Paved with good intentions: how interLATA data relief undermines the competitive provisions of the 1996 Act.

• Author: Walker, Jean F.
• Position: Local access and transport areas; Telecommunications Act of 1996

1. INTRODUCTION

   Just over five years ago, former President Clinton signed the Telecommunications Act of 1996 ("1996 Act") into law, effectively opening long-shut doors to competition.(1) Today, Congress faces the question whether to close those doors once again. H.R. 1542, the "Internet Freedom and Broadband Deployment Act of 2001," seeks to provide Bell Operating Companies ("BOCs") with interLATA relief for the provision of data services. This allows BOCs to provide data services across the LATA boundaries that have restrained them for the nearly two decades since the breakup of AT&T, without complying with the competitive provisions of the 1996 Act. H.R. 1542 aims to lift limitations on "consumer choice and welfare"(2) and to "bridge" the "digital divide."(3) The newly introduced H.R. 1542 takes the place of its identical twin from the 106th Congress, H.R. 2420.(4) This Note illustrates how legislative initiatives like H.R. 1542 not only will fail their essential purpose, but also will harm the consumer choice and welfare they claim to protect.

   As the market moves toward convergence among and within telecommunications industries, legislators evaluating H.R. 1542 must remember the purpose underlying AT&T's divestiture and the subsequent competitive provisions of the 1996 Act: "Free and open competition brings about the lowest possible prices and the mix of services that is most closely aligned with consumers' preferences."(5) Until the local exchange markets are open to robust competition, some regulation must remain in place to afford more choice and lower prices to consumers. If enacted, H.R. 1542 will destroy consumer choice and raise prices by toppling the painstakingly constructed balance struck by the 1996 Act.

   In the past few decades, the climate has transformed for telecommunications companies from unification to fragmentation and back again. Part II of this Note discusses the beginning of this cycle, the divestiture of AT&T, which imposed the original restrictions on BOCs with respect to the provision of interLATA service. Part III describes the competitive provisions of the 1996 Act, which replaced the twelve-year-old restrictions imposed by the divestiture of AT&T.(6) In light of this history, H.R. 1542 attempts to solve the problem of the digital divide by providing expansive interLATA relief for data services. Part IV examines the problem of the digital divide, and Part V provides the background of H.R. 1542. As this Note will show, several feasible solutions superior to H.R. 1542 already exist to address the same problem. Part VI discusses alternatives to changing the current law and why these alternatives are far better than H.R. 1542's heavy-handed solution. Part VII argues that the critical shortcoming of H.R. 1542 is not that it represents an ill-fitting, duplicative solution to the problem of the digital divide, but rather that it will harm consumers in rural and urban areas by eliminating choice and raising prices.

2. THE HISTORY OF THE BELL OPERATING COMPANIES

   To properly understand the debate surrounding this type of legislation, one must understand the terminology and law that arose out of the divestiture of AT&T. The entrance of MCI and other companies into the long-distance market in the 1970s first foreshadowed a potential antitrust action against AT&T.(7) Despite competition from MCI and others, AT&T still commanded about eighty percent of the long-distance market in the late 1970s and early 1980s.(8) The Justice Department ("DOJ") leveled an antitrust suit against AT&T in 1974,(9) because "in the absence of restrictions on their ability to enter new lines of business, the BOCs would cross-subsidize competitive services with their monopolized local services, and would discriminate against competing long-distance companies when providing the connection to the local network."(10)

   On January 15, 1981, proceedings commenced before Judge Harold Greene in the DOJ's case to break up AT&T's monopoly.(11) Cross-subsidization and other monopolistic tactics formed the impetus behind the divestiture: "[A]s long as local exchange service providers were allowed to sell long-distance service, competition in long-distance service could not be free and open."(12) On January 8, 1982, AT&T and the DOJ announced a settlement to break up AT&T, which they called the Modified Final Judgment ("MFJ" or "divestiture agreement").(13) Almost two years later, on January 1, 1984, the divestiture agreement took effect.(14) As part of that agreement, LATAs and BOCs were born.(15)

   1. BOCs

      The divestiture agreement separated the long-distance portion of AT&T's business from its local service portion.(16) Separate companies, BOCs, were formed to provide local service. As part of the divestiture, BOCs were grouped into seven, roughly equivalently sized, Regional Bell Operating Companies ("RBOCs").(17) The original seven have, through mergers, now become four: SBC, Verizon, Qwest, and BellSouth.(18) Under the terms of the divestiture, the BOCs were not allowed to manufacture equipment or, more importantly, to provide long-distance service.(19)

   2. LATAs

      Prior to divestiture, BOCs had operated within geographically designated areas.(20) The divestiture agreement in U.S. v. AT&T further fragmented these regions into local access and transport areas ("LATAs").(21) A LATA defines the area in which a BOC may offer local exchange service.(22) LATAs generally follow state boundaries, contain more area in sparsely populated regions, and encompass the territory of only one RBOC.(23) Currently, 196 LATAs exist in North America.(24)

      The MFJ prohibited BOCs from providing service across a LATA boundary ("interLATA" service).(25) "This limitation restricted the BOCs to providing service only for calls originating and terminating within the same LATA ("intraLATA" calls). These line-of-business restrictions constituted the heart of the MFJ and dramatically changed the structure of the telecommunications industry by forcing the BOCs out of the long-distance market."(26) In February 1996, the competitive provisions of the 1996 Act supplanted the authority of the MFJ.(27)

3. THE ROLE OF THE TELECOMMUNICATIONS ACT OF 1996

   The 1996 Act replaced the MFJ with sections 251, 252, and 271.(28) These sections immediately permitted some interLATA service, if such service was provided outside the legacy region of a BOC.(29) These sections also provided the "carrot" of complete interLATA relief for a BOC if it could prove to the Federal Communications Commission ("FCC" or "Commission") that it had complied with the market-opening provisions of section 251.(30) The 1996 Act also arguably transferred jurisdiction over LATA boundary questions from the district courts to the FCC.(31) Certainly, section 271 provided the Commission with the exclusive authority to determine whether a BOC could provide in-region interLATA service.(32)

   Taken together, sections 251,252, and 271 comprise the competitive provisions of the 1996 Act.(33) These sections provide a mechanism to open the monopolistic local exchange market to competition. Section 251 sets forth the obligations of incumbent local exchange carriers ("ILECs") and BOCs to share their facilities with competitors.(34) Section 271 provides the opportunity for BOCs to provide interLATA voice and data services by satisfactorily opening their networks as required by section 251.(35)

   In return for stripping the BOCs of their local-service monopoly, the 1996 Act permits them to compete in the long-distance service market--an area from which the prior regulatory scheme had banned them.... Congress designed the 1996 Act to spark intense competition in both the local and long-distance markets.(36) These competitive provisions form the "centerpiece" of the 1996 Act.(37) The exclusion of the FCC's forbearance rights from the implementation of these provisions illustrates the value Congress placed on these provisions. "The FCC's privilege of `regulatory flexibility' under the 1996 Act--a precious and hard-fought power to `forbear' from enforcing obsolete or unreasonable portions of its statutory mandate--does not extend to the incumbent LEC provisions of section 251 or to section 271."(38) The Commission's power to revoke its approval of a BOC's section 271 application, if it believes that a BOC is no longer complying with the competitive requirements, also illustrates the force of these provisions.

   1. ILECs and CLECs

      An incumbent local exchange carrier is the dominant local exchange provider within a geographic area.(39) A BOC is always classified as an ILEC, but an ILEC is not necessarily a BOC, because some ILECs, such as GTE before it merged with Bell Atlantic, were the dominant local providers in particular regions and existed before the 1996 Act, but were not a part of the Bell system. The 1996 Act created a distinction between ILECs and competitive local exchange carriers ("CLECs")(40) by setting out special requirements for ILECs beyond those applicable to all local exchange carders in order to open the local exchange markets to competition from CLECs.(41) CLECs--local exchange providers established after the enactment of the 1996 Act(42)--will generally struggle to enforce the market-opening provisions of the 1996 Act against an ILEC so that they might compete freely in the local exchange market as the 1996 Act envisioned.(43)

      The 1996 Act contemplated three methods for CLECs to compete in local markets. First, CLECs compete through "interconnection"--building proprietary networks that they then "interconnect" to incumbents' networks.(44) This allows CLECs' customers to complete calls to and receive calls from ILECs' customers. Both the CLEC and the ILEC may charge for completing a call originating in the other's network--reciprocal compensation.(45) Second, CLECs may compete through "unbundling"--the leasing of unbundled network elements ("UNEs"),(46) the components of the local network.(47) A...