under the consent decrees, the traffic between LATAs (the "interLATA traffic") became
the province of the interexchange carriers (IECs), such as AT&T, Sprint, and MCI. LATA
Decision, supra, 569 F.Supp. at 994. The IECs were also allowed to carry intraLATA
communications in competition with the LECs, subject to state regulations and the local company's
exclusive franchise within its service area. LATA Decision, supra, 569 F.Supp. at 994 n.16.

   19. The LEC nomenclature is somewhat confusing because of the AT&T and GTE consent
decrees, which completely redrew the areas in which different types of telephone companies were
allowed to operate. The traditionally exclusive right of local telephone companies to provide
service for calls which originate and end within their service territories was unchanged. However,
the LECs owned by the Bell Operating Companies ("BOCs") and the General Telephone
Operating Companies ("GTOCs") were prohibited from carrying telephone traffic out of
judicially-defined "exchange" areas, or LATAs ["LATA" is an acronym for "Local Access and
Transport Area." LATA Decision, supra, 569 F.Supp. at 993 n.9] which subsumed the local
companies' service areas. The D.C. Circuit recently refused to remove this restriction. U.S. v.
Western Electric Co., 900 F.2d 283, 300 (D.C.Cir.) ("Triennial Review Decision"), cert. denied,
111 S. Ct. 283 (1990).

                                                   5

loop"20 that physically connect users to each other and to long distance carriers.21 Interexchange
carriers ("IECs"), such as AT&T, transport telecommunications between a point in one Local Access
and Transport Area ("LATA" or "exchange area") and a point located in another exchange area.22

    20. A call is "local" if it is placed within the area in which flat-rate subscribers may call at no
extra charge. In California, this area usually includes the exchange to which the subscriber's line is
directly connected (the "end office"), contiguous exchanges, and other exchanges within 12 miles
of the subscriber's end office. All remaining calls -- both intra- and interLATA -- between
exchanges, except for Zone Usage Measurement ("ZUM") and Extended Area Services ("EAS"),
are "toll" services. California Pubic Utilities Commission Division of Ratepayer Advocates,
Report on Policy and Technical Issues in I. 87-11-033, Phase III, at 3-4 (Feb. 8, 1991) ("1991
DRA Policy Report"). Neither consent decree directly affected these types of services. As Judge
Greene noted in his "LATA" opinion:

        calls placed within any one LATA may still be either "local" or "toll" depending
        upon the requirements or rates established by state regulators. Neither the
        LATAs nor the decree in this case changes that situation in any way.

LATA Decision, supra, at 995.

   21. Pacific Bell and other local exchange carriers charge interexchange carriers for making
available their facilities in the placement, transport and termination of interLATA calls. See
Dingwall, Imputation of Access Charges -- A Prerequisite for Effective IntraLATA Toll
Competition, 40 Administrative Law Review 433, 435 (1988) at 434 n.4. These fees represent a
substantial portion of the revenues generated by local exchange companies.

 Although LECs use the same type of access facilities to complete both intraLATA and
interLATA calls, Dingwall, supra, at 435, they did not until recently charge direct fees for access
and network facilities employed in the placement of intraLATA toll calls. Instead, they shared toll
revenues through "settlement" arrangements with other LECs in their various LATAs. 1991 DRA
Policy Report, supra, at 2A-7-2A-9.

 Local exchange carriers also provide the local switching facilities that direct calls to a local party
or the long distance carrier, depending upon the number dialed.

 IntraLATA services are long distance calls (which are functionally equivalent to interLATA toll
services. See Huber, The Geodesic Network: 1987 Report on Competition in the Telephone
Industry, at 3.1 ("Geodesic Network I").) that can be completed by local carriers. Thus, in most
instances, toll calls within the same area code require intraLATA toll services. IntraLATA toll
services are a major revenue source for most local exchange companies. Huber estimated that, on
a nationwide basis, intraLATA services accounted for one-third, or $20 billion, of all toll revenues.
Geodesic Network I, supra, at 3.15.

In 1987, Peter Huber prepared Geodesic Network I for the Justice Department's "First Triennial
Review" of the MFJ. See U.S. v. Western Electric Co., 673 F. Supp. 525, 528 n. 1, 537 n. 44
(D.D.C. 1987)("First Triennial Decision"), rev'd on other grounds, 900 F.2d 283 ("Triennial

                                                  6

Although the consent decrees permitted the BOCs, as well as the IECs, to provide intraLATA
services,23 in some states, including California, LECs are the only carriers that are explicitly permitted
to complete all types of intraLATA calls. The AT&T consent decree does prohibit Pacific Bell and
the other Bell Operating Companies ("BOCs") from providing interexchange services.24 However,
as we discuss below, cellular long distance telephone calls, such as those provided by McCaw, are
usually routed outside the public switched telephone network ("PSTN") of the LECs.

         In 1992, AT&T generated revenues of $40 billion and earned $2.3 billion net of taxes25 from
its long distance operations. Although McCaw does not separately report its national cellular long
distance revenues, it appears unlikely that its 1992 cellular long distance revenues exceeded $100
million.26 In California, McCaw provided cellular interexchange services through California Intercall
and Cellular Long Distance Company. Annual revenues generated by those two operations were
approximately $18 million as of June 1993.27
B.       McCaw Local Cellular Services

Review Decision"), cert. denied, 111 S. Ct. 283 (1990). Huber published a follow-up report in
1993: Huber, Kellogg, Thome, The Geodesic Network II: 1993 Report on Competition in the
Telephone Industry ("Geodesic Network II").

  23. See U.S. v. Western Electric Co., 569 F. Supp. 1057, 1108 (D.D.C. 1983) (The
"Reorganization Decision").

   24. For several years after the issuance of the MFJ, it was necessary to dial an access code
("10XXX") if a subscriber wished to place a call through an AT&T competitor. By
"presubscribing" to competitive services, users can now access an IEC by dialing "1 plus" the area
code of the receiving area exchange.

   25. Hall, Long Distance: Public Benefits from Increased Competition at 21 (Oct. 1993).

   26. Economists retained by the BOCs estimated that annual cellular long distance charges as of
December 1991 were $771 million. Affidavit of Richard S. Higgins and James C. Miller III at 12
n. 30, attached to Reply of the Bell Companies in Support of Their Motion for Removal of Mobile
and other Wireless Services from the Scope of the Interexchange Restriction and Equal Access
Requirement of Section II of the Decree, United States v. Western Elec. Co., No. 82-0192 (D.D.C.
Aug. 3, 1992) ("Higgins and Miller Affidavit"). According to another study, McCaw serves
twelve percent of the population in the "top 90" MSA markets. See Geodesic Network II, supra at
4.25.

   27. See Exhibits M and N attached to Application, supra.
                                                    7

        Formed only ten years ago, McCaw has pursued an aggressive acquisition strategy28 to
become the largest cellular company29 in the United States30 and the second largest provider in
California.31 McCaw provides local cellular services through exclusive FCC-granted "duopoly"
franchises32 in 83 metropolitan service areas ("MSAs") and 4 rural service areas ("RSAs") located
throughout the United States.33 Between 60 and 100 million people now live in areas served by

    28. McCaw Cellular Communications, Inc., 1992 Annual Report, at 4. Between 1986 and
1990, McCaw purchased cellular holdings from the following companies: Charisma
Communication Corp. and Maxcell Telecom Plus, Inc. (Dec. 1986-Jan. 1987, $255 million); MCI
Cellular Telephone Company (July 1986, $122 million); First Cellular Group (Nov. 1987, $55
million); Post Cellular Telecommunications (Jan. 1988, $245 million); Lin Broadcasting (March
1990, $3.375 billion). Memorandum from B. Davis, Overview, at Bates No. 001752 (Sept. 6,
1990). Through the Lin acquisition, McCaw acquired a controlling interest "a company with
cellular interests in New York -- the most important telecommunications marketplace in the world
-- Los Angeles, Philadelphia, Dallas and Houston." McCaw Cellular Communications, Inc., 1992
Annual Report, at 6 ("1992 McCaw Annual Report").

   29. Cellular radio is a mobile telephone service supported by numerous "cells" in designated
franchise areas. A low-power transmitter within each cell connects users to a mobile telephone
switch office ("MTSO"). The MTSO, which coordinates overall operations, is in turn connected to
the local exchange carrier.

    30. Statistics for populations served by cellular companies (a common measure of the value
of cellular holdings) show that, on an aggregate basis, McCaw is the largest provider of cellular
services in the United States.

   31. In 1991, the major California cellular carriers had access to the following percentages of
State POPs: PacTel Cellular, 64; BellSouth, 30; McCaw, 24; GTEM, 21; LIN Broadcasting, 19;
Contel Cellular, 15; US WEST NewVector, 9; US Cellular Corp., 3; Citizens Utility, 2; General
Cellular, 1. Paul Kagan Associates, Inc., 1991 The Cellular Telephone Atlas at 17 (1991). Note
that because there are two providers in every service area, the total number of POP percentages in
a region will be 200.

   32. In 1981, the FCC established the current network of two cellular systems in metropolitan
service areas ("MSAs") and rural service areas ("RSAs") located throughout the United States.
The FCC reserved one of the licenses for the local telephone company or an affiliate (the "Block B
carrier") and made the other franchise available to any entity which did not provide local telephone
service in that area (the "Block A carrier"). In California, carriers must also sell service at
wholesale rates to "resellers" which compete in the retail market. See Geodesic Network II, supra,
at 4.15.

  33. See Paul Kagan Associates, Inc., 1992 The Cellular Telephone Atlas (1992). See also
Geodesic Network II, supra, at Table 4.6.

                                                 8

McCaw affiliates.34 In California, McCaw affiliates control or share control over 15 MSA and 2 RSA
franchises. The merger will not affect the number of cellular subscribers served by McCaw affiliates.
C.      Regional Cellular and Cellular Long Distance Services

         Following the lead of the paging industry,35 providers of cellular services are expanding the
geographical scope of their coverage outside individual service areas by consolidating and "clustering"
contiguous service areas and entering into regional alliances with other providers.36 From a series
of acquisitions, McCaw has already developed eight regional cellular clusters,37 "bringing it closest
to `national' services provider status."38 The largest of these eight groups is the California/Nevada
cluster, which includes the Los Angeles, San Francisco, San Jose, Las Vegas and Reno service areas.39
Believing that "[t]hese regional consolidations and coalitions are what create the most desirable
service for customers,"40 the company is now "in the process of linking those regional cellular systems
into a `national seamless network' permitting the company's subscribers, without making special
arrangements, to both place and receive calls anywhere they travel . . ."41 The result is the North
American Cellular Network ("NACN").42

   34. Bell Operating Companies, Report of the Bell Companies on Competition in Wireless
Telecommunications Services, 1991, at 29 (October 31, 1991).

   35. See Geodesic Network II, supra, at 4.61, 4.66.

    36. "No major player believes that it can long continue to operate mobile services island by
island; all are aiming to build up seamless, nationwide service by direct acquisition, by reselling
other companies' services, or by developing technology that will make corporate (and therefore
geographic) lines essentially invisible to the consumer." Geodesic Network II, supra, at 4.65.

    37. McCaw Cellular Communications, Inc., Securities and Exchange Commission Form 10-K
at 5-8 (March 23, 1993) ("1993 McCaw 10-K"). See Geodesic Network II, supra, Table 4.11, at
4.68.

  38. Memorandum from L. Chakrin to V. Palson, A. Stark, B. Davis, at Bates No. A100764
(Dec. 7, 1990).

   39. 1993 McCaw 10-K, supra, at 6.

   40. McCaw Cellular Communications, Inc., Cellular Communications: A Vision of the Future,
6 (Oct. 20, 1989), quoted in Geodesic Network II, supra, at 4.66.

   41. 1993 McCaw 10-K, supra, at 1.

   42. 1993 McCaw Annual Report, supra, at 6. According to McCaw, the NACN "provides
nationwide seamless service to users in any participating system. NACN is a major step in the
evolution of cellular as a true mobile service, unconstrained by inflexible notions of `local' and
`long distance' communications. Through NACN, subscribers receive automatic roaming
privileges and the same feature set and dialing plan they enjoy in their home system." Opposition

                                                  9

         As McCaw and other clusters grow, long distance routing issues become increasingly
important. For long distance traffic placed outside clusters, cellular providers must decide whether
to route the calls between the cellular switch (the MTSO) and the long distance carrier's Point of
Presence ("POP") over the local telephone company's switched network or over a "dedicated" line.
Traffic routed over dedicated lines -- regardless of whether the lines are owned by LECs, CAPs, or
IECs -- are said to "bypass" the switched network (i.e., the PSTN).43 McCaw and other non-BOC
cellular providers, which are not subject to the interexchange restrictions of the MFJ, also typically
provide to customers a single interexchange carrier's long distance services, which the cellular
provider obtains at wholesale "bulk" rates.44

         For long distance traffic placed within a (multi-LATA) cluster, non-BOCs have the additional
option of routing the calls over their cellular switched network to the MTSO nearest the destination
end office,45 thereby avoiding the costs of both access and interexchange services.46 Thus, in McCaw's
highly publicized "City of Florida" cluster (which encompasses most of the state of Florida), all calls
are considered "local" and are billed at a flat rate47 which is often less than the cost of placing the
calls over the landline system. As a result of the merger, McCaw will be able to route its calls over
AT&T's vast telephone system and to use AT&T network expertise to determine optimum routing
patterns, in many instances avoiding LEC facilities entirely.

of McCaw Cellular Communications, Inc. at 2, In re Policies and Rules Pertaining to the Equal
Access Obligations of Cellular Licensees, No. RM-8012 (F.C.C. Sept. 2, 1992) ("McCaw Equal
Access Opposition").

  43. A fundamental dispute between the BOCs and AT&T is whether the cost to a CAP or other
non-LEC of installing bypass facilities to the MTSO is prohibitively expensive, thereby providing
LECs with a "cellular bottleneck" in the vast majority of cases. See discussion in Section V, infra.

   44. "If the call is placed to a destination outside the wide-area plan, it will generally be handed
off to an IXC selected by the cellular carrier. In such cases, the cellular carrier often has an
agreement with a particular IXC to obtain bulk service at volume-discounted rates." McCaw
Equal Access Opposition, supra, at 14.
   45. See McCaw Equal Access Opposition, supra, at 17.

   46. See Southwestern Bell Petition, supra, at 24, 25 ("In some instances, McCaw uses
microwave to link cell sites to mobile switches. The company also uses longer microwave shots to
link clusters and switches. In California, for example, McCaw operates more than 50 microwave
facilities linking areas 20 or more miles apart. For example, it links Mt. Pass with Yermo, nearly
80 miles away. It also provides service between Stockton and Elk Grove, a distance of 50 miles");
McCaw Equal Access Opposition, supra, at 13; Affidavit of Steven C. Salop and Franklin M.
Fisher, attached to Southwestern Bell Petition , supra, at 27-32 ("Salop and Fisher Affidavit");
AT&T FCC Opposition, supra, at 49.

   47. An internal AT&T document notes that, "'City of Florida' Plan Offers InterLATA Service
without Using an Interexchange Carrier." Memorandum from E. El Hamamsy, G. Maddaloni, S.
Prysant, at Bates No. A000521 (Apr. 1990). See McCaw Equal Access Opposition, supra, at 13.

                                                  10

 D.     AT&T Wireless Equipment Manufacturing

        AT&T is a leading manufacturer of cellular network equipment, including switching,
transmission, and cell-site equipment, and related software.48 Other leaders include Ericsson,
Motorola, and Northern Telecom.49 As much as 80 percent of the output of the AT&T cellular network
manufacturing group may be sold to the BOCs.50 McCaw reportedly uses AT&T equipment in 43
percent of its systems, representing 22 percent of the population in McCaw service areas.51 Through
the merger, AT&T will obtain McCaw's investment in Steinbrecher Corporation, which has developed
a transceiver that can operate in any frequency band, using any technology. Bell South Petition,
supra, at 26-27.

III.    THE RELEVANT MARKETS

         Traditionally, the antitrust implications of a proposed merger are analyzed by a well-
developed model that seeks to measure the effects of the consolidation within some "relevant
market."52 The model begins with the characterization of each relevant product market affected by
the merger. The product market refers to the range of products or services that are or could easily
be made relatively interchangeable, so that pricing decisions by one firm are influenced by the range
of alternative suppliers available to the purchaser. In their Horizontal Merger Guidelines, the
National Association of Attorneys General define the relevant product market53 by adding "suitable
substitutes" to "[e]ach product produced in common by the merging parties." National Association
of Attorneys General, Horizontal Merger Guidelines, § 3.1 (1993), reprinted in 64 Antitrust & Trade
Reg. Rep. (BNA) No. 1608 (Special Supp.) ("NAAG Horizontal Merger Guidelines"). Where the

   48. Affidavit of Lawrence A. Sullivan at 6-7, attached to AT&T FCC Opposition, supra
("Sullivan FCC Affidavit"); Petition to Impose Conditional Grant to Create a Competitive Market,
or Deny as Filed, at 25 In re American Telephone and Telegraph Company and Craig O. McCaw,
No. ENF-93-44 (F.C.C. Nov. 1, 1993)("Bell South Petition"). An average Series II cell site using
AT&T equipment costs about $750,000. Affidavit of John T. Stupka, attached to Southwestern
Bell Petition, supra, at ¶ 30 ("Stupka Affidavit"). A large capacity AT&T switch costs
approximately $7 million. Id. at ¶ 29.
   49. Sullivan FCC Affidavit, supra, at 6-7.

   50. BellSouth Petition, supra, at 26.

   51. Southwestern Bell Petition, supra, at 35.

   52. In general, whether two goods are within the same relevant market depends upon the
"responsiveness of the sales of one product to price changes of the other." United States v. E.I. du
Pont de Nemours & Co., 351 U.S. 377, 400 (1956) (the "Cellophane" decision).

   53. In its Cellophane decision, the Supreme Court held that the relevant product market consists
of all goods which users find to be reasonably interchangeable or which exhibit a high cross-
elasticity of demand for the good in question. Cellophane, supra, 351 U.S. at 395.

                                                   11

merger involves "the joinder of two levels or phases of production that are usually performed by
different firms,"54 so that there is no "product produced in common," the appropriate "horizontal" and
"vertical" dimensions of the relevant product must be considered.55

        The analysis then proceeds to a determination of the relevant geographic market. The
relevant geographic market is defined as the area in which the sellers compete and in which buyers
can practicably turn for supply. U.S. v. Connecticut National Bank, supra, 418 U.S. 656, 668 (1974).
The NAAG Horizontal Guidelines include within the relevant geographic market "the sources and
locations where the customers of the merging parties readily turn for their supply of the relevant
product," as well as suppliers of "closely proximate" buyers. NAAG Horizontal Merger Guidelines,
supra, at § 3.2. Suppliers within the relevant geographic market for vertical mergers include all
component providers whose output could feasibly be combined and offered at prices competitive with
the products of the merged firm. See Heattransfer Corp. v. Volkswagenwerk, A.G., 532 F.2d 964, 980­
82 (5th Cir.), cert. denied, 434 U.S. 1087 (1977).56
A.      The Relevant Interexchange Service Markets

        In the federal proceedings, the BOCs have alleged that a relevant product market exists for
the wholesale57 provision of long-distance cellular originated telephone calls.58 It is true that the

   54. R. Posner, Antitrust Law: An Economic Perspective 197 (1976).

   55. See Bower, Complementary Inputs and Market Power, 31 Antitrust Bull. 51, 81 (1986).
Thus, in many respects, the central issues faced by the Supreme Court in the recent Kodak decision
were: (a) the horizontal issue of whether "one brand of a product can constitute a separate
product," Kodak at 293, and (b) the vertical issue of what combination of parts, service,
equipment, and information constituted a cognizable relevant market. See Kodak v. Image
Technical Services, 119 L. Ed. 2d 265, 293, 301. See also Direct Testimony of John W. Mayo filed
with Application, supra, at 32 ("Mayo Testimony") (referring to the "vertical dimensions of this
merger").

   56. The BOCs seem to take a similar position. See Salop and Fisher Affidavit, supra, at 11
(apparently excluding certain interexchange carriers from the relevant market because "they are at
a cost disadvantage . . . resulting both from reduced scale economies and from the corresponding
need to fill in gaps in coverage as a long-distance reseller with higher costs than the major
facilities-based carriers.")

   57. "Sandwiched around the basic common carriers are wholesalers and resellers. Some
pipeline or railroad companies that control valuable rights of way act as a carriers' carriers,
offering bulk (usually fiber-optic) services to the ICs. On the other side, resellers and value-added
carriers operate their own switches but lease transmission capacity in bulk from the ICs."
Geodesic Network I, supra, at 3.1-3.2. "An FCC ruling that AT&T must permit resale of its
services has allowed many resellers to enter the market very easily." Id. at 3.4.

   58. Salop and Fisher Affidavit, supra, at 10, 24. Under the MFJ, the BOCs "and their cellular
affiliates are not permitted to purchase long-distance service in bulk at wholesale or to vertically

                                                 12

range of services "produced in common" by the merging parties consists of that narrow group of long
distance calls. However, "because the wholesale long distance services purchased by . . . cellular
carriers are essentially identical to the services purchased by other large volume customers,"59 and
since there is a very active60 resale market for long-distance services,61 arbitrage activities would
defeat any attempt of the merging parties to raise cellular long distance rates above existing levels.
See Willig and Bernheim Affidavit, supra, at 5. As AT&T has also persuasively argued, the limited
product definition advanced by the BOCs implicitly assumes that AT&T could practicably engage in
highly selective, possibly unlawful, and easily visible discriminatory pricing practices. See Willig and
Bernheim Affidavit, supra, at 15-20. We conclude that the relevant product for the horizontal facet
of the merger includes interexchange services that are resold or are available for resale within the
United States,62 such as those provided by AT&T, MCI, Sprint and other interexchange carriers.
B.      The Relevant Markets for Local Cellular Services

         Although the scope of the relevant market for cellular services has never been carefully
examined, the courts which have addressed the issue have limited the market to the provision of
"cellular telephone services"63 in the various franchise areas established by the FCC in which the
franchisee does business. See Metro Mobile CTS, Inc. NewVector Communications, Inc., 661 F.Supp.

integrate into provision of the service. . . . In contrast, where the local cellular provider is, like
McCaw, not an affiliate of [a BOC], the provider can purchase a long-distance service in bulk from
an interexchange carrier at individually negotiated long-term contract wholesale prices. These
carriers then resell the long-distance service on a retail basis to their subscribers. . . . Long-
distance providers compete by bidding to provide wholesale long-distance service in bulk through
long-term contracts with McCaw and other non-RBOC cellular carriers." Id. at 10.

  59. Affidavit of Robert D. Willig and B. Douglas Bernheim at 5, attached to AT&T FCC
Opposition, supra ("Willig and Bernheim Affidavit").

  60. We take no position on the question of whether the resale market is fully competitive, as
AT&T contends. See Willig and Bernheim Affidavit, supra at 5, 18.

   61. In California, long distance resellers which purchase interexchange services at bulk rates
and resell those services to subscribers to BOC cellular affiliates include: Execuline of
Sacramento, Express Tel, Thrifty Telephone, TNC Long Distance, West Coast
Telecommunications, Inc., TELNET Communications, Inc. and Celltoll Corporation. Letter from
Gregory P. Landis to Lindsay Bower (Feb. 3, 1994).

   62. The United States is the relevant geographic market. See Prepared Testimony of Professor
Jerry A. Hausman at 36, filed In re Joint Application of American Telephone and Telegraph
Company, et al. (P.U.C., Jan. 10, 1994) ("Hausman PUC Testimony").

   63. Block carriers sell these services to consumers directly or through intermediaries such as
retailers, agents, dealers, resellers, and broker-agents.

                                                  13

1504, 1521 n.14 (D.Ariz. 1987), 892 F.2d 62 (9th Cir. 1989) ("NewVector");64 Sunshine Cellular v.
Vanguard Cellular Systems, 810 F. Supp. 486, 494-95 (S.D.N.Y. 1992). Thus, separate relevant
markets for cellular services exist in each of the individual MSAs and RSAs in which McCaw does
business. For purposes of this analysis, we also assume, along with the applicants,65 that cellular
franchisees will compete with specialized mobile radio ("SMR") operators66 and PCS providers.67 In
adopting that approach, we note that telephone and cellular suppliers still do not compete68 and that
providers of other types of mobile systems, such as pagers, appear to have little constraining effect
on cellular prices.
C.      The Relevant Markets for Regional Cellular Services

 In Sunshine Cellular, the court also recognized the existence of a separate relevant market for
cellular telephone services provided throughout a cluster of FCC-authorized service areas. Sunshine
Cellular, supra, 810 F.Supp. at 496.69 The relevant market is defined by determining whether
alternative goods which were "comparable in quality . . . could be produced at a cost no higher than

    64. In NewVector, the defendant contended that the product market included other forms of
two-way communication, but accepted cellular telephone service as the relevant product for
purposes of its summary judgment motion. Id. On the other hand, there was "no dispute that the
relevant geographic market is the Phoenix Metropolitan Statistical Area as defined by the FCC."
Id.

   65. See Barksdale Affidavit, supra, at ¶¶ 8-9; Sullivan FCC Affidavit, supra, at 13 (SMR
providers, such as NEXTel, "will compete with cellular service systems;" PCS systems
"unquestionably could compete directly with existing cellular systems").

  66. "SMR is, in essence, a private dispatch service that interconnects with the public network."
Geodesic Network II, supra, at 4.15 n. 62.

   67. "When [PCS] was introduced in the United Kingdom, it caused an immediate drop in the
value of all cellular stocks, including those in the United States. This reflected investor concern
over the impairment of the monopoly aspect of the cellular license." See G. Calhoun, Wireless
Access and the Local Telephone Network, 143, 215 n. 31 (1992). See also Hausman PUC
Testimony, supra, at 16 ("PCS already works. . . . Furthermore, cellular service (airtime) prices
have fallen by about 1/3 since PCS was introduced in the U.K.").

   68. First Triennial Decision, supra, 673 F.Supp. at 550-51; U.S. v. Western Electric, 578
F. Supp. 643, 650 (D.D.C. 1983) ("Cellular LATA Decision"); U.S. v. Western Electric, 1990-2
Trade Cases ¶ 68,177, at 64,450 (D.D.C. 1990). See also Sunshine Cellular, supra, 810 F.Supp. at
495.

   69. In discussions with this office, Professor Sullivan acknowledged the existence of
cognizable relevant markets for regional cellular services. Telephone conversation between
Lindsay Bower, Lawrence Sullivan, Greg Landis, and John Mayo (Nov. 30, 1993. See also
Memorandum from E. El Hamamsy, G. Maddaloni, S. Prysant, at Bates No. A000521 (Apr. 1990)
(noting that "regional cellular networks will make interLATA cellular long distance feasible.")

                                                 14

that of [the defendant's product] or, if no materials of the same quality existed, whether the quality
differences [between the goods] were offset by differences in cost." Posner, supra, at 128.

 A central feature of the services offered by cellular carriers is the geographical territory (the "calling
scope"70) over which cellular calls are supplied and offered on an integrated basis.71 By consolidating
its operations into eight multi-LATA clusters,72 McCaw has achieved substantial economies73 in the
reduction of switching and other operational costs. See Affidavit of Dr. Charles L. Jackson at ¶¶ 10­
21, attached to the BOC Generic Wireless Reply74("Jackson Affidavit").75 Clustering has also enabled
McCaw to institute a billing or "bundled" service program in which some regional calls placed by
subscribers are considered "local" and are billed at a flat rate.76 However, the interexchange

   70. Southwestern Bell Petition, supra, at 61.

   71. Craig McCaw has stated that, "These regional consolidations and coalitions are what create
the most desirable service for customers." See Geodesic Network II, supra, at 4.66

  72. McCaw clusters provide service to areas constituting 80 percent of McCaw's POPs.
Higgins and Miller Affidavit, supra, at 14.

    73. Higgins and Miller Affidavit, supra, at 14; Cellular LATA Decision, supra, 578 F.Supp. at
648-49. MCI affiant Richard Chandler has demonstrated that clustering is not necessarily the most
economical mechanism for supplying cellular services to subscribers in low-density areas where
transmission costs may become prohibitive. Affidavit of Richard Chandler at 6, 9, attached to
letter from Michael H. Salsbury to Richard L. Rosen (Apr. 30, 1993) ("Chandler Affidavit").
Chandler has also shown that clustering does not necessarily result in the creation of flat rate areas.
Id. at 8. However, Jackson does provide a conceptually valid approach for understanding the
major efficiencies that can be derived from consolidating the operations of adjacent service areas.
See Jackson Affidavit, supra; Telephone conversation between Lindsay Bower, Charles P. Mason,
Steven Huels, Gregory P. Landis, David Carpenter, and Len Calley (Jan. 19, 1994).

   74. Reply of the Bell Companies in Support of Their Motion for Removal of Mobile and other
Wireless Services from the Scope of the Interexchange Restriction and Equal Access Requirement
of Section II of the Decree, United States v. Western Elec. Co., No. 82-0192 HHG (D.D.C. Aug. 3,
1992) ("BOC Generic Wireless Reply").

  75. See also Higgins and Miller Affidavit, supra, at 14; Motion of the Bell Companies for
Removal of Mobile and other Wireless Services from the Scope of the Interexchange Restriction
and Equal Access Requirement of Section II of the Decree at 41, United States v. Western Elec.
Co., No. 82-0192 HHG (D.D.C., Dec. 13, 1991) ("Generic Wireless Motion").

    76. See Jackson Affidavit, supra, ¶ 9. See also McCaw Equal Access Opposition, supra, at 13.
("Today, cellular subscribers may place and receive `long distance' calls using their cellular
telephone whether they are in their home system or roaming. Neither McCaw nor, to its
knowledge, any other cellular carrier imposes a surcharge on standard MTS rates for this valuable
capability. Rather, subscribers pay less than `full market' long distance rates for interexchange
cellular calls included within wide-area calling plans, and in almost every other situation, pay no

                                                    15

restrictions of the MFJ prohibit BOCs (which do not have all necessary "waivers"77) from making
similar offerings available at competitive costs and rates,78 and no other cellular providers, such as
GTE, have created regional clusters that are coterminous with McCaw service areas. AT&T claims
to the contrary,79 we conclude that McCaw is currently the only supplier of the appropriately defined
multi-LATA regional cellular services offered within all or part of each of its eight clusters.80

IV.     THE MFJ, REGIONAL CELLULAR COMPETITION, AND CELLULAR BYPASS

         The interexchange restrictions of the MFJ apply to "exchange telecommunication services"
provided by the BOCs, including cellular and other mobile services. Cellular LATA Decision, supra,
578 F.Supp. at 645. Contending that they do not have "bottleneck control over the provision of
interexchange services to cellular customers" and cannot productively discriminate against competing
cellular providers, the BOCs have petitioned the District Court for removal of wireless from the

more than basic IXC rates.")

 In FCC equal access proceedings, "[n]umerous cellular carriers described how they provide
seamless, wide-area service at lower rates than would be available from the IXCs. These
commenters also pointed out that many cellular carriers share with their customers bulk discounts
obtained from IXCs." Reply of McCaw Cellular Communications, Inc. at 4, In re Policies and
Rules Pertaining to the Equal Access Obligations of Cellular Licensees, No. RM-8012 (F.C.C.,
Oct. 15, 1992)("McCaw Equal Access Reply"). Nonetheless, AT&T has made the assertion that
"clustering" does not facilitate the creation of flat rate areas. See AT&T's Opposition to RBOCs'
Motion to "Exempt" Wireless Services from Section II of the Decree at 76 n. 103, United States v.
Western Elec. Co., No. 82-0192 HHG (D.D.C. Apr. 27, 1992) ("AT&T Generic Wireless
Opposition").

   77. See Geodesic Network II, supra, at 4.88-4.99, Tables 4.14-4.16; Generic Wireless Petition,
supra, at 47-52 (noting an average approval period of 19 months for cellular waivers). See also
AT&T Generic Wireless Opposition, supra, at 7, 24 n. 29, 26 n. 33; Reply of the Bell Companies in
Support of Their Motion for Removal of Mobile and other Wireless Services from the Scope of the
Interexchange Restriction and Equal Access Requirement of Section II of the Decree at 22, United
States v. Western Elec. Co., No. 82-0192 HHG (D.D.C. Aug. 3, 1992) ("BOC Generic Wireless
Reply").

   78. See B. Davis, "Project Airtime" at Bates No. A002070 (Jan. 11, 19912); Memorandum
from L. Chakrin, "Briefing for Apache", at Bates No. A001844 (Nov. 4, 1992).

    79. The applicants claim that, "The MFJ allows the RBOCs to offer the same 'seamless'
services that McCaw provides, and the only differences between the RBOCs and McCaw are that
there are occasionally differences in the sizes of "local" calling areas . . ." AT&T FCC Opposition,
supra, at 60; AT&T Generic Wireless Opposition, supra, at 76 n. 103.

   80. NEXTel and other SMRs may enter that market in the near future. See, e.g., Sullivan FCC
Affidavit, supra, at 12-13.

                                                 16

interexchange restrictions of Section II of the MFJ.81 That restriction has limited the ability of the
BOCs to efficiently "cluster" adjacent service areas, interconnect with other providers, and obtain
network and routing efficiencies available to McCaw and other competitors. As a result, the BOCs
cannot effectively compete in many regional cellular markets, including portions of McCaw's
California/Nevada cluster.

         The minimum efficient size of many, if not most, clusters is larger than a single LATA. Thus,
in Florida, McCaw has seven switches "where it provides integrated service to 13 FCC cellular
market regions located in seven different LATAs." Jackson Affidavit, supra, at 9. The MFJ
interexchange restriction prohibits BOCs from forming such multi-LATA clusters or from purchasing
for resale long distance services at bulk rates, and thereby attaining many of the efficiencies that will
be available to the integrated AT&T/McCaw. For similar reasons, the BOCs cannot take full
advantage of their landline system in the placement and routing of cellular long distance calls. Until
recently, the interexchange restriction also prohibited BOCs from using a "dedicated MTSO-to-MTSO
link" to "hand off" calls of subscribers travelling to different LATAs,82 which would result in only
cellular air time charges. Instead, BOC customers roaming in adjacent LATAs had to obtain service
from their preselected interexchange carriers, resulting in frequent delays, fewer call completions,
disconnections, as well as both air time and long distance charges. Procedures exist for obtaining
waivers from these restrictions in individual cases83 and Judge Greene has recognized the "economic
efficiencies which could be produced by integrated, multi-LATA systems,"84 but the approval process

   81. The BOCs originally petitioned for the removal of wireless services from both the
interexchange and the equal access provisions of Section II. They recently withdrew their request
for relief from the equal access requirement in a letter to the Department of Justice. Letter from
Michael K. Kellogg to Richard L. Rosen (September 24, 1993).

        The competitive effects of equal access requirements are not clear. If they were not
subject to interexchange requirements, the BOCs could purchase long distance services in bulk.
Furthermore, if the resulting cost savings were passed on to consumers, as the BOCs contend they
would be (see Higgins and Miller Affidavit, supra, at ¶¶ 30, 50-53), most BOC subscribers would
presumably select the BOC as their interexchange carrier. Moreover, the large customer base
would apparently justify the use by the BOC of a direct connection to the POP.

82. "Intersystem handoff is a service which [permits] the mobile telephone switching office

(MTSO) of a particular [cellular operator] to be interconnected with the MTSOs of an adjacent

cellular system so that cellular telephone calls already in progress can be handed off from one

cellular system to the adjacent system, as a cellular customer approaches and crosses the

boundary between the two cellular systems." U.S. v. Western Elec. Co., No. 82-0192, slip. opn.

at 7-8 (D.D.C., Sept. 12, 1990).

    83. See Generic Wireless Motion, supra, at 47-53.

    84. Cellular LATA Decision, supra, 578 F.Supp. at 648-49.

                                                   17

takes an average of 19 months, which is "an eternity in the competitive race and technological
revolution taking place in mobile services."85
        AT&T opposes the BOCs' motion because "the provision of interexchange services to mobile
customers absolutely depends on the RBOCs' landline access facilities." AT&T Generic Wireless
Opposition, supra, at 45 n. 55.86 In fact, cellular providers can route their long distance traffic to
interexchange carriers over direct connections from the MTSO to the POP or over the LEC's switched
network.87 In some instances, they can also route long distance traffic over their own network.

         The routing scheme actually chosen is a function of cost. BOC Generic Wireless Reply,
supra, at 31. It is true that switched service alternatives to the LECs' networks are limited.88
However, direct connections leased or furnished by LECs, CAPs, interexchange carriers89 and other
providers90 are virtually identical and are offered at comparable fixed, monthly rates.91 Routing long
distance calls over the PSTN (which requires payment of a per minute charge) is economical only at
relatively low traffic volumes. Jackson Affidavit, supra, ¶ 30; Hausman Affidavit, supra, ¶ 45.

     85. Generic Wireless Motion, supra, at 48. See also Affidavit of Jerry A. Hausman at ¶ 52,
 attached to BOC Generic Wireless Reply, supra ("Hausman Affidavit").

   86. AT&T Generic Wireless Opposition, supra, at 4, 40 ("The decisive fact is that the RBOCs
control the bottleneck 'landline' facilities that connect these systems to interexchange carriers
networks." Id. at 4.). The BOCs reply that AT&T attempts to obscure the issue "when it states
that it obtains access to cellular carriers `either through a LEC access tandem [switch] or through
a LEC-provided connection to an MTSO,' as if there were no difference between the two forms of
connection." See BOC Generic Wireless Reply, supra, at 32 n. 37, 6.

    87. Cellular long distance traffic routed over the BOC's PSTN goes from the MTSO to either
(a) the LEC end office (a type I connection), which is the most expensive arrangement or (b) an

access tandem (a Type IIa connection) and then to the POP. Memorandum prepared by L.

Chakrin, Cellular Access Arrangements at Bates No. A100916 (March 20, 1991).

   88. CAPs do "have the technical capability to provide switched access or switched local

exchange service for end users connected to their network." California Public Utilities

Commission Division of Ratepayer Advocates, Report on IntraLATA Competition in California

and Program Proposals, Exhibit 559, at 2-11 (Sept. 23, 1991) ("Exhibit 559").

     89. Jackson Affidavit, supra, at ¶ 22; AT&T, Cellular Access Arrangements, No. A100917
 ("In certain MSAs, cellular traffic reaches a point where it makes economic sense [for the IEC]
 to loop a high capacity T1.5 facility from the MTSO to AT&T's POP.")

     90. Jackson Affidavit, supra, at ¶ 22.

    91. See Jackson Affidavit, supra, at ¶¶ 22-32.

                                                 18

Because of the ready availability of these numerous "supply substitutes," LECs in most service areas
lack bottleneck control over the access of cellular companies to interexchange company POPs.92

         Data provided by AT&T demonstrates the extent of the bypass opportunities available to
cellular providers. In both California and the United States, non-BOC cellular providers route
approximately 92 percent of their AT&T long distance calls over direct links,93 and somewhat less
than 10 percent94 (not the one percent AT&T usually claims95) of the national direct traffic flowed over
non-LEC facilities.96 McCaw figures were similar, although the national figures do not account for

   92. See Landes and Posner, Market Power in Antitrust Cases, 94 Harv.L.Rev. 937, 945-50,
963-67 (1981). Thus, included within the relevant market for access to any relatively high
density population area are the local telephone company, all CAPs capable of serving that area,
and possibly other LECs and CAPs. For identical reasons, long distance services available for
resale are substitutes for, and in the same relevant market as, cellular long distance services. In
assessing the relevant market for cellular long distance services, AT&T is a strong proponent of
the concept of supply substitutes. See Section IV.A., supra.

         However, in assessing each local market for access services, AT&T apparently contends
that CAPs are not competitors or even fringe suppliers because they "only" serve "about 116
cities" and "exist at the sufferance of the LECs, which possess the ability to underprice them and
forestall their expansion . . ." Draft Affidavit for Tom Herr at ¶ 12, attached to letter from George
Deukmejian to Roderick E. Walston (January 31, 1994) ("Draft Herr Affidavit"). Nonetheless, in
a conversation with this office, AT&T director for access procurement, Steven Huels, agreed with
the conceptual validity of the approach taken by Charles Jackson in his affidavit and Huels stated
that local telephone companies have responded to CAPs by "dramatically" reducing direct
connection rates under their "flexible pricing" programs. Telephone conversation between
Lindsay Bower, Charles P. Mason, Steven Huels, Gregory P. Landis, David Carpenter, and Len
Calley (Jan. 19, 1994). Moreover, Landes and Posner indicate (and AT&T would presumably
argue in the long-distance context) total CAP services should be considered because the relevant
market properly includes (in the absence of significant transportation costs) "the total capacity
(wherever located) of the distant sellers rather than their actual output." Landes and Posner,
supra, at 966.

   93. Letter from Gregory P. Landis to Lindsay Bower, at 2 (Feb. 2, 1994); Letter from Gregory
P. Landis to Lindsay Bower, at 2 (Feb. 3, 1994); telephone conversation between Gregory P.

Landis and Lindsay Bower (Dec. 22, 1993).

   94. See letter from Gregory P. Landis to Lindsay Bower, at 2 (Feb. 3, 1994); telephone

conversation between Gregory P. Landis and Lindsay Bower (Dec. 22, 1993).

     95. See AT&T Generic Wireless Opposition, supra, at 43, 46.

   96. DRA has found that the cost of dedicated access fell 50 percent between 1985 and 1991
and that "bypass" may now be economical for "even medium sized businesses." Exhibit 559,
supra, at 2-4. AT&T's director of access procurement, Steven Huels, states that local companies
have responded to CAPs by "dramatically" reducing direct connection rates under their "flexible

                                                  19

interLATA traffic carried within the McCaw network itself.97 On the other hand, BOC cellular
affiliates -- which are "forced to splinter their long distance traffic among different [interexchange
carriers]"98 -- route approximately 75 percent of their AT&T calls over the more expensive PSTN.99

         Finally, we note that approval of the Generic Wireless Motion would not create any incentives
for the BOCs to anticompetitively discriminate against or raise the costs of their cellular rivals.100

pricing" programs. Telephone conversation between Lindsay Bower, Charles P. Mason, Steven
Huels, Gregory P. Landis, David Carpenter, and Len Calley (Jan. 19, 1994) ("Huels Telephone
Conversation"). Thus, Huels states that Ameritech has reduced direct connection rates for
Chicago, in response to pressure from CAPS, to one-fifth of what they were only several years
ago. Id.

   97. "The vast majority of the nationwide long distance traffic originating at McCaw's MTSOs
(including cellular long distance traffic in California) is routed over LEC-provided dedicated lines
procured by AT&T. Typically, McCaw -- either directly or, in California, through its certificated
long distance resellers -- purchases long distance traffic from AT&T's Software Defined Network
("SDN") and Tariff 12, both of which include components for usage and resold-LEC transport
facilities. By far the vast majority of McCaw-originated cellular long-distance traffic travels over
dedicated access connections." Letter from Gregory P. Landis to Lindsay Bower, at 2-3 (Feb. 2,
1994); telephone conversation between Gregory P. Landis and Lindsay Bower (Dec. 22, 1993).

    98. BOC Generic Wireless Reply, supra, at 32. Most non-BOC cellular operators provide
interexchange services to their subscribers as long distance resellers. See Higgins and Miller
Affidavit, supra. Charles Jackson has demonstrated that direct connections become economical
at lower traffic volumes than most non-BOCs carry over their exclusive resale contracts. Jackson
Affidavit, supra, at ¶¶ 29-33. However, the MFJ interexchange and equal access restrictions
prevent BOCs from providing cellular long distance services as a reseller or from entering into an
exclusive arrangement with a single long distance carrier. It is also possible that the cost of
isolating and directly routing only the long distance calls placed through the BOC affiliate's
leading long distance carrier(s) (usually, AT&T) would be prohibitive, even if placing that
volume of calls on a dedicated line would otherwise be justified. Moreover, cellular long distance
traffic in each BOC service area is "split" among several suppliers and only those long distance
carriers operating in the largest service areas apparently carry sufficient volumes to warrant the
use of dedicated access. In any event, the direct connection rate is much lower among BOC
cellular affiliates than among non-BOC operators. MCI has disputed the "crossover point" at
which direct connections become economical, but Jackson's general conceptual approach appears
to be valid. See Affidavit of Richard Chandler at 10-11, attached to letter from Michael H.
Salsbury to Richard L. Rosen (Apr. 30, 1993); Huels Telephone Conversation, supra.

   99. Letter from Gregory P. Landis to Lindsay Bower, at 2 (Feb. 2, 1994); Letter from Gregory
P. Landis to Lindsay Bower, at 2 (Feb. 3, 1994); telephone conversation between Gregory P.

Landis and Lindsay Bower (Dec. 22, 1993).

   100. AT&T contends that the ability of a LEC to raise the access costs of interexchange
carriers is "acute," AT&T FCC Opposition, supra, at 47, but separately estimates that cellular

                                                 20

Discriminatory practices directed at non-BOC cellular competitors would not be effective unless
customers of the rival "could readily detect that they were receiving inferior long distance
connections," and yet the various regulatory agencies would be "unlikely to let such patently illegal
[and necessarily obvious] discrimination to persist." BOC Generic Wireless Reply, supra, at 34-35.
As alternatives, BOCs might instead consider degrading the (1) the access of long distance carriers
to the BOC's landline network or (2) "access to the local access network enjoyed by the cellular firm
itself." BOC Generic Wireless Reply, supra, at 33, 34 n.40.101 However, the first strategy would
"discourage use of [the IEC] system by both mobile and landline customers." Id. at 33. Furthermore,
the theoretical incentive to engage in the second strategy already exists and would in no way be
increased by MFJ relief. See Cellular LATA Decision, supra, 578 F.Supp. at 651.102 We also note that
the profit-maximizing incentive of a cellular provider with (assumed) market power would be to price
its "core service," air time, above marginal cost, and to offer complementary services, such as long
distance and related access services, at competitive rates.103 We conclude that the BOCs lack the
incentive or the market power to significantly raise cellular long distance access rates of its rivals
and, therefore, encourage PUC support for the BOCs' Generic Wireless Petition.

V.       THE NATURE AND COMPETITIVE EFFECTS OF THE MERGER

interexchange services constitute a competitively insignificant .3 percent of the long distance
market. See Affidavit of Professor Glenn Ellison at ¶ 16, attached to AT&T FCC Opposition,
supra. See also Section VI.B., infra; Petition for Rulemaking, In re Petition for Rulemaking to
Determine the Terms and Conditions under which Tier 1 LECs Should Be Permitted to Provide
InterLATA Telecommunications Services, No. R.M.- (F.C.C. July 15, 1993).

 In the Draft Herr Affidavit, supra, AT&T also apparently contends that permitting BOC entry
into the cellular long distance market would induce BOCs to degrade the network, cross-subsidize
or otherwise advantage themselves and their affiliates, and use AT&T connection requests as a
subterfuge for obtaining competitive information. We find these arguments speculative and
wholly analogous to arguments made by the BOCs in support of their notion of an identifiable
market for cellular long distance services. In fact, where the BOCs raised that issue, AT&T (much
like the BOCs here) demonstrated the infeasibility of discriminatorily pricing cellular long
distance services. See Willig and Bernheim Affidavit, supra, at 15-20.

   101. The FCC requires LECs to provide non-wireline carriers with interconnections that are
equal in price and quality to those provided to LEC affiliates. Geodesic Network II, supra, at 4.7.

     102. See also Hausman Affidavit, supra, at ¶¶ 36, 42.

   103. Generic Wireless Motion, supra, at 32-33; Hausman Affidavit, supra, at ¶ 40, n. 40. But
see AT&T Generic Wireless Opposition, supra, at 38.

                                                 21

         Mergers are "conventionally" categorized as horizontal, vertical, or conglomerate.104 Aspects
of this consolidation fall within all three categories, but, as AT&T has noted, the "heart" of the
transaction is the vertical relationship "between a firm offering interexchange services and a firm
offering cellular services." The merger does appear to offer significant cost efficiencies in the
provision and expansion of regional cellular services, which are not currently available to PacBell
and the other BOCs. AT&T may pass some of the resulting cost savings to consumers, but we believe
the magnitude of those savings will increase if the MFJ prohibition on the BOC provision of cellular
interexchange services were lifted.

         Horizontal effects, which would result from the consolidation of the interexchange services
of the two operations, would be de minimus. Furthermore, although a merged AT&T would not
independently enter the wireless market through the PCS auction, adverse competitive effects resulting
from the elimination of AT&T as a potential competitor of McCaw in the local and regional cellular
markets are highly speculative and probably minimal. Finally, we have found no evidence that AT&T
and McCaw have ever engaged in any form of "franchise" or "yardstick" competition in this state.
A.      The Vertical Integration of McCaw Cellular and AT&T Long Distance Operations

         The principal competitive effects of this merger will be in the relevant markets for regional
cellular services,105 where McCaw's existing position will be strengthened and the BOCs will be
correspondingly limited in their relative ability to compete. McCaw's eight clusters already constitute
the most valuable collection of cellular properties in the United States. AT&T can consolidate and
strengthen this leadership position by using its financial resources, long distance operations and
related technical services to accelerate the expansion and linkage of these clusters. At the same time,
the MFJ's interexchange restriction severely hinders the ability of some of McCaw's strongest and
most natural rivals, the BOCs, to provide similar services.106 The BOCs do not question the
efficiencies that would arise from the merger, but they have attempted to condition approval of the
merger on AT&T withdrawal of opposition to the Generic Wireless Motion. We conclude that the
integration of AT&T and McCaw will create pro-competitive efficiencies. However, the degree to
which the public will benefit from those efficiencies will depend upon the extent of competition faced
by the consolidated entity. We also conclude that AT&T opposition to the Generic Wireless Motion
is protected by the Noerr Pennington doctrine.

  104. Williamson, Vertical Merger Guidelines: Interpreting the 1982 Reforms, 71 Cal.L.Rev.
604, 605 (1983).

   105. Thus, AT&T argues that "a ban on joint marketing [of wireless and long distance

services] would be inefficient and would nullify central benefits of the merger." AT&T FCC

Opposition, supra, at 81.

   106. The District Court recognized that the BOCs would encounter "significant competitive

disadvantages . . . were they strictly confined to LATA boundaries in all areas." Cellular LATA

Decision, supra, 578 F.Supp. at 649.

                                                  22

        1.   The Efficiencies

         There is little doubt that synergies between the applicants "offer[ ] real potential for
enhancing [McCaw] as a competitor in the provision of mobile telephone services."107 AT&T has vast
financial resources, while McCaw is highly leveraged.108 With AT&T capital, McCaw can more easily
expand existing clusters and fill some of the "holes" in its nationwide network by acquiring additional
cellular properties and actively participating in the PCS auction.109 AT&T acknowledges that "long
distance service can be viewed as an input into the provision of cellular service"110 and AT&T long
distance facilities, such as its microwave sites,111 can be readily consolidated with McCaw's regional
operations. These long distance facilities, along with AT&T technical services, can also enhance and
expand the extent of scale and scope economies available in regional clusters and the larger AT&T
and McCaw networks.112 In addition, the merged company can apply AT&T technical and networking
resources to McCaw's credit verification operations, thereby facilitating roaming in service areas
where fraud detection capabilities are currently inadequate.113 AT&T traffic routing and network
optimization expertise will further expand roaming capabilities114 and reduce the merged companies'
operating costs.115 In fact, in many instances (as in existing McCaw flat rate areas), integration will

    107. Application, supra, at 22.

  108. McCaw has a net book debt ratio of over 70 percent. Application, supra, at 23-24. 

McCaw admittedly needs additional capital. Barksdale Affidavit, supra,. ¶¶ 13, 21-23; AT&T

FCC Opposition, supra, at 31-32.

     109. Affidavit of Richard P. Rozek at 11, attached to BellSouth Petition, supra.

    110. Mayo Testimony, supra, at 26 n. 6.

  111. Mayo Testimony, supra, at 36; Direct Testimony of Steven W. Hooper at 24, filed with

Application, supra ("Hooper Testimony").

   112. See Cellular LATA Decision, supra, 578 F.Supp. at 648-49; Southwestern Bell Petition,
supra, at 21-22; Sullivan FCC Affidavit, supra, at 12 ("attaining positions in multiple markets can
yield scale or scope advantages and facilitate handing off calls of roaming subscribers"); McCaw
Cellular Communications, Inc., McCaw's Goals and Values 8-9 (Jan. 1991)(declaring intent to
"[c]apture long distance economi[e]s," and to "[m]aintain[] [its] long distance intra/interLATA
revenue advantage").

   113. Inadequate fraud detection capabilities currently limit roaming services available to
cellular subscribers visiting New York City. See also Application, supra, at 24; Mayo Testimony,
supra, at 36; AT&T Doc. No. Memorandum from L. Chakrin, "Wireless" -- Board Presentation,
at Bates No. 000433 (Sept. 1991) (AT&T can provide verification in "two seconds" versus
"45 minutes").

    114. Barksdale Affidavit, supra, at ¶ 26.

     115. See Mayo Testimony, supra, at 36.

                                                  23

be so complete that it will be impossible to "efficiently" offer long distance and other services on a
separate, unbundled basis.116

         Although parties to a vertical merger routinely claim that their transaction will generate
"complementarities and synergies,"117 we have no reason to dispute the existence of the efficiencies
claimed by the applicants. Even so, the creation of efficiencies118 does not preclude the possibility that
the transaction will have an anticompetitive effect and their existence does not, therefore, constitute
an absolute defense.119 In fact, a "long-standing judicial concern associated with vertical mergers is
their potential to create barriers to entry."120
        2.   The Merger, the MFJ, and Barriers to Entry

       In this matter, the BOCs suggest that AT&T's acquisition of McCaw, in combination with
AT&T's opposition to the Generic Wireless Motion, will create competitively objectionable barriers

   116. We, therefore, disagree with BOC proposals to condition the merger on unbundling

requirements. See AT&T FCC Opposition, supra, at 74, 78; Willig and Bernheim Affidavit,

supra, at 34-36 (discussing "technological" and "transactional" efficiencies).

     117. See Mayo Testimony, supra, at 35.

    118. See AT&T FCC Opposition, supra, at 70, n. 133. Various procompetitive effects of

 vertical integration have been identified:

        The most popular [argument for vertical integration] has been that if economies of
        scope between successive stages due to technological or organizational
        interrelationships are strong enough, these activities should be provided under joint
        ownership. Other arguments for Vertical Integration have been the avoidance of
        factor distortions in monopolized markets; uncertainty in the supply of the upstream
        good with the consequent need for information by downstream firms; and the
        transfer of risks from one sector of the economy to another. Furthermore, it has
        been pointed out that transaction costs might create important incentives for vertical
        integration.

 Williamson, supra, 71 Cal.L.Rev. at 604, n. 3, quoting Kleindorfer & Knieps, Vertical

 Integration and Transaction-Specific Sunk Costs, 19 Eur.Econ.Rev. 71 (1982) [citations

 omitted].

   119. However, Areeda and Turner have proposed that "substantial efficiencies" resulting from
a vertical merger be an "absolute defense." 4 P. Areeda and D. Turner, Antitrust Law, ¶ 1016 at
273-80 (1980). For discussions of the "efficiencies defense," see Stockum, The Efficiencies
Defense for Horizontal Mergers: What is the Government's Standard, 61 Antitrust L.J. 829
(1993); Fisher & Lande, Efficiency Considerations in Merger Enforcement, 71 Cal.L.Rev. 1580
(1983).

   120. W.D. Collins and J.R. Loftis III, Non-Horizontal Mergers: Law and Policy at 63 (1988).

                                                   24

to entry.121 One of the central issues analyzed by the Department of Justice in its 1984 Vertical
Merger Guidelines was where profitable entry after the merger would require simultaneous entry in
both of the markets in which the integrated firm operates. The merger was viewed to be
anticompetitive to the extent the new, post-merger requirement for simultaneous entry into both
markets decreases the likelihood that entry will occur in the noncompetitive market.122

         Through its opposition to the Generic Wireless Motion, AT&T seeks to deny the BOCs many
of the types of efficiencies (including those that provide savings from bundling) that will be achieved
through its merger with McCaw. In terms of the DOJ Vertical Merger Guidelines, the MFJ currently
stands as an absolute barrier to BOC entry into the interexchange market.123 Moreover, because of
the synergies claimed by AT&T between the supply of regional cellular and long distance services,
competitive entry into regional markets served by the surviving entity (the "primary markets") will
require entry into the interexchange market (the "secondary markets").124 Finally, we note that AT&T
will face limited competition in the relevant markets for regional cellular services from other
interexchange carriers which have yet failed to successfully combine their cellular and long distance
operations125 and that BOC affiliates are among McCaw's strongest competitors in the local cellular
markets. Together, these conditions strongly suggest that AT&T's cost advantage over the BOCs and
other cellular carriers in providing regional cellular services would enable AT&T to establish a price

    121. See BellSouth Petition, supra, at 20.

    122. This problem could exist if three conditions were present:

             First, the degree of vertical integration between the two markets must be so
        extensive that entrants to one market (the "primary market") also would have to
        enter the other market (the "secondary market") simultaneously. Second, the
        requirement of entry at the secondary level must make entry at the primary level
        significantly more difficult and less likely to occur. Finally, the structure and other
        characteristics of the primary market must be otherwise so conducive to non­
        competitive performance that the increased difficulty of entry is likely to affect its
        performance.
United States Department of Justice Merger Guidelines, 4 Trade Reg. Rep. (CCH) ¶13,103 at

§4.21 (June 4, 1984).

    123. Dr. Hausman characterizes the MFJ as an "artificial inhibition on entry." Hausman

 PUC Testimony, supra, at 41. See Generic Wireless Motion, supra, at 5-6 (referring to entry

 barriers to several telecommunications markets).

    124. See Southwestern Bell Petition, supra, at 37 ("AT&T's acquisition of McCaw will make
it significantly more difficult to enter the wireless market without being vertically integrated with
a long-distance carrier."); BellSouth Petition, supra, at 20.

   125. See Southwestern Bell Petition, supra, at 50-52 (describing MCI's periodic entry into and
exit from the wireless business and GTE's recent abandonment of its long distance businesses).

                                                  25

floor above marginal costs or to exclude competitors from regional cellular markets in which they
compete.126

         The MFJ may already limit the extent of regional cellular competition between the PacTel
and McCaw cellular affiliates serving the Sacramento, Stockton, and Chico LATAs. McCaw currently
uses a single MTSO to provide service to its subscribers throughout that region on an integrated
basis. PacTel also uses only one switch, located in Sacramento, to route cellular calls within each
of the three LATAs.127 However, because of the MFJ, PacTel must transfer calls to the preselected
interexchange carrier (which immediately routes the call back to PacTel) of any subscriber crossing
the boundaries between any two of those three LATAs.128 PacTel estimates that these wholly
unnecessary and redundant transfers are largely responsible for the 2,000 calls it estimates are
dropped per business day at its Mather and Lodi system cell sites.129 These transfers also increase
PacTel operating costs. The District Court did not grant PacTel's request for a waiver, which had
been filed two years earlier, because of an inadequate showing of the court's unique requirement of
a "community of interest in what is a single `metropolitan complex.'"130 Although PacTel will not be
subject to the MFJ after the "spinoff," the MFJ will still apply to PacBell, Bell South, U.S. West and
other BOCs which may enter California markets for local or regional cellular services in the future.

        3.	 AT&T Opposition to the Generic Wireless Motion and the Noerr
            Pennington Doctrine

         In its Noerr decision, the Supreme Court "shield[ed] from the Sherman Act a concerted effort
to influence public officials regardless of intent or purpose." United Mine Workers of America v.
Pennington, 381 U.S. 657, 670 (1965), citing Eastern R.R. Pres. Conf. v. Noerr Motor Freight, 365
U.S. 127 (1961). Thus, concerted petitioning activity designed to persuade legislators or other
governmental officials to impose a restraint on competition is beyond the reach of the antitrust laws.
The Supreme Court has extended this doctrine to include attempts to influence adjudicative bodies.
See California Motor Transport Co v. Trucking Unlimited, 404 U.S. 508 (1972). In particular, the

   126. See BellSouth Petition, supra, at 20 ("AT&T/McCaw would have a cost advantage over
the RBOCs in providing cellular service. As a result, AT&T/McCaw will be able to reap
supranormal profits if it priced the services similarly to its RBOC competitor. AT&T/McCaw
would also have the ability to price its service below the RBOC's cost. Because the RBOC could
not respond competitively to this pricing behavior without incurring losses, the RBOC would
eventually be forced to exit the market.")

   127. Request of Pacific Telesis Group for a Waiver of Section II(D) to Provide MultiLATA

Cellular Service in the Sacramento, Stockton, and Chico LATAs, at Attachment C, United States

v. Western Elec.Co., No. 82-0192 HHG (D.D.C. Sept. 26, 1988).

     128. Id. at 3.

     129. Id. at 5.

    130. U.S. v. Western Elec. Co., slip op. at 32 (D.D.C. Sept. 12, 1990).

                                                 26

doctrine is applicable to efforts to initiate and pursue litigation for anticompetitive purposes.
McGuire Oil Co. v. Mapco, Inc., 1992-1 Trade Cases ¶ 69,799, at 67,702-704 (11th Cir. 1992). Thus,
even though the MFJ prevents the BOCs from providing fully competitive regional cellular services,
AT&T litigative activities in opposition to the BOCs' Generic Wireless Motion may be protected by
the Noerr-Pennington doctrine.
B.       The Horizontal Consolidation of the Long Distance Operations

         A merger between competitors violates Section 7 of the Clayton Act if it significantly enhances
market power or facilitates coordination between competitors. Because it is relatively difficult to
challenge vertical mergers,131 the BOCs have "gone to great lengths in an effort to re-cast the merger
as a horizontal combination"132 between two suppliers of cellular long distance services.133 However,
as noted above, long distance services available for resale are strong substitutes for cellular long
distance services,134 arbitrage opportunities would defeat attempts to price discriminate between
cellular providers and other long distance customers,135 and the relevant geographic market would
include all long distance services available for resale throughout the United States.136 McCaw is a
very important supplier of cellular services, but its sales within the wholesale long distance market
are trivial compared to those of AT&T.137 The merger of the long distance operations of the two
companies will have only a minimal impact on the long distance industry, regardless of whether the
market for those services is in fact competitive.138

   131. See Willig and Bernheim Affidavit, supra, at 2.

     132. Willig and Bernheim Affidavit, supra, at 2.

   133. See Salop and Fisher Affidavit, supra, at 6.

     134. See Willig and Bernheim Affidavit, supra, at 17-18.

   135. Willig and Bernheim Affidavit, supra, at 5. GTE reportedly "purchases all wholesale
long distance services from AT&T -- both for cellular and for other purposes -- under a single
wholesale contract, and in effect resells a portion of this long distance capacity to its own cellular
unit." Id. at 18-19.

     136. See Willig and Bernheim Affidavit, supra, at 28-30.

    137. Professor Ellison estimates McCaw's share at .3 percent. Affidavit of Professor Glenn
 Ellison at 7 n.3, attached to AT&T FCC Opposition, supra. Assuming an AT&T market share of
 60 percent, the merger will increase the industry HHI by less than 40 points.

    138. The BOCs contend that the long distance markets are not competitive. See Willig and
 Bernheim Affidavit, supra, at 14. Industry observers do agree that AT&T has over 60 percent of
 the $50 billion market for conventional, landline long distance services. Hall, supra, at 18; Jerry
 A. Hausman, The Long-Distance Markets Today, at 5 (Nov. 12, 1993), attached to Opposition to
 the Motion of American Telephone & Telegraph Company for Reclassification as a
 Nondominant Carrier, In re Policy and Rules Concerning Rates for Competitive Common

                                                  27

C.      AT&T as a Potential Competitor in the Relevant Markets for Cellular Services

         In the absence of the merger, it is theoretically possible that AT&T and McCaw would have
competed at some time in the future in certain relevant markets for wireless services. AT&T
acknowledges that, prior to the merger, it was a "potential" supplier of PCS services. When those
services become commercially available, they will "rely on `microcells served by small, low power,
digital transceivers, providing wireless short range links on one side, and connections to landline
networks and higher powered cellular networks on the other." Geodesic Network II, supra, at 2.17.
The FCC expects that supply of PCS services "will be subject to substantial competition, both from
other PCS services . . . [and from] cellular services."

          Under the disputed139 "actual potential" competition doctrine, the "challenging party would
have to show that the acquiring firm had the capacity, interest, and economic incentive to enter the
market [at some time in the future. Even when there is no . . . present effect, the outside firm . . .
might add beneficially to competition at that future time.] Economic incentive . . . has been defined
as the likelihood that the acquiring firm could earn a profit after entry. Finally, the alleged entry must
be likely to occur in the near future." Pitofsky, New Definitions of Relevant Market and the Assault
on Antitrust, 90 Columbia L.Rev. 1805, 1831-32 (1990).140

        Beginning in May 1994, the FCC will begin to distribute licenses for the right to provide PCS
licenses in "basic trading areas" ("BTAs") and "major trading areas" ("MTAs") throughout the

 Carrier Services and Facilities Authorization Therefore, No. 79-252 (F.C.C. Nov. 12, 1993)
 ("BOC Reclassification Opposition"); AT&T, 1992 Annual Report, at 21. There is also
 widespread agreement that industry capacity far exceeds current demand, (Hausman PUC
 Testimony, supra, at 18; BOC Reclassification Opposition, supra, at 6; Hall, supra, at 23) and
 that "800" (Basket "2") (See Hall, supra, at 11) and analog private line (Basket "3") (Affidavit of
 Alfred E. Kahn and William E. Taylor at 5 n.10, attached to BOC Reclassification Opposition,
 supra ("Kahn and Taylor Affidavit")) services are competitive. However, there is considerable
 debate over the question of whether prices for regular residential and small business long
 distance ("residential, operator, and IMTS" or "basket 1") (Hall, supra, at 11; Kahn and Taylor
 Affidavit, supra, at 2; AT&T FCC Opposition, supra, at 47) services are also competitive. Much
 of this controversy surrounds the related issues of the significance of price leadership patterns
 within the industry (Hall, supra, at 25), ease of entry (Hall, supra, at 26) and whether AT&T
 rates, exclusive of access charges and productivity measures, are constrained by (i.e., equal to)
 "price cap" regulated prices or by competition. Hall, supra, at 18, 24; AT&T FCC Opposition,
 supra, at 48; Hausman PUC Testimony, supra, at 37-38.

   139. The potential competition doctrine has been challenged as unworkable. See, e.g., J.R.
Carter, Actual Potential Entry Under Section 7 of the Clayton Act, 66 Va.L.Rev. 1485 (1980). In
fact, "[t]here remains some uncertainty whether the future effect -- that is, the elimination of an
actual potential competitor -- is covered by Clayton Act § 7 at all." Areeda & Hovenkamp,
Antitrust Law, ¶ 1116', at 931 (Supp. 1991) ("Areeda & Hovenkamp").

   140. Areeda and Hovenkamp believe that the prima facie case is actually more complicated.
See Areeda & Hovenkamp, supra, ¶ 1116 at 931-33.

                                                   28

country.141 Because licenses will be auctioned, it is impossible to identify which licenses particular
bidders will obtain. At this time, there is also considerable speculation about how long it will take
before PCS services become fully operational. Because of these and other uncertainties, we cannot
find that AT&T had the requisite capacity, interest, and economic incentive to enter any California
local or regional market currently served by McCaw.

VI.      CONCLUSION

          We conclude that the merger of AT&T and McCaw will have significant procompetitive
effects. AT&T and McCaw operations are highly complementary, and the merger of these companies
is likely to significantly reduce the cost to McCaw of providing local and regional cellular services.
It is unlikely that the merger will have anticompetitive effects in other markets, such as those for
interexchange services and related franchise rights. Although the merger will obviously preclude
further competition between AT&T and McCaw in certain wireless markets, we will not speculate
about future competitive effects in geographic and product markets which do not currently exist. On
balance, the merger between AT&T and McCaw will result in higher quality services and lower rates
for consumers who obtain cellular services from the merged company.

         We also believe that the benefits of the merger to consumers would be enhanced if the Bell
Operating Companies (BOCs) were allowed to fully compete against McCaw in the provision of
regional cellular services. The Modified Final Judgment (MFJ) adopted by the federal district court
prohibits the BOCs from providing cellular long distance services. The merger will strengthen the
competitive advantage that McCaw already has over the BOCs in the markets for regional cellular
services. However, in our view, leveling the "playing field" on which McCaw and the BOCs compete
would improve the quality of, and reduce the rates for, cellular services available to consumers in
California, as in other states. Because of the restrictions of the federal court decree, PacTel and the
other BOCs, which are McCaw's strongest and most natural rivals, have been unable to take full
advantage of their landline system in the placement and routing of cellular long distance calls. In
addition, the absence of a cellular long distance "bottleneck" indicates that BOC entry into the
cellular long distance market would not enable their local telephone affiliates to engage in
anticompetitive conduct against other cellular companies.

          In the final analysis, it is essential that in the age of the "information highway," a full range
of suppliers be allowed to compete in providing telecommunications services to the public, and that
artificial restraints imposed by judicial decrees should be modified in order to advance competition
within this field. The MFJ, whatever its other merits, seems outdated as a framework for regulating
competition in the cellular long distance market; indeed, that market did not exist, at least to any
measurable degree, at the time that the decree was entered. In the telecommunications industry, as
in other markets, competition will accelerate and, we believe, result in higher quality and lower costs,
and thus will provide significant benefits to the people of California and other states.

   141. See Notice of Proposed Rule Making, In re Implementation of Section 309(j) of the

 Communications Act Competitive Bidding, No. 93-253 (F.C.C. Oct. 12, 1993).

                                                    29

          Therefore, we conclude that this merger will not adversely affect competition within
California but we urge the Commission to consider in a separate proceeding the possibility of
supporting attempts by the BOCs to remove wireless from the interexchange restrictions of Section
II of the MFJ.

                                           *****

                                               30