Justice Department and Bells battle over strategic documents

STEPHEN N. BROWN

Woe to those companies that do not grasp the subtleties of American law. In its editorial on December 27, The Wall Street Journal correctly opined on the Telecommunications Act of 1996: "The process of writing this bill has been shaped by so many competing political and commercial interests...that it is hard to believe that even its authors can recognize any more which end of it is up. ...[The bill] is so full of tortuous compromise language that nobody...will be quite sure of what`s been approved." Compromise always leads to ambiguity, to the need for further clarification by courts and to more lawsuits.

The cycle has begun. Four regional Bell operating companies have fired on the U.S. Department of Justice, which is firing back. In a suit filed in the U.S. District Court presided over by Judge Harold Greene, Bell Atlantic, BellSouth, Nynex and SBC Communications Inc. have demanded that the Justice Department return to them the strategic plans the companies handed over last year in a case now under a court secrecy order. The latest suit stems from two seemingly unrelated aspects of the new law. One purpose of the law was to strip Greene of his jurisdiction over the telecommunications industry, which he had established in the 1982 AT&T divestiture case, U.S. vs. Western Electric Co. Inc. Thus, Section 601 of the new law states: "Any conduct or activity that was before the date of enactment of this Act, subject to any restriction or obligation imposed by the AT&T Consent Decree shall, on and after such date,...not be subject to the restrictions and the obligations imposed by such Consent Decree." This language finishes Greene`s tenure as a telecommunications policymaker but does not end his role as a judge. He will decide if the Justice Department has to return the companies` secret documents.

No jurisdiction for Greene

The companies argue that because Greene no longer has jurisdiction over issues stemming from the Consent Decree, all pending cases are moot and the Justice Department has no right, need or legitimate use for the material. The case would be open and shut in a day were it not for Section 151 of the law. It contains the so-called "Special Provisions Concerning Bell Operating Companies," which spell out the conditions that must be met before the Federal Communications Commission (FCC) allows the Bells into the long-distance market: "Before making any determination...the Commission shall consult with the Attorney General, and if the Attorney General submits any comments in writing, such comments shall be included in the record...[of the] Commission`s decision. In consulting with and submitting comments to the Commission...the Attorney General shall provide to the Commission an evaluation of the [company`s] application [to offer long-distance service] using any standard the Attorney General considers appropriate. The Commission shall give substantial weight to the Attorney General`s evaluation, but such evaluation shall not have any preclusive effect on any Commission decision."

The language gives the Justice Department considerable influence in the FCC`s decision making. Therefore, to rebut the Bells` argument, the Justice Department reminded the court about the law`s consultative language and stated that the companies` secret documents are "undeniably relevant to the FCC proceedings." Imagine the FCC`s power if it can use those documents as a cross-check to evaluate the companies` long-distance plans. The strategic value of those documents and the importance of the Justice Department keeping them are not lost on AT&T. It filed a legal brief in support of the government. Given his history of concern and suspicion about the Bells, Greene will most likely rule in favor of the Justice Department.

Look to San Antonio

This case is propelled by the Justice Department`s antitrust concerns that a regional Bell`s market power will crush the competition at the first opportunity. If the Department wants a window on the future behavior of the regional companies, the agency should follow a current case involving a small fiber-optic network in San Antonio, TX, the home of SBC Communications and its newest acquisition, Pacific Telesis Group, the Bell holding company providing local telephone service in California and Nevada (see page 3). The city`s municipal electric utility, City Public Service, has installed 60 miles of fiber-optic cabling. and plans to add another 250 miles as part of a $21-million expansion plan to improve communications between power plants and substations. The side benefit is the abundant capacity of the fiber-optic network, which can be used to offer telecommunications services.

That prospect prompted ICG Access, a member of the Denver-based Intelcom Group, to pay half of the $21 million in exchange for a 25-year lease on the network`s excess capacity and the right to use that capacity for retail and wholesale communications services. ICG expects to serve high-volume commercial clients. However, Southwestern Bell (a subsidiary of SBC Communications) is trying to stop the utility from leasing the capacity and to stop ICG from reselling it. Southwestern Bell claims the arrangement is illegal because it makes San Antonio a competitor. The company suggests that it is regulated by the city through its franchise fees and right-of-way permits. Bell also contends the contract between ICG and the city violates state law and the city charter.

ICG`s Sheldon Ohringer, vice president of business development and strategic planning, describes Bell as "tortuously interfering with" the contract between ICG and the city. In response, ICG has filed a lawsuit against SBC. The suit has far-reaching implications for municipalities across the nation because many of them want to build a telecommunications network on the back of existing services, such as a municipal electric utility. The network would then be run by the city or leased to a competitive local exchange carrier such as ICG. Anaheim, CA, and Lakeland, FL, are leading the way and have issued requests for proposals that contemplate city-owned fiber networks that offer communications services to the private sector. The outcome of ICG`s suit depends on whether Texas`s 1995 telecommunications law allows municipalities to gain revenue by leasing communications capacity to would-be competitors of incumbent telephone companies.

If the contract is in violation of state law, then the state law probably violates the new federal law. It places a duty on the FCC and state public service commissions to prevent the quashing of such networks. Section 706 of the law states: "The [Federal Communications] Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans by...measures that promote competition in local telephone markets [where] the term `advanced telecommunications capability` is defined, without regard to any transmission media or technology, as high-speed, switched, broadband telecommunications capability..." This language appears to override state law and any lawsuit that could be filed by Southwestern Bell. Also, the Texas law may be overhauled soon because one of its chief provisions appears to contradict federal law regarding the development of competition to local markets. The law requires any long-distance company with more than 6% of the Texas market to install enough cabling and telephone switches to serve at least 60% of the local customers in any 25-square-mile area. This requirement is aimed at and affects only AT&T, MCI and Sprint. One way or another, the Texas law will likely be overturned.

Projects such as those in San Antonio, Anaheim and Lakeland fill a gaping hole in the Telecommunications Act of 1996. The Act does nothing to wean broadband deployment away from its dependence on video entertainment, which is considered the only service with a market large enough to support broadband investment. When that market is unsettled, broadband deployment suffers. Companies that depend on video markets for the financial support of fiber networks, such as US West and Bell Atlantic, have rethought their plans because of emerging competition from high-power direct broadcast satellites (DBSs). Their signals are received by an 18-inch diameter receiver, small enough to be placed on any roof or patio. Large companies are already investing in the satellite systems. AT&T has joined Hughes Electronics Corp. in a DBS operation known as "DirecTV," which has already acquired 1.25-million subscribers in 18 months. MCI has joined News Corp., owned by Rupert Murdoch, to develop a DBS network. Last January, MCI paid the federal government $683 million for the right to use the frequency required to offer the DBS service. If these ventures cut into the market for terrestrial cable TV, Bell operating companies will have less incentive to deploy fiber-optic networks.

The Bells are depending on capturing a good share of the video entertainment market to maintain their profitability, which was emphasized in the lawsuit between US West and Time Warner. The telephone company has sued Time Warner to prevent it from acquiring the Turner Broadcasting Network. The president of Time Warner Cable Ventures, Glenn Britt, testified in a Delaware court that he was told by US West`s Chairman Richard McCormick that the telephone company`s core "business was dead meat" and that US West would "invest heavily in domestic cable to compete in [its] home territory and internationally." A US West spokesman said that McCormick did not recall using the phrase "dead meat." Although "dead duck" or "flatliner" would have been more appropriate terms, the company is standing by McCormick`s assessment. US West recently announced the purchase of Continental Cablevision Inc. of Boston for $11 billion in stock and cash. The sale is expected to close in January 1997.

The Bells` investments will soon encompass a wide variety of activities, including cellular markets, personal communications, long-distance, local telephone and television, and online information services. Given the size and scope these activities, it is unwise to crush projects like those in San Antonio. On the day that President Clinton signed the Telecommunications Act into law, Judge Greene asked all parties in the Bell case to submit briefs. His comments are worth noting: "It is just and proper for national policy on telecommunications to be made on a long-range basis rather than by this or any other judge. ...It could turn out that sufficient safeguards do not exist to prevent domination in the future of the vital information industry by a few large providers [who may] dominate what is rapidly becoming the central factor of American life--the control of the dissemination of information in its many forms."

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. Tel: (615) 399-1239