The Forgotten Quo

The recent D.C. Circuit Court

of Appeals decision in USTA v. FCC to vacate the FCCs Triennial Review Order is a striking and disturbing example of just how much the courts, FCC and Congress have forgotten the very genesis, foundation and core principle of the Telecommunications Act of 1996. This principle is summed up in three little Latin words - quid pro quo.

Everyone in and around the telecom industry understood the meaning of this Latin expression in the years leading up to and following the passage of the 1996 act. In recent months, however, the expression, and more importantly the meaning behind the expression, seemingly has been erased from the collective memories of our elected and non-elected decision-makers, replaced instead by an entirely new concept called “intermodal competition.”

While the quid pro quo is evident throughout the 1996 act’s legislative history and is emboldened in the core provisions of the act (Sections 251 and 271), the same cannot be said of “intermodal competition.”

For those with short memories, let’s revisit the early 1990s when the regional Bell monopolies, only 10 years removed from the divestiture of AT&T Corp., began stirring up support in Congress for ways to legislate their way back into the long-distance market. The battle in Congress over legislation that ultimately became the 1996 Act centered around what, conceptually, seemed to be a simple quid pro quo: In exchange for re-entry into the longdistance market and elimination of other business restrictions imposed after the AT&T divestiture, the Baby Bells would open their bottleneck monopoly local exchanges to competition from long-distance companies, like AT&T and MCI.

Since 1996, the quid – Baby Bell entry into long distance as embodied in Section 271 of the 1996 Act - has been satisfied in spades. Today, less than eight years after the 1996 act’s passage, the Bells are free to compete in the long-distance market in every state. Experience has shown that within months of obtaining FCC Section 271 authority, these behemoth companies garner upwards of 25 percent long-distance market share.

The D.C. court decision is the clearest evidence to date that the quo has all but been forgotten. AT&T and MCI, the principal long-distance companies that bartered in Congress in the early 1990s to obtain the quid pro quo in the 1996 act, remain stifled in their efforts to break into the local markets - each garnering less than 3 percent share in any given market and much less in most markets. In addition, the future of the very local market entry vehicle through which AT&T and MCI have had their only demonstrable success - UNE-P - now is on life support following the D.C. Circuit’s decision.

Not only does the D.C. Circuit’s decision demonstrate a disturbing lack of knowledge, understanding and appreciation of AT&T’s divestiture in 1982 and Judge Harold Greene’s Modified Final Judgment, it also seemingly is ignorant of Congress’ purpose in enacting the 1996 act.

The decision engages in extreme judicial activism by “legislating” into the act a Congressional purpose that finds no precedent in the legislative history and even less in the intent and efforts of the industry in formulating the quid pro quo terms.

The court did manage to raise two new perspectives, however. First, the court highlights the contradictions inherent in the FCCs decisions granting the Baby Bells Section 271 authority to enter the long-distance market and the FCC’s findings in its Triennial Review Order about the state of competition in the local market.

Second, the court rightly takes the FCC to task for shirking its duties to be the direct and principal enforcement agency of the 1996 act’s pro-competitive purposes.

Nevertheless, for someone practicing telecom law for nearly 40 years, recent court decisions continue to demonstrate that appellate panels either “just don’t get it” or are simply not persuaded by the arguments of the competitive industry any longer. Perhaps it is because, all too often, the arguments in support of competition appear to come from only one or two sources - namely, AT&T and MCI. These “majors” are viewed by the courts as the sole representatives of the competitive side of the telecom industry. Too often, the competitive industry is all too content letting AT&T and MCI carry the load. The courts now seemingly ignore that their decisions have significantly more harmful consequences on the hundreds, if not thousands, of smaller competitive companies.

This is none too evident in the D.C. Circuit decision, which, instead of focusing on the core principles of the 1996 act and the legislative history of the act, introduces the concept of intermodal competition as being sufficient to accomplish the purposes of the 1996 act. However, the 1996 act was based on a very pronounced compromise of competing interests that the MFJ had rightly balanced for the 14 years between AT&T’s divestiture and the enactment of the 1996 act.

Restated, the quid pro quo for releasing the Baby Bells from the long-distance prohibition was the opening of their local exchange markets to meaningful and sustainable competition. The 1996 act has nothing to do with supporting the theory that this “trade off ” can in any way be satisfied by so-called “intermodal competition” between cable monopolies, wireless oligopolies (predominantly owned by the Baby Bells themselves) and the Baby Bells. Indeed, just reading the relevant provisions of the act that required the Baby Bells to open their local markets to competition, it is unmistakably clear that they are linked directly to the interests of long-distance carriers being able to compete in the local markets.

Cable television, for example, is not defined as a “telecommunications service” and has a separate section in the 1996 act. Nothing in the 1996 act that relates to the opening of local markets relates in any way to cable companies. Yet, the D.C. Circuit court gratuitously links the recent development of cable’s emergence as a broadband provider as a fulfillment of the 1996 act’s main purpose of opening local markets to long-distance carriers when the Baby Bells enter the long-distance market.

What has happened is nothing less than a complete failure of the 1996 act to achieve its principal purpose and worse, to allow the Baby Bells to extend their monopolies back into the long-distance market.

The blame for this must fall squarely on the FCC, Congress and, ultimately, the courts.

The FCC caved to pressure from the Baby Bells, which have relentlessly pressured Congress to pressure the FCC by arguing, as they continue to argue today, that the restrictions on their ability to enter the long-distance market was somehow “impeding” competition. Over these past eight years, the Baby Bells won Section 271 authority and approval to merge with each other. They achieved these victories despite the fact that no “real” or sustainable competition existed in their local markets. In the meantime, the Baby Bells have succeeded in convincing the world that local resale competition, one of the three entry methods explicitly supported by Congress back in 1996, does not constitute “competition” and that the only competition Congress really envisioned was “facilities-based.”

The latter argument on facilities-based competition is quite ironic. It acts as a complete ban to any hope of real competition because no one can afford to rebuild the local plant that the citizen ratepayers of this country have “invested in” for more than 100 years and because the sorry state of the telecom industry today is in large part due to the overbuilding of plant where capacity far exceeds the revenue-producing traffic demand required to pay for such build-outs.

Now the D.C. Circuit shows total ignorance of these considerations by legislating into the 1996 act the use of intermodal competition to achieve the competitive purposes of the act. In short, the longdistance carriers are being cheated out of the bargain they struck with Congress. They, of course, have been cheated for the past eight years by the litigation and lobbying tactics used by the Baby Bells, so the D.C. Circuit’s decision might be viewed with some irony as the cherry on top of their dessert.

The competitive side of this industry has been outplayed by the Baby Bells since the enactment of the 1996 act. Now it seems they are about to be eliminated by the D.C. Circuit’s gross misreading of the act and its complete lack of understanding of the history and reality of the past eight, strike that, 100 years.

Today’s reality is that the majority of local markets are not open to free and vibrant competition. If the D.C. Circuit decision stands, those few local markets that are experiencing some competitive entry certainly will constrict. At the very same time, the Baby Bells have rapidly gained entry into the long-distance market and are busy solidifying their position by bundling local, broadband, long distance and wireless services. These are the facts. What needs to be done to advance competition and prevent re-monopolization of the telecommunications industry is to remind ourselves and to remind Congress, the FCC and the courts that, until or unless it is significantly amended, the 1996 Act still has a quo, and not just a quid.

Charles H. Helein is managing partner at The Helein Law Group LLP, a D.C. area firm specializing in telecommunications and regulatory law. Helein was assisted by Jonathan S. Marashlian in the preparation of this article.