Telephone Industry, Regulation of

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Commercial telephone service began in the United States in 1877. Recognizing the advantage of monopolistic control over the industry, the fledgling Bell Telephone Company sought regulation as protection from "aggressive competition" during the period from 1877 to 1910. The U.S. Congress responded with the Mann-Elkins Act of 1910, which effectively brought interstate telecommunications traffic within the regulatory jurisdiction of the Interstate Commerce Commission (ICC). The ICC, however, maintained a focus on interstate rail traffic more than on interstate telecommunications. Nevertheless, the ICC, along with the U.S. Department of Justice (DOJ), became concerned with the rapid growth of Bell Telephone. The two agencies attempted, in 1913, to force Bell Telephone into the Kingsbury Commitment, which was a decision designed to limit monopolistic growth by requiring Bell Telephone to provide interconnection to independent telephone companies and to refrain from further acquisitions. The Willis-Graham Act, however, overturned the Kingsbury Commitment, so after 1921, the ICC was authorized to approve telecommunications consolidations, and the agency approved almost all of them.

The ICC regulated interstate telecommunications, but individual states controlled intrastate telecommunications. The distinction between interstate and intrastate communication, however, has been a vague one. Two cases, the Shreveport Rate Case (1914) and Smith v. Illinois Bell Telephone Co. (1930), broadened federal authority at the expense of state power due to the often unclear distinction between intrastate and interstate telephone service. This power, later transferred to the Federal Communications Commission (FCC), facilitated the breakup of the Bell System in the 1980s and allowed for the reentry of the individual Regional Bell Operating Companies (RBOCs) into interstate service in the 1990s.

The ICC actually did little to regulate consolidations and the monopolistic growth of Bell. While the commission was given this authority in 1921, the ICC was not powerful enough to regulate the growth of the industry. The Willis-Graham Act indicated that telecommunications regulation was an imperfect and inadequate adaptation of railroad regulation to the communication field; the ICC lacked significant broad statutory authority under such ambiguously applied policies. However, the ICC did prove to have the power to preempt state regulation. The stage was now set for the development of a new federal agency with broader statutory authority than the ICC and a mandate to encourage the development of a telecommunications infrastructure designed for adoption by all U.S. citizens.

By the early 1930s, 98 percent of all calls still did not cross state lines. Therefore, at some level, there remained a distinct geographic division in the regulation of state and federal telecommunication services. Furthermore, the potential of telephone services was not being exploited. The main objective of the Communications Act of 1934, then, was to make available to all U.S. citizens wire and radio communication service at reasonable charges in order to support the expansion of the communication infrastructure. The act addressed telecommunications services generally, but it specifically addressed in subchapter two the regulation of common carriers, or those entities whose services are open to public hire for handling interstate or international communications by electrical means.

The FCC was created by the Communications Act of 1934 as the primary regulatory agency of the telecommunications industry. Among other duties, the FCC was created to oversee common carriers. While the distinction between intrastate and interstate telecommunications services has always been a tenuous one, individual states were granted authority over most matters of intrastate services, terminal equipment, and intercity services. The FCC does, however, influence the economics of intrastate communication through local exchange carriers (LECs)—to the extent that it prescribes a uniform system of accounting to be followed by all providers, prescribes the depreciation practices to be followed by providers, and has the authority to set the value of communications property used in providing services.

Established as the primary regulatory authority over U.S. telecommunications services, the FCC carried the mandate to enforce the Communications Act of 1934. The FCC has relied on its serving of the public interest as the root of its power as a regulatory authority. As is obvious in section 201(a) of the 1934 act, public interest was implicitly defined by consumer access, traditionally referred to as universal service. Thus, while the industry faced little competition until the 1970s and sought regulation as a form of protection from competition, section 201(a) clearly establishes the requirement for interconnection with other companies and services if the FCC deems such interconnection necessary for the advancement of the public interest.

Competition, in service of the public interest, is the implicit guiding principle for regulation under Title II of the Communications Act of 1934. Therefore, since 1959, federal regulators began to view telephony less as a natural monopoly and adopted and implemented a consistent policy that encouraged competitive entry into the telecommunications market. Furthermore, beyond the shifting attitudes concerning competition and monopoly-based pricing, technology-driven changes began to affect the rules of entry for new companies and services.

Refusal to interconnect with new technology and face potential competition is what led to the eventual dissolution of the Bell telephone monopoly. The FCC made its "Above 890" decision in 1959, which allowed companies other than American Telephone & Telegraph (AT&T) to provide long-distance services using microwave frequencies. The FCC allowed Microwave Communications, Inc. (MCI) to enter the telecommunications market in 1969. This decision effectively destroyed Bell Telephone's monopoly and opened common-carrier services to competition. The aggressive defense taken by AT&T/Bell drew the attention of the DOJ, which brought a major antitrust suit against the company in 1974. This federal action against the Bell System was actually a carryover from an earlier 1956 consent decree between the DOJ and AT&T to settle a 1949 lawsuit. In 1949, the DOJ determined that AT&T had violated the Sherman Antitrust Act of 1890 by monopolizing manufacturing, distribution, sales, and installation of telephone equipment. The DOJ determined that the lack of competition in the telephony market inhibited the growth of universal service. The DOJ requested that AT&T relinquish Western Electric, which was the manufacturing unit of AT&T. AT&T signed a consent decree in 1956 that prohibited the company from engaging in any business other than common-carrier service.

The 1974 antitrust suit against AT&T was settled after several years in what has become known as the 1982 Consent Decree. AT&T agreed to divestiture of its operating companies under this agreement so long as it could enter other unregulated markets. The parent company became three distinct entities after completion of divestiture in 1984: (1) AT&T provided common-carrier service, (2) the company's products division eventually became Lucent Technologies, and (3) the company's LECs produced seven RBOCs. The Modified Final Judgment governing the process produced a change in how exchanges were conceptualized. Exchanges were no longer defined by state boundaries but were now defined by much larger local access and transport areas (LATAs). Thus, the RBOCs were not responsible for intrastate communication but intraLATA services; AT&T and the other interexchange carriers were now responsible for interLATA telecommunications.

This attempt to dissolve the power of a telecommunications monopoly seems, ironically, to have facilitated later attempts at reconsolidation of the industry. LATAs further blurred the distinction between intrastate controls over telecommunications and federal interstate controls. It is important to note that the Communications Act of 1934 did not specify the regulatory jurisdiction for any matter that did not divide neatly along intrastate and interstate boundaries. Also, by the time the Modified Final Judgment was implemented, technology, not the states, was driving policy. Technology-driven innovations further facilitated the evolution of the industry from monopoly to competition. The FCC is granted power by section 154(i) of Title 47 of the Communications Act of 1934 to expand its authority with changes in technology as long as such changes are necessary for performance of its functions. Under authority of the 1934 act, the FCC began in 1966 to look into the possibilities of merging telecommunications and computer technology. While the benefits of merging the technologies became clear, the FCC realized that encouraging the unregulated development of computer services with regulated telecommunications services would be difficult. The FCC made its Carterfone decision in 1968, allowing non-AT&T equipment to be attached to existing networks, thus relaxing regulations to encourage such technological innovation.

Because the Communications Act of 1934 encouraged increased public access, and because lower costs to the consumer encouraged wider adoption of telecommunication services, technological innovations were encouraged for furthering the expansion of the infrastructure. Federal regulators' allowance, after the 1982 Consent Decree, of AT&T and other common carriers into unregulated markets encouraged exploration into the potentials of merging telephony with other technologies, such as cable and computer technology. The use of unregulated technologies, such as fiber optics, have allowed telephone companies to bypass regulation altogether because alternative services fall outside the realm of "common carrier" as technically defined by the 1934 act.

The FCC had broad discretion in the enforcement of the 1934 act; section 401(a) gave federal district courts jurisdiction over FCC enforcement actions that failed to comply with any provision of the act. The U.S. Court of Appeals for the District of Columbia, in fact, did challenge a major FCC decision in 1978 concerning MCI. In 1975, MCI petitioned for approval of Execunet, which was an interconnected, switched network. The FCC determined that the network was not a private system and therefore was not allowable under the 1970 Specialized Common Carrier decision. While not disagreeing with the FCC, the court insisted that the commission had not presented evidence illustrating that Execunet would harm the telecommunications infrastructure. The Execunet appeal was the major turning point in the FCC's stance on competition and was possibly as significant as the divestiture of AT&T for telecommunications deregulation.

Telecommunications regulation falls under the control of the individual states and under the FCC. Nevertheless, the U.S. telephone industry appears to have been shaped more by antitrust law than any aspect of federal or state regulation. While the FCC may address unfair business practices leading to potential monopolies, antitrust violations fall primarily under the jurisdiction of the DOJ. Antitrust policy typically is brought to bear upon perceived monopolies under the Sherman Antitrust Act, this being an act originally targeted at the U.S. rail system. One important doctrine of antitrust policy relates to the notion of "essential facilities." The principle behind this doctrine is that one firm may control a market, thus blocking competitors from entering or punishing those already in the system, through the control of facilities necessary for operation in that market. The doctrine does not mandate the absolute equality of access for all, but is often used to enforce a reasonable and feasible attempt at fair competition.

The FCC began to support antitrust-based regulation once its philosophy toward telephony evolved from that of natural monopoly to one of competition. In retrospect, it is evident that the period from the mid-1950s to the early 1970s would lead to an eventual confrontation between the key players in telephony, AT&T/Bell and the FCC. Furthermore, the FCC has always had individual states with which to contend in telecommunications regulation, since the 1934 act that established the commission also created the tenuous divide between state and federal lines of communication. With the major exception of Louisiana Public Service Commission v. FCC in 1986, the courts have traditionally held that the FCC has jurisdiction over all facilities except those that clearly belong to intrastate networks, and the U.S. Court of Appeals for the Fourth Circuit effectively established a presumption that all facilities are interstate facilities. Also important in the enforcement of telecommunications policy is the DOJ, which is the agency responsible for the enforcement of fair U.S. trade practices.

The RBOCs were being considered for entry into interstate long-distance service almost immediately after divestiture. In fact, the RBOCs requested waivers for entry into new unregulated lines of business from the point of their genesis in the 1982 Consent Decree. The basic policy debate at the time, of course, was between fears of rising anticompetitive behavior on the part of the RBOCs versus fears of lost competitive benefits by restricting their entry into markets beyond intraLATA telecommunications service. A particular antitrust concern that remains is the "bottleneck" dilemma. The concern has been that monopoly control over essential facilities, the LECs, was inevitably created by restricting the RBOCs to intraLATA telephony. Beyond this basic antitrust issue, the courts were also worried that the rush of the RBOCs to diversify just weeks after divestiture represented their lack of concern for universal service.

Nevertheless, the mood toward telecommunications in the United States after divestiture was one that supported competition. In a proposal that fore-shadowed the Telecommunications Act of 1996, the Danforth Amendment (1986) attempted to define the primary objective of the FCC as the preservation of universal availability of affordable telephone service while maintaining a particular emphasis on competition rather than regulation for the future development of telecommunications services. If any one individual illustrated the competitive tone concerning telecommunications deregulation leading up the 1996 act, however, it was none other than the then-chairman of the FCC, Mark Fowler. From his appointment in 1981, Fowler's reconception of "public interest," the guiding principle of the FCC in most matters of telecommunications regulation including merger review, demonstrated his push for marketplace principles. Fowler considered marketplace principles to be the best means for access for the poorest segments of the U.S. population. Therefore, competition, not protection, was clearly established as being synonymous with the public interest.

One principle seems to have defined telecommunications policy in the mid-1980s: uncertainty. The principle regulatory authority was pushing for competition, not regulation. It was clear that, with the exception of the 1986 Louisiana decision, the states had little say in the future of regulation of telecommunications. Most would agree that technological advancement guided regulatory decisions by the time the FCC proceeding known as the Third Computer Inquiry (Computer III) was settled in 1987. The deregulatory context leading into the 1990s indicated that there was a need for an updated policy with regard to regulating telecommunications. Furthermore, in retrospect, it appears evident that it would be only a matter of time before monopoly would once again dominate U.S. telecommunications. Many predicted that once the RBOCs were allowed to enter the long-distance market, bundled services and "one-stop shopping" would again be available. It seemed that almost everyone anticipated the marketplace approach to regulation as the means to serve the public interest the best. Fowler insisted that the local-exchange market would become competitive with the inclusion of services such as cable and cellular radio providers and called for a reexamination of the government's regulation of the U.S. telecommunications industry. Fowler, essentially, called for implementation of the Telecommunications Act of 1996.

See also:Bell, Alexander Graham; Communications Act of 1934; Telecommunications Act of 1996; Telephone Industry; Telephone Industry, History of; Telephone Industry, Technology of.


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Martin L. Hatton