Essential facilities and Trinko: should antitrust and regulation be combined?

• Author: Brennan, Timothy J.
• Position: The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospective

1. INTRODUCTION II. COMPARING A T&T AND TRINKO: CHANGES IN ATTITUDES, CHANGES IN LATITUDE III. REGULATION AND ANTITRUST AS COMPLEMENTS, NOT SUBSTITUTES IV. "ESSENTIAL FACILITIES" AND TRINKO: TWO SIDES OF THE SAME COIN V. SHOULD ANTITRUST AND REGULATION BE COMBINED? I. INTRODUCTION

   Having worked on the economics of competition and regulation in telecommunications since before AT&T's divestiture of its local telephone operating companies was announced in early 1982, (1) I have learned at least one lesson: issues never die. Even after a quarter century, we (taken in both the national and international senses) continue to cope with the extent to which competition can and should displace regulation in this sector and the degree to which telecommunications companies can vertically integrate. Nationally, struggles over the scope of regulation have taken place over the definition and terms of access to "network elements." (2) An international example of that struggle is the recent proceeding in Canada in which the national government intervened to force the Canadian regulatory agency to set relatively favorable terms for the deregulation of local telephone service. (3)

   Vertical integration was a central issue in the antitrust case leading to the AT&T divestiture, which itself was a vertical remedy. There, the concern was that AT&T used its control over the local monopoly to discriminate in the amount and quality of access against competitors in long-distance and terminal equipment markets. (4) Regulation provided the incentive to discriminate, by preventing AT&T from directly profiting from its local monopoly, giving it the impetus to create and exploit market power in those less regulated or unregulated sectors. (5) A second vertical concern was that AT&T allegedly could force its local ratepayers to bear the costs of its operations in less regulated markets, allowing it to cross-subsidize and price without regard to cost. (6) This created credible predatory threats that would discourage entry into otherwise competitive markets, particularly private line services. (7) In the present, a notable example of concern regarding vertical integration is the debate over "net neutrality," which to some degree deals with the ability of broadband providers to determine, if not outright own, the content that goes over their facilities. (8)

   Although the issues may remain relatively constant, perspectives on them can change. This Article illustrates this first by comparing the outcome in U.S. v. AT&T to the recent and substantively similar 2004 Supreme Court decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko. (9) Comparing the two, and reviewing other decisions contemporaneous with both, indicates a radical change in the relationship between competition law and regulation law. At the time of U.S. v. AT&T, the courts applied antitrust law to regulated industries absent a "plain repugnancy" (10) test regarding antitrust in the regulatory statute. In Trinko, the Supreme Court took the contrary position that the benefits of antitrust enforcement in the presence of regulatory authority covering the conduct at issue were minimal, despite an explicit "savings clause" in the underlying statute--the Telecommunications Act of 1996. (11) This Court's view was not gratuitous; it reinforced it in granting securities law precedent over antitrust in its 2007 decision in Credit Suisse Securities v. Billing. (12)

   The implicit assumption in the recent decisions is that regulation and antitrust are substitute methods for controlling market power. In fact, regulation and antitrust are complementary in this context, as well as in others. (13) Absent regulatory constraints on the direct exercise of market power over the local exchange (AT&T) or network elements (Trinko) through monopoly pricing, the regulated firm would have no incentive to subvert competition in related markets. Failure to see this has affected not just telecommunications and antitrust, but other monopolization cases as well, notably United States v. Microsoft Corp. (14)

   The change in legal presumptions from AT&T to Trinko and Credit Suisse can be thought of as an assertion that in regulated industries, a sector-specific regulator should do both antitrust and regulation, rather than leave the former to a separate body of law and enforcement agency. (15) Ironically, a hallmark of Trinko was the Court's explanation of why it rejects the application of an "essential facilities" (EF) doctrine to monopolization law. (16) One reason that defining an EF remains problematic is because to identify one in theory, one has to ask whether regulation would increase output. (17) Unfortunately, this precludes logically using EF doctrine as a prior justification for regulating.

   The irony is that the EF doctrine rejected in Trinko makes exactly the same institutional point as does the Trinko decision overall--the same institutions should both regulate price and enforce antitrust law. This is because effective relief in an EF case requires price regulation. This Article elaborates the points made above, and concludes with a brief assessment of whether, as both Trinko and the EF doctrine say, it is best if price regulation and antitrust are left to the same entity, whether it be a sectoral regulator or an antitrust court.

2. COMPARING A T&T AND TRINKO: CHANGES IN ATTITUDES, CHANGES IN LATITUDE (18)

   U.S. v. AT&T and Verizon v. Trinko were in many respects substantively identical, as Table 1 indicates. (19) First, the structural relationships were parallel. In AT&T, the defendant possessed a regulated monopoly over local telephone service generally, and also provided competitive long-distance service. In Trinko, the regulated monopoly was over the physical loops themselves, while the competitive market opened by the Telecommunications Act of 1996 (20) was the retailing of services over those loops. In both contexts, we had entrants. During the 1970s, new suppliers of long-distance service included MCI and Sprint, while the post-Telecommunications Act world was designed to encourage competitive local exchange carriers, including AT&T, which switched from being the local service provider to a local service entrant, prior to its acquisition by Southwestern Bell. (21)

   In both cases, the vertically related competitors needed services from the regulated monopolies. In the 1970s and 1980s, long-distance carriers needed local access to serve their customers. More recently, those wanting to serve retail customers needed access to loops to be able to connect customers to their switches and networks. (22) Similar discriminatory allegations were made involving denials of access, outages, and inferior quality and technical support, leading to accusations that such conduct led to monopolization of the erstwhile competitive markets in long-distance (AT&T) and local retailing (Trinko). Not only were the economic settings essentially identical in both cases, the FCC exercised oversight regarding interconnection in both contexts as well.

   Nonetheless, the outcomes could not have been more different. In U.S. v. AT&T, the result was AT&T's divestiture of its local operating companies, along with requirements that all who use the exchange get equal access. (24) In addition, the divested local telephone companies were forbidden from entering vertically related markets. This restriction generally persisted until the Telecommunications Act of 1996 replaced the AT&T settlement decree with detailed regulatory procedures to allow the divested companies to reenter prohibited lines of business--particularly long-distance service--and to facilitate competitive entry in local services, as carriers using the incumbent's facilities or their own. The divestiture in AT&T was the result of a settlement rather than a completed trial, but it was adopted prior to trial court rulings that arguably indicated that the court believed the government had presented a compelling case.

   The decision in Trinko was exactly the opposite. Rather than apply the antitrust laws because a firm was monopolizing a market in order to evade regulatory profit constraints, the Supreme Court invoked regulation as a justification not to apply the antitrust laws. One justification was that the Supreme Court regarded Verizon's conduct, not in terms of regulatory evasion, but as simply a refusal to deal with a competitor. The Court properly regarded duties to deal as rarely justified, on the grounds that such obligations are likely to chill...