Notice: Competitive Impact Statements and Proposed Consent Judgments: SBC Communications, Inc., Et Al.

Wednesday,
April 5, 2006
Part II
Department of
Justice
Antitrust Division
Competitive Impact Statements and

Proposed Consent Judgments—Response
to Public Comments; Notice
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17164 Federal Register / Vol. 71, No. 65 / Wednesday, April 5, 2006 / Notices
DEPARTMENT OF JUSTICE currently available for inspection in Simultaneously with the filing of the
Room 200 of the Antitrust Division, Complaints, the United States filed
Antitrust Division Department of Justice, 325 Seventh proposed Final Judgments 2 and
Street, NW., Washington, DC 20530, Stipulations signed by plaintiff and
Response to Public Comments on the telephone: (202) 514–2481 and the defendants consenting to the entry of
Proposed Final Judgments in United Clerk’s Office, United States District the respective proposed Final
States v. SBC Communications, Inc. Court for the District of Columbia, 333 Judgments after compliance with the
and AT&T Corp. and United States v. Constitution Avenue, NW., Washington, requirements of the Tunney Act.
Verizon Communications Inc. and MCI, DC 20001. (The United States’s Pursuant to those requirements, the
Inc. Certificate of Compliance with United States filed Competitive Impact
Pursuant to the Antitrust Procedures Provisions of the Antitrust Procedures Statements (‘‘CISs’’) in this Court on
and Penalties Act, 15 U.S.C. 16(b)–(h), and Penalties Act will be made available November 16, 2005; published the
the United States hereby publishes the at the same locations shortly after they proposed Final Judgments and CISs in
three comments received on the are filed with the Court.) Copies of any the Federal Register on December 15,
proposed Final Judgments in United of these materials may be obtained upon 2005, see United States v. SBC
States v. SBC Communications, Inc. and request and payment of a copying fee. Communications Inc. and AT&T Corp.,
AT&T Corp., Civil Case No. 70 FR 74,334, 2005 WL 3429685; United
J. Robert Kramer II, States v. Verizon Communications Inc.
1:05CV02102 (EGS), and United States Director of Operations, Antitrust Division.
v. Verizon Communications, Inc. and and MCI, Inc., 70 FR 74,350 2005 WL
MCI, Inc., Civil Case No. 1:05CV02103 In The United States District Court for 3429686; and published summaries of
(EGS), filed on March 21, 2006 in the The District of Columbia the terms of the proposed Final
United States District Court for the Judgment and CISs, together with
United States of America, Plaintiff, v. directions for the submission of written
District of Columbia, together with the SBC Communications, Inc. and AT&T
response of the United States to the comments relating to the proposed Final
Corp., Defendants Judgments, in the Washington Post for
comments. On October 27, 2005, the
United States filed separate complaints [Civil Action No.: 1:05CV02102 (EGS)] seven days beginning on December 8,
alleging that the proposed acquisitions 2005 and ending on December 14, 2005.
United States of America, Plaintiff, v. The 60-day period for public comments
of AT&T Corp. (‘‘AT&T’’) by SBC Verizon Communications Inc. and MCI,
Communications, Inc. (‘‘SBC’’) and MCI, ended on February 13, 2006, and three
Inc., Defendants comments were received as described
Inc. (‘‘MCI’’) by Verizon
Communications, Inc. (‘‘Verizon’’) [Civil Action No.: 1:05CV02103 (EGS)] below and attached hereto.
would both violate section 7 of the Plaintiff United States’ Response to I. Background: The United States’
Clayton Act, 15 U.S.C. 18, by Public Comments Investigation and Proposed Resolution
substantially lessening competition in On January 30, 2005, SBC entered into
the provision of local private lines (also Pursuant to the requirements of the
antitrust Procedures and Penalties Act, an agreement to acquire AT&T. On
called ‘‘special access’’) and other February 14, 2005, Verizon entered into
telecommunications services that rely 15 U.S.C. 16(b)–(h) (‘‘APPA’’ or
‘‘Tunney Act’’), the United States an agreement to acquire MCI. Over the
on local private lines in eleven and following eight and a half months, the
eight, respectively, metropolitan areas— hereby responds to the public comments
received regarding the proposed Final United States Department of Justice
SBC/AT&T: Chicago; Dallas-Fort Worth; (‘‘Department’’) conducted an extensive,
Detroit; Hartford-New Haven, Judgments in these cases. After careful
consideration of the comments, the detailed investigation into the
Connecticut; Indianapolis; Kansas City; competitive effects of the proposed
Los Angeles; Milwaukee; San Diego; San United States continues to believe that
the proposed Final Judgments will transactions. As part of this
Francisco-San Jose; and St. Louis; and investigation, the Department issued
Verizon/MCI: Baltimore; Boston; New provide an effective and appropriate
remedy for the antitrust violations Second Requests to the merging parties,
York; Philadelphia; Tampa; Richmond, as well as more than 60 Civil
Virginia; Providence, Rhode Island; and alleged in the Complaints. The United
States will move the court for entry of Investigative Demands to third parties.
Portland, Maine. To restore competition, In response, the Department received
the proposed Final Judgments, if the proposed Final Judgments after the
public comments and this Response and considered more than 25 million
entered, would require the defendants pages of material. More than 200
in both actions to divest assets in the have been published in the Federal
Register, pursuant to 15 U.S.C. 16(d). interviews were conducted with
metropolitan areas listed above in order customers, competitors, and other
On October 27, 2005, the United
to proceed with the acquisitions. Public
States filed the Complaints in these
comment was invited within the the documents will be referred to collectively.
matters alleging that the proposed
statutory 60-day comment period. The Moreover, because the comments received by the
acquisition of AT&T Corp. (‘‘AT&T’’) by
comment and the response of the United United States generally relate to both matters, this
SBC Communications, Inc. (‘‘SBC’’), and response will also refer to both, unless otherwise
States thereto are hereby published in
the proposed acquisition of MCI, Inc. indicated.
the Federal Register, and shortly
(‘‘MCI’’) by Verizon Communications 2 The United States filed amended proposed Final
thereafter these documents will be Judgments on November 28, 2005. The amendments
Inc. (‘‘Verizon’’), would violate Section
referenced in a Certificate of added appropriate procedural recitals regarding the
7 of the Clayton Act, 15 U.S.C. 18.1 Court’s public interest determination to both
Compliance with Provisions of the
proposed Final Judgments and corrected an error in
Antitrust Procedures and Penalties and 1 Because these matters raised similar issues, the SBC/AT&T proposed consent decree,
filed with the Court, together with a
including almost identical allegations of conforming it to the parties’ intent. The SBC/AT&T
motion urging the Court to enter the competitive harm and proposed relief, the United Competitive Impact Statement reflects the
proposed Final Judgment. Copies of the States filed an uncontested motion to consolidate correction to the proposed Final Judgments. The
them on November 1, 2005. That motion was corrected versions, not the original versions, were
Complaint, the proposed Final granted by the Court. Because the Complaints, published in the Federal Register. None of the
Judgment, the Competitive Impact Competitive Impact Statements, and proposed Final public comments addressed this aspect of the
Statement, and other papers are Judgments in the two matters are virtually identical, proposed Final Judgment.
Federal Register / Vol. 71, No. 65 / Wednesday, April 5, 2006 / Notices 17165
individuals with knowledge of the merger would likely reduce otherwise be a reduction in competition,
industry. Two commenters here— competition.4 The Department sought there would be, post-merger, another
COMPTEL and ACTel—represented extensive data from the merging firms as carrier besides the merged firm with a
carriers who had complaints about the well as dozens of CLECs regarding their direct fiber-optic connection to the
proposed transactions; the investigative local networks, and the products building. In the Department’s judgment,
staff carefully analyzed their allegations provided over those networks. In every a divestiture of fiber-optic capacity to
and submissions, as well as the views metropolitan area of overlap, the the buildings of concern would remedy
and data presented by dozens of others. Department found that there were this potential loss of competition.6
While the Department was reviewing multiple CLECs with local networks As explained more fully in the
these transactions, the Federal offering products and services very Complaints and CISs, the proposed
Communications Commission (‘‘FCC’’),3 similar to the merging firms. Indeed, in transaction would lessen competition
numerous state public utility most of the overlapping metropolitan substantially for (a) Local Private Lines
commissions, and several state areas the acquired CLEC did not even and (b) voice and data
Attorneys General conducted their own have the most extensive local network telecommunications services that rely
reviews. The third commenter, the in terms of number of buildings on Local Private Lines in several
Attorney General of the State of New connected or miles of fiber-optic cable hundred commercial buildings. To
York, was one of the reviewing state installed. And even in the few cases restore competition, the proposed Final
officials. where the acquired CLEC did have the Judgments, if entered, would require a
As part of the Department’s most extensive local network, there divestiture of indefeasible rights of use
investigation, it considered the potential were ample other firms that have (‘‘IRUs’’) 7 for lateral connections 8 to the
competitive effects of these transactions extensive networks and that continue to buildings in question along with
on numerous products, customer grow those networks. transport facilities 9 sufficient to enable
groups, and geographic areas. For the Nevertheless, the Department the IRUs to be used by the purchaser to
vast majority of these, the Department identified one limited competitive provide telecommunications services.
concluded that the proposed mergers problem: for hundreds of buildings, the Entry of the proposed Final Judgments
were unlikely to reduce competition. transactions would combine the only would terminate these actions, except
Indeed, the Department concluded that, two firms that owned or controlled a that the Court would retain jurisdiction
viewed as a whole, the transactions direct fiber-optic connection to the to construe, modify, or enforce the
were likely to create substantial building, and for a subset of these provisions of the proposed Final
efficiencies that could benefit buildings, entry (i.e., another carrier Judgments and punish violations
consumers. For the most part, the constructing its own fiber-optic thereof.10
mergers combined firms with connection) was not sufficiently likely 6 The modest nature of the competitive problem,
complementary strengths, assets, and to offset the potential anticompetitive as compared to the overall value of the mergers, is
customer bases. Whereas SBC’s and effect. These fiber-optic connections are illustrated by the fact that in 2004, Local Private
Verizon’s strengths were in the ‘‘mass used to provide Local Private Lines 5 to Lines offered by AT&T in SBC’s territory accounted
market’’ and small business segments, wholesale and retail customers and for less than 0.3 per cent of AT&T’s total revenues.
AT&T’s and MCI’s strengths were in And, the revenues attributable to the buildings at
value-added telecommunications issue in this case would be a fraction of that.
serving large enterprises; whereas SBC services that rely on Local Private Lines. 7 ‘‘An IRU (or indefeasible right of use) is a long-
and Verizon had very extensive local Accordingly, the Department filed term leasehold interest commonly used in the
networks, AT&T and MCI had extensive Complaints alleging competitive harm telecommunications industry that gives the holder
national and international networks. In in this set of buildings and sought a the right to use specified strands of fiber in a
telecommunications facility.’’ CISs at 11.
areas of significant overlap, with the remedy that would ensure that for each 8 A ‘‘lateral connection’’ is the last segment of the
exception of the markets alleged in the of the buildings where there would fiber-optic cable to a building, running from the
Complaints, there will remain, post- point of entry of the building to the splice point
merger, sufficient competitive 4 Local networks typically are comprised with fiber used to serve different buildings. CISs at
alternatives such that no principally of fiber-optic cable running throughout 10.
the metropolitan area. Fiber connecting aggregation 9 ‘‘Transport,’’ as used in the industry, has no
anticompetitive effects are likely. points is often called ‘‘transport’’ fiber, and fiber precise meaning but generally refers to fiber-optic
Because AT&T and MCI have among running from a central office or node to an end-user capacity to carry data between aggregation points
the most extensive local networks of any building is often referred to as a loop or ‘‘last-mile on a network. Often, it is used to refer to
competitive local exchange carriers connection.’’ These local networks are typically ‘‘interoffice transport,’’ i.e., carriage of data between
used to provide services to large enterprise two central offices (switching facilities). In the
(‘‘CLECs’’) in SBC’s and Verizon’s customers. As part of its investigation, the proposed Final Judgments and CISs the term more
regions, the Department devoted Department interviewed scores of such customers, broadly refers to facilities used to carry data from
substantial time and resources to and received affidavits from dozens of others. In the splice point of the lateral connection to the
analyzing those overlapping assets, and general, customers had little competitive concern purchaser’s network. CISs at 9–11.
regarding the proposed mergers and, indeed, many 10 The SBC/AT&T merger closed on December 18,
the products and markets they believed they were likely to be beneficial. 2005, and the Verizon/MCI merger closed on
implicated to determine whether the 5 ‘‘A Local Private Line is a dedicated, point-to- January 6, 2006. In keeping with the United States’
point circuit offered over copper and/or fiber-optic standard practice, neither the Stipulations nor the
3 The FCC approved the proposed mergers in transmission facilities that originates and proposed Final Judgment prohibited closing the
orders adopted on October 31, 2005, and released terminates within a single metropolitan area and mergers. See ABA Section of Antitrust Law,
on November 17, 2005, including voluntary typically includes at least one local loop. Local Antitrust Law Developments 387 (5th ed. 2002)
commitments of the parties as conditions. Private Lines are sold at both retail (to business (noting that ‘‘[t]he Federal Trade Commission (as
Memorandum Opinion and Order, In the Matter of customers) and wholesale (to other carriers). [SBC well as the Department of Justice) generally will
SBC Communications Inc. and AT&T Corp. and Verizon refer] to Local Private Line circuits as permit the underlying transaction to close during
Applications for Approval of Transfer of Control, ‘special access.’ Depending on how they are the notice and comment period’’). Such a
FCC WC Docket No. 05–65 (rel. Nov. 17, 2005), configured, Local Private Lines can be used to carry prohibition could interfer with many time-sensitive
2005 WL 3099626; Memorandum Opinion and voice traffic, data, or a combination of the two. deals or prevent the realization of substantial
Order, In the Matter of Verizon Communications Local Private Lines may be purchased as stand- efficiencies. Here, the magnitude of the potential
Inc. and MCI, Inc. Applications for Approval of alone products but are also an important input to competitive harm from the mergers was relatively
Transfer of Control, FCC WC Docket No. 05–75 (rel. value-added voice and data telecommunications small, but delaying the closing of the transactions
Nov. 17, 2005), 2005 WL 3099625 (collectively services that are offered to business customers.’’ by the several months required for the Tunney Act
‘‘FCC Orders’’). Complaints ¶¶ 13–14. Continued
II. Legal Standard Governing the nowhere compelled to go to trial or to The proper test of the proposed Final
Court’s Public Interest Determination engage in extended proceedings which Judgment, therefore, is not whether it is
Upon publication of the public might have the effect of vitiating the certain to eliminate every
comments and this Response, the benefits of prompt and less costly anticompetitive effect of a particular
United States will have fully complied settlement through the consent decree merger or to assure absolutely
with the Tunney Act. It will then ask process.’’ 119 Cong. Rec. 24,598 (1973) undiminished competition in the future.
the Court to determine that entry of the (statement of Sen. Tunney).11 Rather: Court approval of a consent judgment
proposed Final Judgments would be ‘‘in [a]bsent a showing of corrupt failure of the must be subject to a standard more
the public interest,’’ and to enter them. government to discharge its duty, the Court, flexible and less strict than the standard
15 U.S.C. 16(e). In making its public in making its public interest finding, should the court would apply were it devising
interest determination, the Court shall * * * carefully consider the explanations of a remedy after an adjudication of
the government in the competitive impact liability. Microsoft, 56 F.3d at 1460–61
consider:
statement and its responses to comments in
(A) the competitive impact of such order to determine whether those
(‘‘[W]hen a consent decree is brought to
judgment, including termination of alleged explanations are reasonable under the a district judge, because it is a
violations, provisions for enforcement and circumstances. settlement, there are no findings that the
modification, duration or relief sought, defendant has actually engaged in
anticipated effects of alternative remedies United States v. Mid-America
illegal practices. It is therefore
actually considered, whether its terms are Dairymen, Inc., 1977–1 Trade Cas.
inappropriate for the judge to measure
ambiguous, and any other competitive (CCH) ¶ 61,508, at ¶ 71,980, 1977 WL
the remedies in the decree as if they
considerations bearing upon the adequacy of 4352, at *9 (W.D. Mo. 1977).
such judgment that the court deems A court’s task under the Tunney Act were fashioned after trial.’’ (citation
necessary to a determination of whether the is to review the negotiated settlement of omitted)); see also United States v.
consent judgment is in the public interest; a dispute, not to devise a remedy for an AT&T Corp., 552 F. Supp. 131, 151
and adjudicated antitrust violation. (D.D.C. 1982) (‘‘[A] proposed decree
(B) the impact of entry of such judgment must be approved even if it falls short
upon competition in the relevant market or Accordingly, a court may not ‘‘engage in
an unrestricted evaluation of what relief of the remedy the court would impose
markets, upon the public generally and
would best serve the public.’’ United on its own, as long as it falls within the
individuals alleging specific injury from the
violations set forth in the complaint States v. BNS Inc., 858 F.2d 456, 462 range of acceptability or is ‘within the
including consideration of the public benefit, (9th Cir. 1988) (quoting United States v. reaches of public interest.’ ’’) (quoting
if any, to be derived from a determination of Bechtel Corp., 648 F.2d 660, 666 (9th Gillette, 406 F. Supp. at 716), aff’d sub
the issues at trial. Cir. 1981)); see also Microsoft, 56 F.3d nom. Maryland v. United States, 460
Id. section 16(e)(1). As the Court of at 1460–62.12 Courts have held that: U.S. 1001 (1983); United States v. Aclan
Appeals has held, the Tunney Act Aluminum Ltd., 605 F. Supp. 619, 622
[t]he balancing of competing social and
permits a court to consider, among other political interests affected by a proposed
(W.D. Ky. 1985) (approving the consent
things, the relationship between the antitrust consent decree must be left, in the judgment even though the court might
remedy secured and the specific first instance, to the discretion of the have imposed a greater remedy had the
allegations set forth in the government’s Attorney General. The court’s role in matter been litigated).
complaint, whether the proposed Final protecting the public interest is one of The Court must evaluate the adequacy
Judgment is sufficiently clear, whether insuring that the government has not
breached its duty to the public in consenting of the proposed decree as a remedy for
enforcement mechanisms are sufficient, the antitrust violations alleged in the
to the decree. The court is required to
and whether the proposed Final determine not whether a particular decree is Complaint, not for other supposed
Judgment may positively harm third the one that will best serve society, but violations. The Tunney Act does not
parties. See United States v. Microsoft whether the settlement is ‘‘within the reaches authorize the Court to ‘‘construct [its]
Corp., 56 F.3d 1448, 1458–62 (D.C. Cir. of the public interest.’’ More elaborate own hypothetical case and then
1995). requirements might undermine the evaluate the decree against that case.’’
The Tunney Act is not intended to effectiveness of antitrust enforcement by
Microsoft, 56 F.3d at 1459. Because the
impose on a court procedures that consent decree.
‘‘court’s authority to review the decree
would impair the utility of consent Bechtel, 648 F.2d at 666 (emphasis depends entirely on the government’s
decrees in antitrust enforcement. Thus, added) (citations omitted).13 exercising its prosecutorial discretion by
the Act is not to ‘‘be construed to bringing a case in the first place,’’ it
require the court to conduct an 11 The public interest determination can be made
follows that ‘‘the court is only
evidentiary hearing or to require the on the basis of the CISs and the United States’
authorized to review the decree itself,’’
court to permit anyone to intervene.’’ 15 Response to Comments. The Tunney Act authorizes
the court to use various procedures to gather and not to ‘‘effectively redraft the
U.S.C. 16(e)(2)(2006). In conducting its additional information, 15 U.S.C. 16(f), but a court complaint’’ to inquire into other matters
public interest inquiry, ‘‘[t]he court is need not invoke them unless it believes that the that the United States did not pursue.
information already available is insufficient to
resolve any critical issues that the public comments Id. at 1459–60. The United States is
public interest determination could have costs tens,
if not hundreds, of millions of dollars in lost may have raised. See H.R. Rep. No. 93–1463, 93d entitled to ‘‘due respect’’ concerning its
efficiencies from the transactions as a whole. In Cong., 2d Sess. 8–9 (1974), as reprinted in 1974 ‘‘prediction as to the effect of proposed
consent decrees requiring divestitures, it is also U.S.C.C.A.N. 6535, 6538–39. remedies, its preception of the market
12 Cf. United States v. Gillette Co., 406 F. Supp.
standard practice to include ‘‘preservation of structure, and its view of the nature of
assets’’ clauses in the decree and stipulation to 713, 716 (D. Mass. 1975) (recognizing it was not the
ensure that the assets to be divested remain court’s duty to determine whether the proposed the case.’’ United States v. Archer-
competitively viable. That practice was followed decree was the best settlement, because the parties, Daniels-Midland Co., 272 F. Supp. 2d 1,
here. Proposed Final Judgments § VIII; Stipulations not the court, settle the dispute). 6 (D.D.C. 2003) (citing Microsoft, 56
§ V. In appropriate cases, particularly where a 13 Cf. BNS, 858 F.2d at 464 (holding that the
F.3d at 1461).
separate, distinct operating business is to be court’s ‘‘ultimate authority under the [Tunney Act]
divested, ‘‘hold separate’’ provisions are also is limited to approving or disapproving the consent
included. In the Proposed Final Judgments at issue decree’’); Gillette, 406 F. Supp. at 716 (noting that Microsoft, 56 F.3d at 1461 (discussing whether ‘‘the
here, no ‘‘hold separate’’ provisions were necessary the court is constrained to ‘‘look at the overall remedies [obtained in the decree are] so
or appropriate, as the divested assets are not of a picture not hypercritically, nor with a microscope, inconsonant with the allegations charged as to fall
type that could meaningfully be ‘‘held separate.’’ but with an artist’s reducing glass’’); see generally outside of the ‘reaches of the public interest’ ’’).
In 2004, Congress amended Congress in 2004 did not change the A. ACTel
provisions of the Tunney Act, but the applicable standard, but limited itself to
1. Summary of Comment
amendments did not materially affect a finding purporting to clarify its intent
the scope or standard of review. Where of 30 years ago—a finding that is not The Alliance for Competition in
pre-amendment the Act provided a list inconsistent with the case law’s Telecommunications (‘‘ACTel’’) is a
of factors a court ‘‘may’’ consider in interpretation of the Tunney Act. group whose members include CLECs
making its public interest and interexchange carriers (‘‘IXC’’) that
The purpose of the Tunney Act, both
determination, post-amendment the buy Local Private Lines at wholesale
before and after amendment, is clear:
court ‘‘shall’’ consider the listed factors. from the merging companies,17 and
courts must determine that a proposed
Compare 15 U.S.C. 16(e) (2004) with 15 compete against the merging companies
decree is in the public interest before
U.S.C. 16(e)(1) (2006) (amended for retail business customers. On
entering it, and must do so after the
version). Of course, even before the February 9, 2006, ACTel submitted a
public has had an opportunity to
amendment courts were unlikely to comment alleging that the proposed
comment and the government has
choose to ignore factors that were on the remedy ‘‘cannot succeed’’ and fails to
responded to any comments. As part of
list, and thus of clear congressional meet the Tunney Act standard. After
that determination, a court should
interest, merely because the statute used some discussion of that standard,18 and
consider certain factors listed in the Act
‘‘may’’ rather than ‘‘shall.’’ The a description of ACTel’s view of the
relating to the competitive impact of the
amendment also slightly modified the wholesale markets for Local Private
judgment and whether it adequately
list of factors. It added one new factor Lines, ACTel criticizes the proposed
remedies the harm alleged in the
(whether the terms of the judgment are Final Judgments. ACTel notes that
complaint. But the scope of a court’s
ambiguous, 15 U.S.C. 16(e)(1)(A), which whereas the Complaints allege harm to
review is not unlimited: The Tunney
the Court of Appeals had already made competition in the provision of Local
Act does not permit a court to redraft
clear was appropriate to consider, Private Lines, the remedy is focused on
the complaint, examine possible
Microsoft, 56 F.3d at 1461–62); the divestiture of (a) certain laterals to
competitive harm the United States did
modified a catch-all factor to limit its particular buildings, and (b) sufficient
not allege, or engage in a wide-ranging
scope to competitive considerations; 14 transport to connect those circuits to the
and added ‘‘upon competition in the search for the relief that would best
network of the entity purchasing the
relevant market or markets’’ to the list serve the public.
divested lateral circuits. ACTel
of impacts to be considered, 15 U.S.C. III. Summary of Public Comments and identifies what it claims are three
16(e)(1)(B), as one would expect in an Responses ‘‘deficiencies’’ in the remedy that will
antitrust case. As for procedure, the prevent it from being effective.
amendment added the unambiguous During the 60-day public comment First, ACTel notes that the proposed
directive that ‘‘[n]othing in this section period, the United States received Final Judgements do not cover all
shall be construed to require the court comments from COMPTEL, ACTel, and buildings for which the mergers will
to conduct an evidentiary hearing or to the New York State Attorney General. reduce the number of Local Private Line
require the court to permit anyone to Upon review, the United States believes competitors from ‘‘2 to 1’’ (i.e.,
intervene.’’ 15 U.S.C. 16(e)(2). that nothing in the comments warrants buildings where only the merging firms
In addition to amending the Tunney a change in the proposed Final have last-mile connections). Relying on
Act, Congress made findings. In Judgments or is sufficient to suggest that data purchased from a third party,
particular, it found that ‘‘it would the proposed Final Judgments are not in ACTel contends that the number of
misconstrue the meaning and the public interest. These comments, in buildings for which the United States
Congressional intent in enacting the large measure, do not address whether seeks relief is at least two orders of
Tunney Act to limit the discretion of the proposed remedy adequately magnitude less than the number of
district courts to review antitrust redresses the competitive harm alleged buildings it believes present a 2-to-1
consent judgments solely to determining in the Complaints, but rather whether problem. It thus contends that the
whether entry of those consent the United States should have brought ‘‘Government’s remedy does not include
judgments would make a ‘mockery of a different much broader case. The all buildings that the Complaint
the judicial function.’ ’’ 15 That finding comments do include some concerns purports to cover,’’ suggests that the
seems entirely correct. And, so far as we relating to whether the proposed Final ‘‘Government needs to explain its
know, no court has ever construed the Judgments adequately remedy the methodology,’’ and argues that ‘‘[i]f the
Tunney Act to limit judicial review alleged harms. The United States Proposed Final Judgment does not
solely to whether the proposed addresses these concerns below and address all situations in which AT&T is
judgment would make a ‘‘mockery of explains how the remedy is appropriate.
the judicial function.’’ 16 In any event, 17 ACTel Comment at 3 (attached hereto as
decree makes a ‘‘mockery of judicial power.’’ It Attachment 1). ACTel was formed in March 2005
14 The language was modified to read ‘‘any other
explicitly stated that in a Tunney Act review, ‘‘the by six competitive carriers ‘‘to challenge the
competitive considerations bearing upon the court can and should inquire * * * into the Verizon/MCI and SBC/AT&T mergers’’ and was an
adequacy of such judgment that the court deems purpose, meaning, and efficacy of the decree. If the active complainant in both the United States’ and
necessary to a determination of whether the consent decree is ambiguous, or the district judge can FCC’s investigations of these transactions.
judgment is in the public interest.’’ 15 U.S.C. foresee difficulties in implementation, we would Competitive Carriers Challenge Telecom Mergers
16(e)(1)(A) (italics indicate new language). expect the court to insist that these matters be (Mar. 15, 2005), available at http://
15 Antitrust Criminal Penalty Enhancement and attended to. And certainly, if third parties contend www.allianceforcompetition.com/newsroom/
Reform Act of 2004, Pub. L. No. 108–237, that they would be positively injured by the decree, release/050315–1.php.
§ 221(a)(1)(B), 118 Stat. 661, 668 (2004). a district judge might well hesitate before assuming 18 ACTel states that the public interest
16 ‘‘[M]ockery of the judicial function’’ echoes that the decree is appropriate.’’ Id. at 1462. A determination here ‘‘will constitute the first
Microsoft’s ‘‘[a] decree * * * is a judicial act, and comparison of the Tunney Act as amended, and the significant application of the Tunney Act since
therefore the district judge is not obliged to accept associated congressional findings, with Microsoft Congress amended that statute in 2004.’’ ACTel
one that, on its face and even after government perhaps suggests why Senator Hatch, then Comment at 4. However, since the effective date of
explanation, appears to make a mockery of judicial Chairman of the Senate Judiciary Committee, said the Tunney Act amendments—June 22, 2004—at
power.’’ Microsoft, 56 F.3d at 1462 (emphasis that ‘‘this amendment essentially codifies existing least 12 antitrust consent decrees have been
added). The Court of Appeals was, of course, not case law.’’ 150 Cong. Rec. S3610, at S3613 (daily reviewed by courts, found to be in the public
limiting Tunney Act review solely to whether a ed. Apr. 2, 2004). interest, and entered.
eliminated as the only facilities-based Most of the issues ACTel raises, central offices with sizable demand.
competitive alternative to SBC for loops, however, question the wisdom of the Moreover, CLECs typically continue to
the court must withhold its approval of filed Complaints, and urge theories of add new locations to their networks as
the settlements.’’ 19 competitive harm that the United States demand warrants.27
Second, ACTel contends that the did not believe were supported by the Accordingly, the United States
proposed Final Judgments are deficient evidence. Additionally, in a number of concluded that the mergers were
because they address ‘‘only the part of instances in which ACTel claims to be unlikely to create a ‘‘metropolitan area-
the Local Private Line that connects to challenging the adequacy of the remedy, wide’’ competitive problem, or a
a building, not the part of the Private ACTel construes the Complaints far too competitive problem in the vast
Line that connects to a carrier’s broadly. For instance, ACTel misreads majority of buildings in any given
network.’’ It argues that if the number of the Complaints as identifying a metropolitan area.28 Nevertheless,
suppliers of the ‘‘transport’’ part of the competitive problem in all 2-to-1 because there is considerable
network (the part of a circuit that buildings. The allegations in the differentiation in the buildings reached
interconnects carrier central offices) Complaints do not reach all such by different carriers networks,
goes from two to one, customers of buildings, and therefore, whether the particularly for end-user buildings, in a
Local Private Lines will still be subject remedy addresses them is not a proper relatively small number of buildings the
to competitive harm, and contends that subject for Tunney Act review. In any acquired company is the only
the United States must look at transport event, the United States believes the alternative to the RBOC 29 for a last-mile
on a ‘‘segment by segment’’ basis. In proposed remedy is adequate to redress connection. The competitive problem
short, ACTel contends that the proposed the likely competitive harm from the created by the mergers, therefore,
remedy is ineffective because customers mergers. involves this set of buildings.
will ‘‘still be subject to the ‘2 to 1’ choke As ACTel correctly points out,
hold because the Government’s remedy a. Transport however, the relevant product that uses
does not include transport (unless it is In its investigation, the United States this connection or loop is Local Private
attendant to a divested loop for a examined the extent of AT&T’s local Lines service (or value-added services
building).’’ 20 networks in SBC’s territory, and MCI’s that rely on Local Private Line). What
ACTel’s third alleged deficiency is local networks in Verizon’s territory, the Complaints therefore allege is a
that the remedy addresses only 2-to-1 which the acquired firms use to provide likelihood of harm in the markets for
situations, whereas it believes there are Local Private Line and related services. Local Private Lines, or services that rely
‘‘many ‘anticompetitive effects’ in In order to analyze the competitive on Local Private Lines, due to a
Private Line situations beyond ‘2 to 1’ effects of the mergers, the United States reduction from two to one in the
loops.’’ 21 In particular, it argues that 4- also examined the other CLEC networks number of providers of last-mile
to-3 and 3-to-2 situations also create a in each metropolitan area of overlap. connections. In other words, the market
competitive problem here, and suggests Using compulsory process, the United is Local Private Line, but the merger-
that the United States has done ‘‘an States obtained highly-confidential created bottleneck or competitive
about-face’’ and engaged in a maps of fiber-optic networks and problem alleged in the Complaints is the
‘‘significant departure from established information about ‘‘on-net buildings’’ 26 last-mile connection.30 In general, there
and documented procedures’’ by not from more than two dozen different is no such bottleneck for transport, nor
alleging a competitive problem in those CLECs. The United States found that do the Complaints allege a competitive
instances.22 Finally, ACTel argues that a there were multiple CLECs with local problem specific to transport. Thus,
purchaser of the divested assets, even if networks in every metropolitan area contrary to ACTel’s contention, there is
it is a ‘‘viable, ongoing under consideration. Those networks no ‘‘inconsistency’’ between the
telecommunications business’’ may not vary in their scope and reach, but Complaints and proposed Final
be an effective competitive substitute for several in each metropolitan area reach Judgments in their treatment of
AT&T and MCI at least in part because the highest volume locations, especially transport nor are the proposed Final
its network would not be as broad, or its Judgments deficient because they
customer base as ‘‘robust.’’ 23 ACTel redraft the complaint himself.’’); id. (stating that the address ‘‘only the part of the Local
concludes by suggesting alternate district judge may not ‘‘reach beyond the complaint Private Line that connects to a
to evaluate claims that the government did not
remedies to those contained in the make’’); BNS, 858 F.2d at 462–63 (The Tunney Act
proposed Final Judgments including ‘‘does not authorize a district court to base its
27 The FCC reached a similar conclusion. See,
divestiture of ‘‘all redundant loop and public interest determination on antitrust concerns e.g., FCC Orders ¶ 45 (‘‘In many MSAs, some
in markets other than those alleged in the competitors appear to have more extensive
transport circuits,’’ releasing customers networks than [AT&T/MCI]. We conclude,
government’s complaint.’’) Nothing in the 2004
from their current contracts, and Tunney Act amendments could be viewed as therefore, that there are existing competitors with
prohibiting the merged firms from suggesting that the reviewing court should look local fiber networks that reasonably could provide
raising prices.24 beyond the allegations in the complaint in wholesale special access in MSAs where [AT&T/
determining whether the proposed decree is in the MCI] now operates local facilities.’’).
2. Response public interest. Indeed, to do so could result in the 28 Indeed, for the vast majority of buildings in a
court substituting its prosecutorial judgment for given metropolitan area the SBC or Verizon is the
Tunney Act review principally that of the United States. Were a court to reject a only firm with a last-mile connection to the
addresses the adequacy of the remedy, proposed decree on the grounds that it failed to building. Complaints ¶ 15. Accordingly, the merger
not the adequacy of the complaint.25 address harm not alleged in the complaint, it would results in no less of actual competitive options to
offer the United States what the Court of Appeals that vast majority of buildings.
19 Id. at 12, 15. for the D.C. Circuit referred to as a ‘‘difficult, 29 The term ‘‘RBOC’’ refers to a regional Bell
20 Id. perhaps Hobson’s choice’’: it would have to either operating company, such as SBC or Verizon.
at 21.
21 Id.
redraft the complaint and pursue a case it believed 30 Similarly, the proposed Final Judgments focus
had no merit, or else drop its case and allow on divestiture of ‘‘laterals’’ and ‘‘transport’’ rather
22 Id. at 23. conduct it believed to be anticompetitive to go than Local Private Lines because, as ACTel
23 Id. at 24. unremedied. Microsoft, 56 F.3d at 1456. acknowledges, Local Private Line is a product, not
24 Id. at 25. 26 An ‘‘on-net’’ building is a building for which a specific asset. Any divestiture needs to identify
25 See, e.g., Microsoft, 56 F.3rd at 1459 (‘‘Congress a carrier has built or acquired its own last-mile specific assets, rather than ‘‘products,’’ in order to
surely did not contemplate that the district judge fiber-optic connection, connecting the building to avoid the very ambiguity that would cause concern
would, by reformulating the issues, effectively its network. Complaints ¶ 16. under the Tunney Act.
building,’’ not the transport part.31 It entry would be likely in response to a about where the mergers might cause
would be inappropriate to suggest that post-merger price increase. Indeed, the competitive harm, and it is therefore not
the remedy is inadequate because it Complaints specifically list some of the a proper subject for Tunney Act
does not address a competitive harm factors governing whether a CLEC will consideration.36
that the United States neither concluded build fiber to a particular building and In any event, the United States
was likely nor alleged in its state that ‘‘entry may occur in response believes that divestitures of laterals to
Complaints.32 to a post-merger price increase in some the set of buildings identified in the
The divestiture remedy is focused on of buildings where [AT&T or MCI] is the proposed Final Judgments are sufficient
the assets that would be necessary to only connected CLEC.’’ 33 Similarly, the to remedy any competitive harm that
replace the competition lost in the CISs also discuss entry, and conclude otherwise would be likely to result from
buildings where harm was anticipated that ‘‘[w]hile entry may occur in some the mergers. In order to identify
as a result of the mergers: those assets buildings where [AT&T or MCI] is the buildings where the merging firms were
are the laterals to the specific buildings only CLEC present in response to a post- the only carriers with a last-mile
that likely would be subject to merger price increase, the conditions for connection (i.e., 2-to-1 buildings),37 the
anticompetitive effects. As noted in the entry are unlikely to be met in the United States sought and received, via
CIS, however, lateral’s are of little use hundreds of buildings that are the compulsory process, ‘‘on-net’’ building
if they are not connected to a network. subject of the Complaint[s].’’ 34 The lists from AT&T, MCI, and over 30 other
Therefore, the proposed Final Complaints did not allege, nor were CLECs and compared those lists.38 The
Judgments also require the divestiture of intended to allege, harm in all 2-to-1 United States then eliminated from the
IRUs for transport facilities sufficient to buildings; rather the ‘‘subject of the resulting list of 2-to-1 buildings those
connect the divested laterals to Complaint[s]’’ is the subset of buildings buildings where circumstances
locations mutually agreed upon by where harm was likely and that were suggested that there was no competitive
Defendants and the purchaser. This will identified in the proposed Final problem. For instance, because where
ensure that the purchaser can connect Judgments. there is no likely customer, there
the laterals to its network facilities and Ambiguity in the terms of a proposed probably is no harm, the United States
provide both Local Private Lines and judgment is a legitimate subject for eliminated vacant buildings, buildings
any other telecommunications services consideration under the Tunney Act. 15 where a subsidiary of the merging firms
that rely on Local Private Lines that a U.S.C. 16(e)(1)(A). ACTel contends that was the only customer, and buildings
customer in the building may desire. there is ambiguity ‘‘due to discrepancy with zero current demand for Local
between the number of buildings the Private Line or related services.39
b. Omitted 2-to-1 Buildings
Proposed Final Judgment identifies and
ACTel complains that the proposed what publicly available data suggests in 36 Ultimately, the United States makes two kinds
Final Judgments do not cover all 2-2- terms of the number of ‘2 to 1’ loop of judgments. The first is whether and where a
buildings. However, it incorrectly buildings affected by the mergers.’’ 35 particular merger is likely to cause competitive
suggests that it is ‘‘impermissible by the This ‘‘discrepancy,’’ however, is not an harm; the second is whether a remedy is likely to
express terms of the Complaint’’ for the be adequate to remedy the identified harm. The first
ambiguity in the terms of the proposed is not a proper subject for Tunney Act review, as
United States to have excluded certain Final Judgments. The proposed Final it would require the Court to substitute its
2-to-1 buildings because the Complaints Judgments very clearly specify the prosecutorial judgment for that of the United States;
allege harm in all 2-to-1 buildings. buildings to be divested. It is true that the second is indeed a proper subject for such
Nowhere do the Complaints state that review, as intended by Congress. The United States’
although the Complaints allege as to which 2-to-1 buildings pose a competitive
there would be competitive harm in all competitive harm in only a subset of 2- problem and therefore require a remedy is
2-to-1 buildings, nor would the facts to-1 buildings, they do not specifically fundamentally a judgment of the first kind, not the
support such an allegation. One reason list the buildings in that subset. second.
is that for some of the 2-to-1 buildings However, the set of buildings as to
37 The United States’ reasons for treating
differently buildings where at least two carriers

31 Indeed, contrary to ACTel’s assertion (ACTel
which the United States believed there would have a last-mile connection post-merger, is
Comment at 16), the Complaints never even use the
was sufficient evidence to support a discussed below. See infra section III.A.2.c.
38 In its comment, ACTel suggests that the
word ‘‘transport.’’ conclusion of competitive harm, and
number of 2-to-1 buildings in each metropolitan
32 ACTel argues ‘‘the Government must look at which is the subject of its Complaints, area is in the thousands. Such numbers are absurdly
transport on a ‘segment by segment’ basis rather is the set of buildings identified in the high. For instance, ACTel’s estimate that there are
than via area-wide analysis.’’ Indeed, the United
States effectively did just that. Although the United
proposed Final Judgments filed 6318 2-to-1 buildings in Los Angeles exceeds AT&T
States’ investigation revealed that the vast majority simultaneously with the Complaints. total number of on-net buildings in that
metropolitan area (much less 2-to-1 buildings) by
of interoffice transport routes where AT&T or MCI Thus, the question of whether the more than twenty times. Contrary to ACTel’s
is present would also have competitive alternatives United States should have sought relief
post-merger, the United States, like ACTel, was assertions that the number of 2-to-1 buildings in
concerned about any reduction of competitive in additional 2-to-1 buildings goes not each metropolitan area is in the thousand buildings,
options from two to one that could potentially to the adequacy of the remedy, but the United States found that the total number of 2-
to-1 buildings in all the alleged metropolitan areas
result. Because an interoffice transport circuit is rather to the United States’ conclusions combined barely reached 1,000 for the Verizon and
essentially a circuit to a central office location, the
United States chose to treat ‘‘central offices’’ as any SBC regions respectively.
33 Complaints ¶ 29. ACTel cites the Complaints 39 Of course, it is hypothetically possible that a
other building and analyzed Local Private Line
connections to them along with all other buildings on entry, quoting the language ‘‘entry is unlikely to building in this category could have a competitive
connected to AT&T’s and MCI’s networks. eliminate the competitive harm that would likely problem, for instance, if post-merger a new
Ultimately, the United States identified only two result from the proposed merger.’’ ACTel Comment customer moved into a vacant building. However,
SBC central offices and three Verizon central offices at 15. That language recognizes that for the Section 7 does not look to some hypothetical
where AT&T or MCI, respectively, was the only hundreds of buildings identified in the proposed possibility of harm, but rather to a likelihood of
connected CLEC and where entry was unlikely. Final Judgments entry is indeed unlikely, and a harm. See, e.g., New York v. Kraft General Foods,
remedy is required. But ACTel omits the preceding
Consistent with the United States’ approach to Inc., 926 F. Supp. 321, 358–59 (S.D.N.Y. 1995)
other 2-to-1 buildings where entry was unlikely, language that acknowledges that for some of the 2- (‘‘Section 7 deals in ‘probability,’ not ‘ephemeral
these five central offices are included in the to-1 buildings, entry may well occur. See possibilities.’ ’’) (quoting United States v. Marine
proposed remedy and thus, to the extent that there Complaints ¶ 29. For these buildings, a remedy is Bancorp., Inc., 418 U.S. 602, 622–623 (1974)));
is a competitive problem for the small number of unnecessary. Fruehauf Corp. v. F.T.C., 603 F.2d 345, 351 (2d Cir.
34 CISs at 8.
transport routes from these central offices, the 1979) (‘‘[T]here must be ‘the reasonable probability’
proposed Final Judgments will remedy it. 35 ACTel Comment at 12. Continued
In addition, because entry is likely to acknowledges this, suggesting that the evidence did not support a finding of
occur in response to a price increase for United States has done ‘‘an about-face’’ likely unilateral anticompetitive effects
some set of the 2-to-1 buildings, the by not alleging a competitive problem in in these buildings. Finally, the fact that
United States considered the prospects those instances in its Complaints. at least two CLECs has added the
for entry for each of the 2-to-1 buildings. Because the United States did not buildings in question to their networks
As noted in the Complaints, two of the conclude that there was likely to be a suggested that the characteristics of the
most important factors in determining competitive problem in 4-to-3 or 3-to-2 buildings (e.g., location, capacity
whether entry is likely in a given buildings, there is no reason to have demand) made them susceptible to
building is the proximity of competitive included such buildings in the proposed entry—significantly more so than the 2-
fiber to that building, and the capacity remedy. to-1 buildings.45 Thus, after almost nine
required by the building.40 The United In many markets, a merger reducing months of analysis, and consideration of
States sought and received through the number of competitors from three to millions of pages of material and
compulsory process the fiber maps of two or four to three is a competitive hundreds of interviews, the United
more than two dozen CLECs. Using problem and the United States does not States determined that the evidence did
mapping software, the United States hesitate to bring such cases. To not support alleging a competitive
compiled ‘‘master’’ electronic maps of conclude, however, that a merger is problem in the 3-to-2 or 4-to-3 buildings
each of the overlapping metropolitan anticompetitive simply because the in the SBC and Verizon territories; the
areas. For each of the hundreds of number of competitors is reduced from, likely competitive problem is limited to
buildings in question, the United States e.g., three to two, is incorrect. Many the provision of Local Private Line and
identified the distance to the nearest other considerations relating to market related services in certain 2-to-1
competitive fiber and compared that structure are also relevant. Before buildings. That is the only competitive
with demand data for each of the coming to a judgment on the harm alleged in the Complaints, and the
buildings. From this, the United States competitive effect of a merger, the only harm that the proposed Final
was able to make judgments about the United states evaluates whether Judgments properly remedy.46
likelihood of entry in each building. The coordinated or unilateral effects are
likely,43 whether entry likely will occur, d. Divestiture Purchaser
buildings it chose to include in the
proposed Final Judgments are those as and whether a merger will generate ACTel does raise one point that goes
to which the United States believed it efficiencies.44 Here, given the particular directly to the adequacy of the proposed
could show that entry was unlikely, and structure of the marketplace, in looking remedy. It argues that a purchaser of the
at buildings where the number of divested assets, even if it is a ‘‘viable,
therefore that competitive harm would
competitors went from three to two or ongoing telecommunications business,’’
be likely. Accordingly, the divestitures
four to three, the United States was may not be an effective competitive
required by the proposed Final
unable to conclude that the mergers substitute for AT&T and MCI at least, in
Judgments reflect the set of 2-to-1
would significantly increase the risks of part, because its network would not be
buildings where competitive harm was
coordinated interaction. Moreover, as broad, nor its customer base as
likely, and should be adequate to
largely because the merging firms were ‘‘robust.’’ It is, indeed, important for the
remedy the mergers’ likely
not especially close substitutes, the success of the proposed remedy that the
anticompetitive effects.
divestiture buyer be able to replace the
c. Anticompetitive Effects Beyond 2-to- at 21, and state that ‘‘AT&T and MCI are the most competition that might otherwise be lost
1 Loops significant and effective competitors to the as a result of the merger. For that reason,
acquiring companies,’’ Id. at 23. In both cases it the proposed Final Judgments require
ACTel alleges that the proposed cites to paragraph 17 of the Complaints. Paragraph
remedy does not fix the ‘‘many 17, however, makes no such allegations. Instead, it that the purchaser, and terms of the
‘anticompetitive effects’ in Private Line makes the more limited allegations that AT&T and purchase, be subject to the United
MCI are, respectively ‘‘among the leading CLECs’’ States’ approval. As the CISs note, in
situations beyond ‘2 to 1’ loops’’ 41 such in the number of buildings connected to their
as buildings where the number of networks, and that for hundreds of buildings, the
scrutinizing the proposed purchaser(s),
providers would go from four to three to merging firms are the only two carriers that own or ‘‘the United States will be particularly
two. The Complaints, however, do not control a direct building connection. focused on the purchaser’s ability to be
allege a competitive problem as a result
43 United States Department of Justice & Federal
a viable competitor in offering Local
Trade Commission, Horizontal Merger Guidelines, Private Lines on both a retail and/or
of reducing the number of competitors (rev. Apr. 8, 1997) § 2, available at http://
wholesale basis.’’ CISs at 9.
serving a building from four to three, or www.usdoj.gov/atr/public/guidelines/hmg.htm.
44 Id. §§ 3, 4. Thus, ACTel’s contention that the In each metropolitan area under
three to two.42 Indeed, ACTel
United States’ decision to allege only a problem in consideration there are at least several
certain 2-to-1 buildings is an ‘‘about-face’’ and
of a substantial impairment of competition to represents a ‘‘significant departure from established 45 In arguing that the mergers present competitive
render a merger illegal under § 7. A ‘mere and documented procedures’’ is without merit.
possibility’ will not suffice.’’) (citations omitted). problems in Local Private Lines beyond the limited
Merger analysis is a complex, fact-specific, case-by- number of 2-to-1 situations alleged by the United
40 Complaints ¶¶ 27–28. The closer a building is
case undertaking and one which cannot simply be States, ACTel relies heavily on information it and
to a competitor’s fiber, the less it is likely to cost resolved by looking only at the change in its members submitted to the Department and FCC.
that competitor to install additional fiber to reach concentration or the number of remaining The Department devoted significant time to
that building (since typically a major component of competitors in a market. See, e.g., id. § 0 (‘‘Because analyzing this date. But based on this analysis, as
the cost of installing fiber is the cost of digging up the specific standards set forth in the Guidelines well its consideration of the large volumes of other
city streets to lay new fiber-optic cable and that cost must be applied to a broad range of possible factual information gathered during the course of the
increases with distance). The larger the demand for circumstances, mechanical application of those investigation, the Department could not draw the
capacity in a building, the greater the expected standards may provide misleading answers to the same conclusions as ACTel seeks to draw. Nor,
revenues. The decision of a carrier whether to enter economic questions raised under the antitrust apparently, could the FCC. See. e.g., FCC Orders
a building often turns on the extent to which the laws.’’); see also United States v. Continental Can ¶ 46.
expected revenue exceeds the construction cost. See
Co., 378 U.S. 441, 458 (1964) (‘‘Market shares are 46 The FCC, which conducted its own in-depth
also CISs at 8. the primary indicia of market power but a judgment analysis of the transactions, reached a consistent
41 ACTel Comment at 21.
under § 7 is not to be made by any single qualitative conclusion. FCC Orders ¶ 40 (‘‘We find that the
42 ACTel’s comment incorrectly cites the or quantitative test. The merger must be viewed terms of the consent decree should adequately
Complaints. It alleges that ‘‘according to the functionally in the context of the particular market remedy any likely anticompetitive effects in the
Complaint AT&T and MCI are the most significant involved, its structure, history and probable provision of Type I wholesale special access
competitors for SBC and Verizon,’’ ACTel Comment future.’’). services.’’).
CLECs with extensive networks, begins by summarizing, and criticizing, known) were to buy the divested assets
including, e.g., switches, fiber, dozens the United States’ Complaints. In from Verizon and vice versa. COMPTEL
or hundreds of‘‘on-net’’ locations. Those particular, it contends that the argues in favor of an alternate remedy
carriers are already effective competitors geographic market alleged by the United that would require the merged firms to
in the metropolitan area. Where those States is too narrow and ‘‘cannot divest all the acquired companies’ ‘‘in-
carriers are not currently effective is the plausibly be considered to be as small region assets’’—including customers
specific buildings here the acquired firm as an individual building.’’ 50 Moreover, and employees—and would also
has fiber and they do not. The proposed it suggests that there are barriers to entry eliminate certain contracting practices.
remedy, by providing another carrier in addition to those alleged in the
2. Response
with fiber-optic capacity to these United States’ Complaints, and that
buildings, will enable it to replace the barriers to entry apply not just to Like ACTel’s comment, some of
competition that could be lost as a result buildings, but to entry into a COMPTEL’s comment criticizes the
of the merger. Even if the purchaser’s metropolitan area as sell. COMPTEL United States’ Complaints rather than
pre-existing network is not as extensive suggests that a ‘‘post-merger price the adequacy of the remedy for the harm
as the acquired firm’s, as long as it has increase in the metropolitan area is just alleged in the Complaints. In particular,
all the assets necessary to be able to as much (actually more) of a danger COMPTEL criticizes the Complaints’
reliably provide service to the buildings than the threat of building-specific price geographic market definition as well as
in question, there is little reason to increases’’ and contends that the the decision not to include any
believe that the purchaser would likely proposed remedy would not prevent allegations of ‘‘metropolitan-area-wide
be a less aggressive, effective competitor those increases.51 harm,’’ harm due to coordinated
for those buildings. In short, the United COMPTEL’s comment also addresses interaction between the two merged
States believes that there are potential the proposed remedy specifically, firms, or harm due to RBOC contracting
purchasers who could effectively use arguing that it is inconsistent with the practices. However, the proposed Final
the assets to compete, and intends to United States’ merger and remedy Judgments should not be viewed as
exercise its approval rights to approve guidelines. It suggests that a divestiture inadequate because they fail to address
only such purchasers.47 of laterals to only certain 2-to-1 competitive harm not alleged in the
buildings is inadequate and that, Complaints. COMPTEL also raises
(e) Alternate Remedies instead, the merged firms should be concerns that do go to whether the
Because the United States’ proposed required to divest ‘‘all of the AT&T and proposed remedy is sufficient to rectify
remedy adequately redresses the MCI network assets that serve each the competitive harm alleged in the
competitive harm alleged in its metropolitan area.’’ Next, COMPTEL Complaints. However, the United States
Complaints, there is no need to consider contends that the proposed remedy is believes that the proposed remedy will
the remedies proposed by ACTel in its faulty because it requires only the adequately redress the alleged
comment. Moreover, some of its divestiture of currently unused fiber- competitive harm and will do so in a
proposed remedies could raise difficult optic strands to the buildings in manner that avoids disruptions or
issues.48 That the proposed Final question, and without a guaranteed dislocations of the ultimate retail
Judgments do not include ACTel’s customer or revenue stream, a proposed enterprise customers whose businesses
suggested remedies in no way suggests purchaser would be unwilling to depend on reliable telecommunications
that they fail to fall within the reaches commit the capital to purchase the service.
of the public interest. assets and install equipment needed to a. Metropolitan Area Harm
B. COMPTEL ‘‘light’’ the fiber-optic strands in
questions and make them ready to use. COMPTEL contends that the proper
1. Summary of Comment Third, COMPTEL argues that the form of geographic market definition cannot be
COMPTEL, a trade association of the proposed divestitures—10-year as small as an individual building. It
communications providers that compete IRUs—is inadequate to resolve the suggests that the market is much
against the merging firms and also competitive concerns. Finally, broader, and that the harm the mergers
purchase wholesale services from them, COMPTEL suggests that the remedy is cause is likely to be felt throughout the
submitted a comment on February 13, not ‘‘clear and enforceable’’ because metropolitan area, rather than just in the
2006, objecting to the proposed Final some terms of the divestiture (pricing, specific buildings identified in the
Judgments because, in its view, they ‘‘do splice points, and transport) are left to United States’ papers. This concern is,
not replace the competition lost from negotiation between the merged firms primarily, a challenge to the United
the elimination of AT&T and MCI as the and divestiture buyers. States’ Complaints rather than the
two most significant competitors to SBC The final section of COMPTEL’s proposed remedy and, as previously
and Verizon.’’ 49 COMPTEL’s comment comment complains that certain RBOC noted, Tunney Act review properly
contracting practices are serving as a addresses the proposed remedy, not the
47 This does not mean that only a carrier with an barrier to entry, and that the combined correctness of the Complaints’
extensive pre-existing network could be acceptable effect of the mergers and the contracting allegations of geographic market or
as a purchaser. Depending on the assets the carrier practices will be to enhance the risks of competitive harm.
is purchasing from the merged firm in the particular In any event, the market definition is
metropolitan area, its plans to build or acquire other anticompetitive coordination between
assets, its existing customer base, its business plan, the two surviving firms. COMPTEL correct, and markets can be as narrow as
etc., an established carrier without a pre-existing suggests that the proposed remedy the individual building.52 As COMPTEL
network in the metropolitan area in question might would compound this problem if AT&T
also be acceptable as a purchaser. 52 The FCC also concluded that the geographic
(as the merged SBC/AT&T is now
48 For instance, their proposal that the merged

market is the individual building. FCC Orders ¶ 28
firm divest all duplicative ‘‘loop and transport (stating that ‘‘the relevant geographic market for
circuits’’ could cause significant customer Intervene on February 8, 2006, raising essentially wholesale special access services is a particular
disruptions as discussed further, see infra Sections the same concerns regarding the proposed Final customer’s location’’). It also is worth noting that
III.B.2.b, III.B.2.c.i. Judgments as are expressed in its comments. even the statement of Dr. Farrell, submitted on
49 COMPTEL Comment at 2 (attached hereto as 50 Id. at 8.
behalf of Global Crossing in the FCC’s SBC/AT&T
Attachment 2). COMPTEL also filed a Motion to 51 Id. at 12. Continued
notes, the United States defines markets of buildings, the RBOC is the only firm entire operating business needs to be
primarily from the demand perspective, owning a last-mile connection, and the divested here appears largely based on
i.e., what options face the customer.53 merger does not change this. For most its erroneous assertion that the likely
Customers for Local Private Lines can of the small percentage of buildings competitive harm extends beyond a
select only from the set of providers that where AT&T or MCI is present as a limited set of 2-to-1 buildings. To the
offer service to the particular building competitive option, either another CLEC extent that COMPTEL’s argument is that
those customers need to connect. is also present or circumstances are an entire operating business needs to be
Although RBOC networks are typically such that entry would be likely in divested in order to resolve the
ubiquitous and reach virtually every response to a price increase. Therefore, competitive harm in the specific 2-to-1
building in their franchised territories, for these buildings also the evidence is buildings identified in the United
CLECs, including AT&T and MCI, insufficient to establish that the merger States’ papers, that contention is
directly connect to only a small will likely lead to competitive harm. meritless.
minority of buildings. Because the set of Only in the set of 2-to-1 buildings for The purpose of any remedy is to avoid
providers varies from building to which the United States sought a harm to competition that would
building, and because a customer for a remedy did it conclude that the otherwise be created by the merger.
Local Private Line cannot substitute a evidence was sufficient to show that the Here, AT&T and MCI are being
circuit to a different building to supply merger would likely lead to competitive eliminated as independent competitors
the one it needs to connect, the relevant harm. COMPTEL’s contention that the in the respective RBOC regions for Local
geographic market for Local Private remedy is insufficient because it does Private Lines and value-added services
Lines can indeed be the individual not address the concern that the mergers that rely on Local Private Lines. But the
building.54 will lead to price increases throughout competitive problem is not a dearth of
Regardless, however, of whether the all the buildings in a metropolitan area providers of these services in the
appropriate geographic market here is as is therefore without merit: The evidence specified metropolitan areas; indeed,
narrow as the individual building or as did not show that such increases were each metropolitan area in question has
broad as the metropolitan area,55 the likely,57 the United States did not allege several competitive providers of Local
competitive harm likely to result from such increases, and therefore there was Private Lines and value-added services
the proposed merger is limited to a set no reason to seek relief to prevent such that rely on Local Private Lines. The
of 2-to-1 buildings, and that is what the increases. problem here is there are some
Complaints allege.56 In the vast majority buildings in each metropolitan area to
b. Divestiture of Specific Assets Versus which AT&T or MCI can offer fully
an Operating Business
merger proceeding and attached to COMPTEL’s facilities-based Local Private Line and
comment as Exhibit E, recognizes that markets as COMPTEL complains that the related services but that to which no
narrow as individual buildings would be an proposed remedy is inadequate to
appropriate way to analyze the geographic markets other CLEC can, or would be likely to,
here. See Statement of Joseph Farrell ¶¶ 10–14 resolve the harm alleged in the offer such services post-merger. An
(Apr. 25, 2005). Complaints because it achieves the effective remedy in this instance,
53 COMPTEL Comment at 10; Horizontal Merger
divestiture of only specific assets therefore, does not necessitate creating
Guidelines § 1.0. (laterals to certain 2-to-1 buildings),
54 That a customer might need Local Private Lines
an entirely new competitor offering
to multiple locations does not in itself change this
rather than an entire operating business. Local Private Line and related services
analysis. For instance, a customer’s need for It contends that this is in violation of in each metropolitan area, but rather can
connections to three locations within a given the United States’ remedy guidelines.58 be limited to a divestiture that would
metropolitan area does not necessarily mean the COMPTEL’s position, however, than an
geographic market is the metropolitan area. The
allow an existing carrier to provide fully
customer may simply be an active purchaser in facilities-based Local Private Line and
three different markets. In fact, wholesale these last-mile connections to buildings where related services to the particular set of
customers—such as those that constitute [AT&T or MCI] is the only CLEC that creates the
harm alleged in the Complaint * * *. [D]ivesting buildings in which the merger would
COMPTEL—often will purchase from multiple
providers of Local Private Lines in a given these last-mile connections will restore the lost otherwise be likely to harm
metropolitan area, relying on the RBOC for the facilities-based competition.’’). competition.59 Accordingly, a remedy
57 As COMPTEL notes, often a particular carrier’s
majority of their circuits, but purchasing from lower that gives an already viable CLEC the
priced CLECs for the locations to which the CLECs default pricing for Local Private Lines covers an
entire metropolitan area. However, given that in
fiber-optic capacity to serve the
can provide service. The fact that the wholesale
customers may have ‘‘master service agreements’’ each metropolitan area in question, AT&T or MCI buildings in question on acceptable
with carriers that cover a whole metropolitan area were each only one of multiple CLECs with local
and specify the terms under which circuits are networks and typically controlled no more than a 59 See, e.g., Remedy Guide § III.C.2 (‘‘Divestiture
purchased does not change the fact that their small minority of CLEC on-net connections, the of Less than an Existing Business Entity Also May
competitive alternatives (and hence, prices) vary by evidence did not show that elimination of AT&T or Be Considered When Certain of the Entity’s Assets
building, and they may (and often do) choose to MCI as an independent competitor would lead to Are Already in the Possession of, or Readily
purchase circuits on a building-by-building basis. ‘‘metropolitan area-wide’’ anticompetitive price Obtainable in a Competitive Market by, the
55 Because there are also some facts that suggest effects; the likely anticompetitive effect could be no Potential Purchaser.’’). Here, essentially all the
broader markets, the United States’ Complaints broader than certain individual buildings. assets necessary to compete in the problematic
acknowledge that the geographic market may be as 58 COMPTEL Comment at 14; see U.S. Dep’t. of buildings are already in the hands of, or readily
broad as the metropolitan area. Nevertheless, if the Justice, Antitrust Div., Antitrust Division Policy obtainable by, numerous potential purchasers—
market is as broad as the metropolitan area, then the Guide to Merger Remedies, § I (Oct. 2004) (‘‘Remedy except the fiber-optic connections to those
market is highly geographically differentiated, with Guide’’) available at http://www.usdoj.gov/atr/ buildings. For recent cases in which the United
different carriers able to reach very different sets of public/guidelines/205108.pdf. (‘‘This Guide is a States has required divestiture of only certain assets
locations and buildings within the area. policy document, not a practice handbook. It is not rather than an entire operating business, see United
56 See, e.g., Complaints ¶ 25 (alleging that the a compendium of decree provisions, and it does not States v. Cal Dive Int’l, Inc., No. 1:05CV02041 (EGS)
merging parties ‘‘are the only two carriers that own list or give ‘best practices’ or the particular language (D.D.C. Jan. 12, 2006) (order entering final judgment
or control a Local Private Line connection to many or provisions that should be included in any given requiring divestiture of two vessels and a saturation
buildings in each region. The merger would, decree.’’). Although the Remedy Guide is not diving system), available at http://www.usdoj.gov/
therefore, effectively eliminate competition for binding, the proposed remedy here is entirely atr/cases/f213100/213177.htm; United States v.
facilities-based Local Private Line service to those consistent with the Remedy Guide. As the Remedy Cingular Wireless Corp., No. 1:04CV01850 (RBW)
buildings’’) (emphasis added); see also CISs at 10 Guide notes, the fact that a provision was included (D.D.C. Mar. 14, 2006) (order entering final
(‘‘[T]here are numerous buildings where [AT&T or in prior settlements does not make it necessarily judgment requiring, in certain markets, divestiture
MCI] is the only CLEC with a last-mile connection. appropriate for new ones; each matter must be of wireless spectrum only), available at http://
It is the decreased competition in the provision of evaluated on a case-by-case basis. Id. www.usdoj.gov/atr/cases/f208000/208093.htm.
terms resolves the competitive harm. A Therefore, the divestiture package must (i) Capacity Without Customers
divestiture of an entire ‘‘operating be one a carrier would be willing to buy. As COMPTEL has noted, the United
business’’ is unnecessary.60 The only COMPTEL’s criticisms of the proposed States often requires the divestiture of
question is whether the particular assets divestiture properly address whether customers in antitrust remedies.64
that the divestiture buyer must receive any buyer would be willing to purchase Nevertheless, such a divestiture is not
under the proposed Final Judgments, and operate the assets under the always necessary or appropriate. Here,
and the terms by which those assets are proposed terms (e.g., ‘‘unlit’’ fibers, because there are multiple providers of
conveyed, are sufficient to allow the without customers, on an IRU basis, for Local Private Line and related services
buyer to compete effectively in the only ten years). in each metropolitan area, the set of
buildings in question. As discussed divestiture assets could be relatively
The United States believes that the
further below, the United States believes narrow: a purchaser could serve the
proposed terms are adequate to secure a
that the proposed Final Judgments potentially problematic buildings
viable buyer for the assets. Since the
adequately resolve these issues. simply by acquiring ‘‘last-mile’’ fiber-
United States agreed to the divestiture
c. Concerns Regarding the Assets To Be terms, the divestiture process itself has optic capacity connected to its local
Divested helped to validate their adequacy. Both network. Because fiber-optic capacity
AT&T and Verizon are well into the will be sold to an established CLEC,
COMPTEL contends that the
process of auctioning the divestiture there is little concern that the purchaser
divestiture of unused capacity to the
assets in question.61 Affidavits that both would not be competitively viable
buildings in question in the form of ten-
have filed with the United States without also receiving customer
year IRUs is inadequate to resolve the
pursuant to Section IV(B) of the contracts. A divestiture of customers
competitive concerns alleged in the
Stipulations and Section IX of the would be necessary or appropriate in
Complaints. This raises several separate
proposed Final Judgments indicate that this case only if no adequate purchaser
but related issues regarding the
there has been substantial interest in the were willing to take on the assets in the
proposed remedy: (a) Whether it is
divestiture assets: multiple carriers have absence of some sort of guaranteed
sufficient to divest fiber-optic capacity
revenue stream. From its investigation,
(as opposed to also divesting submitted proposals for some, or all, of
the United States concluded that
customers); (b) whether it is sufficient to the AT&T and MCI assets. The bids
purchasers would be willing to take on
divest ‘‘unused’’ capacity, i.e., ‘‘unlit’’ cover every metropolitan area identified
the assets, even without customers, on
fibers; (c) whether a divestiture in the in the proposed Final Judgments. In the
the assumption that they would be able
form of an IRU, instead of ownership, is case of AT&T (which began the
to compete for, an and win, customers
sufficient, and (d) whether ten years is divestiture process earlier than did over time in the buildings at issue. The
a sufficiently long IRU term. The United Verizon), definitive agreements have fact that multiple CLECVs—including
States considered each of these issues in already been reached with three members of COMPTEL—submitted bids
its negotiation of the remedy. different well-established carriers that for these assets (and, in AT&T’s case,
Ultimately, the United States concluded would cover divestiture of all the assets have agreed to purchase the assets)
that the provisions of the proposed in question.62 That several CLECs have helps confirm this.65
Final Judgments are sufficient to redress bid to purchase and operate the assets,
the competitive harm. Events since the and the AT&T has already been able to (ii) Unused Capacity Versus ‘‘Lit’’ Fibers
filing of the proposed Final Judgments reach definitive agreements to divest all COMPTEL correctly notes that
have helped confirm the United States’ its required assets, should help allay purchasers of the divested assets will
judgment, and should serve to reassure any concerns about whether the terms of receive unused capacity to the point of
the Court as to the adequacy of the the proposed divestiture are sufficient to entry of each building, and, in order to
proposed remedy. attract viable buyers.63 begin serving customers, would have to
As a result of the proposed mergers, invest some capital to gain building
customers for Local Private Line and 61 In order to secure a prompt remedy, the entrance and activate (‘‘light’’) the
related services to certain buildings will proposed Final Judgments require a divestiture fibers. COMPTEL’s analogy to the cost
lose their only alternative to SBC or within 120 days after the closing of the respective
of constructing entirely new ‘‘last-mile’’
Verizon. The purpose of the divestiture acquisitions, or within five (5) days after notice of
the entry of final judgment by the Court, whichever connections, however, and its
remedy is to ensure that if and when is later. Proposed Final Judgments § IV(A).
those customers seek a provider for the 62 On February 20, 2006, AT&T entered into 64 See, e.g., Remedy Guide § III.B (‘‘In markets
relevant services, another competitive definitive agreements to divest the assets in Los where an installed base of customers is required in
carrier will be able to supply them. That Angeles and Chicago to one carrier, and the assets order to operate at an effective scale, the divested
in Detroit, Hartford, Kansas City, Milwaukee, San assets should either convey an installed base of
purpose will be achieved if another Francisco, and St. Louis to another. On February 21, customers to the purchaser or quickly enable the
carrier acquires sufficient AT&T or MCI 2006, AT&T entered into a definitive agreement to purchaser to obtain an installed customer base.’’)
assets to service the buildings in divest the San Diego, Dallas, and Indianapolis 65 In this instance, a divestiture of customers
question. However, another carrier will assets to a third carrier. The United States has not might cause substantial disruption and
yet determined whether to approve these purchases, complication—far more than in the ordinary
only purchase the divested assets if they pursuant to Section IV(A) of the Stipulation and antitrust settlement. Among other things, shifting a
present a viable business opportunity. Section VI(C) of the proposed Final Judgment. portion of a customer’s telecommunications service
63 If the United States is wrong about whether the risks outages, something particularly worrisome
60 Divestiture of an entire ‘‘operating business’’ or terms of the proposed divestiture are attractive given the extent to which many retail enterprises
‘‘business unit’’ is not only unnecessary here, but enough to prompt a carrier to purchase the assets depend on reliable telecommunications service.
also impractical. Neither AT&T nor MCI have in any given metropolitan area, then after both the Had the United States sought to include a customer
separate, easily severable ‘‘business units’’ that defendant(s) and trustee have failed to sell the divestiture as part of the proposed remedies, it
operate the Local Private Line business is the assets, the trustee will file a report with the Court, could well have run afoul of the Tunney Act’s
metropolitan areas in question. The manner in the United States will make recommendations, and concern that the proposed remedy not adversely
which the respective corporations are organized the Court ‘‘shall enter such orders as it shall deem affect third parties. 15 U.S.C. 16(e)(1)(B) (requiring
would make it very difficult to implement an appropriate to carry out the purpose of the Final court to consider the impact of entry of the
effective divestiture of an entire ‘‘operating Judgment.’’ Proposed Final Judgments § V.G. Such judgment ‘‘upon the public generally’’), see also
business’’ here. Moreover, such a divestiture could orders could alter the terms of the divestitures, or Microsoft, 56 F.3d at 1462 (suggesting the Tunney
cause substantial customer disruption. See infra the nature of the assets, in such a way as to make Act analysis should consider whether ‘‘third parties
Section III.B.2.c.i. the divestiture viable. * * * would be positively injured by the decree’’).
contention that these entrance and and related services will thereby have (v) Negotiable Terms
activation costs would prevent the the benefits of competition, even if the COMPTEL suggests that the remedy is
remedy from being effective, are divestiture purchaser ultimately does not ‘‘clear and enforceable’’ because
misplaced. not win a customer contract, or ‘‘light’’ some terms of the divestiture (pricing,
Although costs vary widely, the cost the fiber in their particular building. splice points, and transport) are left to
of gaining building entrance and negotiation between the merged firm
activating fibers is typically a small (iii) IRU Versus Ownership
and divestiture buyer. In any
fraction of the cost of constructing an divestiture, however, many of the terms
COMPTEL characterizes the form of
entirely new ‘‘last-mile’’ connection need to be negotiated between the seller
the divestiture as a ‘‘lease’’ and suggests
often an order of magnitude less. and buyer. Indeed, the United States
that it will be ineffective because it is
Optronics equipment (equipment to never specifies a purchase price in its
not full ownership. Although COMPTEL
light fiber) may not be cheap, but its still settlements. The requirements of the
typically does not cost anywhere near as is correct in that the remedy does not
require transfer of full ownership, IRUs, proposed Final Judgments here are
much as digging up city streets and ‘‘clear and enforceable’’: the merged
laying new fiber. Moreover, whereas which carry broader rights than typical
leases, are commonly used in the firms must divest laterals to more than
most of the cost of a new ‘‘last-mile’’ 700 specific addresses and sufficient
connection is sunk (i.e., it cannot be industry and often viewed as almost
indistinguishable from ownership. In transport to connect those laterals to the
recouped once committed), much of the buyer’s network. The United States has
cost of optronics equipment is not fact, many CLECs’ metropolitan area
networks—including some of those of no reason to believe that the negotiation
generally sunk because the carrier can of a commercial, arms-length agreement
remove the equipment and use it pre-merger AT&T—are constructed
largely from IRU fiber rather than between the merged firms and
elsewhere if it is no longer needed in its divestiture buyers are likely to lead to
original location. Accordingly, the owned fiber. In its investigation, the
United States did not uncover any any unusual problems.68 In fact, the
evidence gathered by the United States
significant evidence suggesting that evidence to date is otherwise: AT&T has
revealed that whereas carriers do not
conveying laterals in the form of IRUs already submitted to the United States
typically ‘‘build out’’ (i.e., build a new
would undermine the effectiveness of for approval definitive agreements for
last-mile connection) to a customer
the remedy. the divestitures required by the
without a relatively large guaranteed
proposed Final Judgment with the terms
revenue commitment, they typically do (iv) Ten-Year Duration fully resolved. Of course, should there
light fiber and negotiate entrance to
be any difficulties, the ultimate terms of
buildings connected to their network COMPTEL complains that the
the divestiture must be acceptable to the
with unlit fiber if they are able to secure required minimum term of the IRU—ten
United States.69
a customer of even modest capacity years—is ‘‘relatively short’’ and will
needs. impair the effectiveness of the remedy. d. Contracting Practices and
As COMPTEL suggests, for each The United States disagrees. Retail Coordination
building in question, the buyer of the agreements for Local Private Line and COMPTEL complains at length that
divested assets may not negotiate a related services are virtually always certain RBOC contracting practices are
building entrance agreement or activate much shorter than ten years; typically serving as a barrier to entry, and that, in
a fiber lateral until it has secured a they are no more than two or three its view, the combined effect of the
customer in the building. But that does years. The fact that the IRUs are for ten mergers and the contracting practices
not negate the effectiveness of the years should not impair the ability of will be to enhance the risks of
remedy. The buyer of the divested assets the divestiture purchaser to compete anticompetitive coordination between
can bid to supply Local Private Line and except, perhaps, near the end of the ten- the two surviving firms. As part of its
related services to the building in year term. At that point, it is impossible investigation the United States, of
question, and if it prevails, negotiate to predict what the competitive course, considered potential entry
building entrance and activate the fiber. landscape will look like, especially in barriers in the markets in question
The CLECs who have bid for the assets the rapidly changing
in all likelihood plan to do exactly (including RBOC contracting practices)
telecommunications industry. It is for as well as the possibility that the
that.66 Customers for Local Private Line that reason that the United States’ mergers could enhance the risks of
66 The United States also concluded that any
consent decrees—including those collusion. Whatever the entry barrier
attempt to divest ‘‘lit’’ capacity would have been proposed here—do not extend beyond that may be posed by RBOC contracting
unduly complicated and problematic. For instance, ten years. The United States cannot, practices, the mergers do nothing to
splicing ‘‘lit’’ fibers out of the seller’s network and with confidence, predict whether the enhance them. Nor have such contracts
into the buyer’s would raise the prospect of mergers would continue to cause
customer outages. On a similar note, if the proposed served to prevent multiple CLECs from
Final Judgments had required the merged firm to anticompetitive harm beyond ten years building networks, entering markets,
provide the purchasers with fiber into the building, in the future, as technological or other and selling significant volumes of, both
as opposed to simply to it, the merged firm might changes could substantially reshape the
have to negotiate entrance agreements with wholesale and retail, Local Private Lines
hundreds of landlords on behalf of a third party
industry. Therefore, the remedy cannot and related services. To the extent that
who might not need entrance agreements for all be faulted for not extending beyond ten AT&T and MCI were successful in
those buildings until some time in the future. years.67
Perhaps more importantly, the divestiture buyer 68 Indeed, because of the relative simplicity of the
could well have ended up paying lease or entrance
fees for countless buildings where it had no 67 It is also worth noting that fiber-optic cable remedy here, the agreements between the merged
customers, greatly adding to the carrying costs of does not last forever. The useful life of that fiber firms and divestiture buyers are likely to be much
the fiber and making the divestiture assets much may be no more than 20 to 25 years. It is possible, less complex and potentially problematic than
less attractive as a business proposition. The better if not likely, that much of the AT&T and MCI fiber many other divestitures, which typically can
approach was to simply let the buyers negotiate at issue here may have been laid ten or more years involve difficult issues regarding, e.g., transition
their own building entrance agreements, on their ago. Thus, in many cases, in 10 years time, much agreements, intellectual property transfer, ‘‘splitting
own terms, and better suited to their specific needs, of the divestiture fiber may be nearing the end of up’’ of customer contracts, arrangements for
for each building if and when they need it (i.e., if its useful life and there would be little purpose in employees.
and when they win a customer in that building). requiring an IRU significantly longer than ten years. 69 Proposed Final Judgments § VI(C).
selling Local Private Lines and related MCI’s resale of circuits owned by SBC Similarly, NYAG argues that the
services to the buildings in question, the and Verizon; 73 argues that the proposed mergers could have anticompetitive
divestiture purchaser could be as well. divestitures are inadequate because they effects in the Internet backbone market
As for coordination, the United States involve only a ‘‘handful of buildings’’ and argues that ‘‘[t]he Court should
was unable to conclude that the change and, therefore, would not affect pricing reject the Verizon-MCI merger unless
in market structure brought on by the throughout New York City or State, or and until Verizon provides the
mergers was likely to lead to constitute a viable network for a information needed to make an
competitive harm due to an increased buyer; 74 and suggests that the remedy is informed decision regarding the extent
risk of coordination.70 The existence of ‘‘written in disappearing ink’’ because to which backbone concentration will
numerous competitors (in addition to the assets to be divested can be increase as a result of the proposed
the merging firms) for both wholesale modified at the purchaser’s option and merger with MCI.’’ It goes on to suggest
and large retail telecommunications with the consent of the United States.75 that the Court should consider ‘‘the
customers tends to make collusion appropriateness of divestiture of
difficult. In any event, the United States’ 2. Response backbone assets’’ based on that
Complaints did not make any a. DSL, Internet Backbone, and Local information.78 The United States
allegations regarding RBOC contracting Private Line Resale investigated the effects of the mergers
practices or anticompetitive on the Internet backbone market,
Most of NYAG’s comment 76 relates to
coordination, and hence, COMPTEL’s considering both the current traffic
issues well beyond the scope of the
concerns are beyond the scope of the shares of the merging parties as well as
Complaints and have essentially Complaints. NYAG argues that the
proposed Final Judgments should have potential increases in shares that might
nothing to do with whether the result from shifting SBC or Verizon
proposed remedy resolves the required customer access to unbundled
DSL services. It is not clear from the retail customers onto the AT&T and MCI
competitive harm alleged by the United backbone. Ultimately, the United States
States.71 comment what merger-related harm
NYAG intends this to remedy, but, in concluded that competition in this
C. New York Attorney General any event, there appears to be no market would not be harmed as the
relationship between that proposed merged firms would continue to face
1. Summary of Comment several strong competitors. Therefore, it
restriction and the markets alleged in
On February 13, 2006, the New York the United States’ Complaints.77 did not allege Internet backbone as a
Attorney General (‘‘NYAG’’) submitted a relevant product market, nor did it
comment arguing that the proposed 73 Id. at 5. allege any harm in such a market.79
remedies are ‘‘unlikely to constrain the 74 Id. at 6. Accordingly, relief directed to the
merged entities,’’ 72 in particular, 75 Id. at 6–7. Internet backbone market is unnecessary
because (a) they did not address the 76 NYAG also filed comments with the New York and NYAG’s concerns about Internet
effect of the mergers on Internet access, Public Service Commission (‘‘NYPSC’’) on April 29, backbone do not implicate whether the
2005, as part of the Verizon/MCI merger
and (b) they inadequately addressed the proceedings before that body, raising essentially the
proposed Final Judgments are in the
competitive concerns as to Local Private same ‘‘naked DSL’’ and Internet backbone concerns public interest.
Lines. With respect to the former, NYAG it raises here. The NYPSC approved the Verizon/ NYAG’s comment also includes a
argues that the proposed Final MCI merger, with certain conditions, in a detailed paragraph complaining that the mergers
64-page order on November 22, 2005. Order
Judgments are faulty because they do Asserting Jurisdiction and Approving Merger
will adversely affect competition
not require the merged firms to offer Subject to Conditions, Joint Petition of Verizon because they will eliminate ‘‘discounted
DSL on a stand-alone basis to Communications Inc. and MCI, Inc. For a ‘last mile’ wholesale leasing.’’ Although
consumers (i.e., without also requiring Declaratory Ruling Disclaiming Jurisdiction Over or this concern does, at least, involve Local
consumers to subscribe to telephone in the Alternative for Approval of Agreement and
Plan of Merger, New York Public Service Comm’n
Private Lines, it raises an issue
service), and because they do not CASE 05–C–0237, (Nov. 22, 2005) (‘‘NYPSC unrelated to anything alleged in the
require any relief related to Internet Order’’), available at http://www3.dps.state.ny.us/ United States’ Complaints. The United
‘‘backbones,’’ the large, interconnecting pscweb/WebFileRoom.nsf/ArticlesByCategory/ States investigated whether the mergers
fiber-optic networks that constitute the 135BB9AA905F47A7852570C0005155BD/$File/
05c0237_11_22_05.pdf?OpenElement.
would have a significant adverse impact
core of the Internet. With respect to 77 DSL is primarily a ‘‘mass market’’ service, and on competition in Local Private Lines by
Local Private Lines, NYAG complains the most frequently cited justification during the eliminating AT&T and MCI as
that the proposed remedies do not Department’s and FCC’s investigations for requiring independent resellers of ILEC circuits,
address the loss of competition from the the merged firms to offer ‘‘naked’’ or ‘‘unbundled’’ but determined that the evidence did
potential elimination of AT&T’s and DSL as a remedy is the allegation the mergers
would reduce competition for mass market
telephone service. If the merged firms were required commitments to provide ‘‘naked DSL’’ and
70 The FCC reached a similar conclusion. FCC to offer naked DSL, it would allegedly make it included them as part of their orders. FCC Orders,
Orders ¶ 52 (‘‘We also do not believe that the easier for standalone VoIP (‘‘voice over internet Apps. F, G (respectively); NYPSC Order at 61–62,
merger increases the likelihood of coordinated protocol’’) providers like Vonage to compete against 63.
interaction.’’); see also id. 54. the merged firm. The United States concluded that 78 NYAG Comment at 17. Essentially, NYAG asks
71 COMPTEL’s sole basis for arguing that the
the evidence would not support a Section 7 case the Court to conduct its own discovery and de novo
contracting practices and coordination are relevant alleging competitive harm in the ‘‘mass market.’’ antitrust investigation of the Internet backbone
to the remedy is its allegation that if Verizon buys That conclusion was consistent with those reached market, conduct a trial on whether the discovered
the divested AT&T assets, and vice versa, that may by the New York Public Service Commission as facts prove liability, and then determine the
compound the competitive harm COMPTEL alleges. well as the FCC. See NYPSC Order at 29 (‘‘We appropriate remedy. This is, of course, not
Putting aside the questionable merit of these claims, conclude that the merger will not likely result in consistent with the Tunney Act.
as discussed above, the merging firms have already anti-competitive effects for mass market 79 The FCC and the European Union also looked
solicited and received bids for the assets in question customers.’’); FCC Orders at ¶¶ 81 (SBC/AT&T), 82 at the Internet backbone issue and determined that
as required under the proposed Final Judgments, (Verizon/MCI) (‘‘As discussed below, we find that no relief was rquired. See, e.g., FCC Orders ¶¶ 108
and Verizon did not bid for the AT&T assets nor [Verizon/SBC]’s acquisition of [MCI/AT&T] is not (SBC/AT&T), 109 (Verizon/MCI); Commission of
did AT&T bid for the MCI assets that Verizon is likely to result in anticompetitive effects for mass the European Communities, Case No. COMP/
divesting. Thus, COMPTEL’s concern appears to be market services.’’). Although neither the FCC nor M.3752–Verizon/MCI, Art. 6(1)(b) Non-Opposition
moot. the NYPSC identified a problem in ‘‘mass market,’’ Decision, ¶ 45 (Oct. 7, 2005), available at http://
72 NYAG Comment at 4 (attached hereto as and therefore saw no need for a mandatory ‘‘naked europa.eu.int/comm/competition/mergers/cases/
Attachment 3). DSL’’ remedy, they did accept the parties’ voluntary decisions/m3752_20051007_20310_en.pdf.
not support such a conclusion.80 competition beyond the footprint of the The proposed divestitures in these
Accordingly, it did not allege this as handful of individual buildings matters involve a great many assets,
competitive harm in its Complaints, nor identified.’’ 84 But that is the point: The including more than 700 lateral
would it be appropriate to seek any identified buildings are the only ones connections to specific street addresses.
relief regarding resold circuits.81 where competition was likely to be Moreover, because 18 metropolitan
harmed, and they are, therefore, the areas are involved, there will almost
City or State-wide Pricing
only ones for which a remedy was certainly be several different purchasers.
NYAG briefly complains that the required. The proposed remedy should It is possible that as the divestiture sales
divestiture of only a ‘‘handful of not be viewed as inadequate, or proceed, it will be discovered that
buildings’’ is insufficient because it inconsistent with the public interest, exclusions in the divestiture assets are
would not affect pricing throughout simply because it fails to affect desirable. For instance, if it turns out
New York City or State. The United competition in locations where the that, unbeknownst to the United States
States did not allege, however, that the evidence did not demonstrate an at the time of filing, one of the buildings
mergers would adversely affect prices anticompetitive effect. in question is scheduled for demolition,
throughout a whole city, state, or it hardly makes sense to require a
metropolitan area. As previously noted, (c) Scope of Divestiture divestiture of a lateral to that building.
there are multiple carriers with NYAG also argues that the divested In order to maintain flexibility to deal
extensive networks in each metropolitan buildings, at least in New York, ‘‘do not, with such contingencies, and to avoid
area under consideration,82 and the themselves, form the critical mass burdening the Court with requests for a
evidence did not demonstrate a needed to build a network * * *. [A]ny decree modification each time such an
likelihood of anticompetitive price would-be competitor who acquired the occasion might arise, the United States
effects covering all buildings in a divested MCI facilities serving these included in the proposed Final
metropolitan area. What the United scattered buildings would have neither Judgments a mechanism for minor
States alleged was that the proposed the scope nor scale necessary to stand exclusions from the divestiture assets.87
mergers were likely to reduce in MCI’s competitive shoes.’’ 85 But the To ensure that such exclusions are
competition to certain 2-to-1 buildings proposed Final Judgments did not consistent with the purposes of the
in each area, and the proposed remedy contemplate that the purchaser would proposed Final Judgments, any
is directed at restoring competition to necessarily have no other assets beyond exclusions must be at the purchaser’s
those buildings.83 NYAG notes that it is those being divested. As discussed in option, will require the consent of the
‘‘hard to see how this remedy could Section III.A.2.d, in every metropolitan United States, and are limited to assets
have any significant positive effect on area identified in the Complaints and rights not necessary to meet the
(including New York) there are at least competitive aims of the Final Judgment.
80 The United States’ investigation determined
several CLECs with extensive networks, IV. Conclusion
that A&T’s and MCI’s sales of resold circuits are
relatively small and of limited competitive
including, e.g., switches, fiber, dozens
or hundreds of ‘‘on-net’’ locations. After careful consideration of these
significance. Moreover, because numerous other
CLECs have extensive fiber-optic networks in the Those CLECs are already effective public comments, the United States
metropolitan areas under consideration, as well as competitors in many buildings in the remains of the view that the proposed
contracts with Verizon and SBC providing them
metropolitan area, though not in the Final Judgments provide an effective
with discounts similar to those of AT&T and MCI, and appropriate remedy for the antitrust
other competitors could likely replace any buildings covered by the proposed Final
Judgments where they lack a last-mile violation alleged in the Complaints and
competition that might be lost by the elimination
of AT&T and MCI as independent resellers in SBC’s connection. The proposed remedy, by that their entry, therefore, would be in
and Verizon’s territories respectively. The FCC
providing a carrier with fiber-optic the public interest. Any settlement is a
reached a similar conclusion. FCC Order ¶¶ 33, 43.
capacity to those buildings, will enable product of negotiation and compromise,
81 The United States devoted significant time to
it to replace the competition that could and as courts have noted, the purpose
investigating the issues discussed in NYAG’s
of Tunney Act review is not for the
comments and concluded that the evidence did not potentially be lost as a result of the
support alleging competitive harm related to ‘‘mass court to engage in an ‘‘unrestricted
merger. The purpose of the United
market,’’ Internet backbone, or resold Local Private evaluation of what relief would best
Lines. NYAG has the statutory ability to investigate States having approval rights over the
serve the public’’ 88 or to determine the
violations of state and federal antitrust laws, see proposed buyer of the assets is to ensure
relief ‘‘that will best serve society,’’ 89 it
e.g., N.Y. Gen. Bus. Law § 343 (McKinney 2006) that the assets are acquired by a firm
(providing for pre-complaint discovery), and the is simply to determine whether the
that can effectively compete to provide
standing to enforce them. If NYAG believed the proposed decree is within the reaches of
evidence justified a broad antitrust case based on services to the buildings in question.
resold Local Private Lines, Internet backbone, DSL,
or anything else, it could have brought that case.
(d) ‘‘Disappearing Ink’’ in other antitrust consent decrees that suggest that
something less than the entire ‘‘divestiture assets’’
Here, it elected not to do so. Finally, NYAG also raises one brief can be sold if the United States consents in writing.
82 For instance, in the New York metropolitan
point regarding the assets to be divested: See e.g., United States v. Marquee Holdings, Inc.,
area—the focus of NYAG’s concerns—the United No. 05 CV 10722 § IV(I) (KMW) (S.D.N.Y. filed Dec.
States’ investigation identified more than a dozen
it suggests that the proposed remedy is
22, 2005) (proposed final judgment), available at
carriers besides Verizon and MCI with significant ‘‘written in disappearing ink’’ because http://www.usdoj.gov/atr/cases/f213800/
fiber networks. At least a half dozen of these had the assets to be divested can be 213862.htm.; United States v. United Health Group
hundred or thousands of route miles of fiber. The modified at the purchaser’s option and Incorporated, No. 1:05CV02436, § IV(I) (RMU)
United States identified well in excess of 4,000 (D.D.C. filed Dec. 20, 2005) (proposed final
CLEC ‘‘last-mile’’ building connections; less than 15
with the consent of the United States.86 judgment), available at http://www.usdoj.gov/atr/
percent of these belonged to MCI. These cases/f213800/213817.htm.
84 NYAG Comment at 6.
conclusions are consistent with those reached by 87 The Tunney Act condemns ambiguity in
the New York Public Service Commission in its 85 Id. proposed Final Judgments. 15 U.S.C. 16(e)(1)(A). It
analysis of the New York metropolitan area. See 86 NYAG Comment at 7; see Proposed Final is for that reason that the proposed Final Judgments
NYPSC Order at 45 (‘‘We conclude that on average Judgments § II(D) (‘‘With the approval of the United are extremely specific, identifying hundreds of
there are approximately six alternative fiber States, and in its sole discretion, and at the individual building addresses. But that very
networks within 1/10 of a mile of the MCI-lit Acquirer’s option, the Divestiture Assets may be specificity creates the need for some flexibility.
buildings in New York, and that 75% of those modified to exclude assets and rights that are not 88 BNS, 858 F.2d at 462 (citing Bechtel Corp., 648
buildings have two or more alternative carriers.’’) necessary to meet the competitive aims of this Final F.2d at 666).
83 See supra note 56. Judgment.’’). This provision is similar to ones used 89 Bechtel, 648 F.2d at 666.
the public interest—‘‘even if it falls doubt upon the adequacy of the Plaintiff United States’ Response to
short of the remedy the court would proposed Final Judgments. Comments
impose on its own.’’ 90 Under subsection (B), the Court is to Filed in United States v. SBC
Under subsection (A) of 15 U.S.C. consider ‘‘the impact of entry of such Communications, Inc. and AT&T
16(e)(1), the Court is instructed to judgment upon competition in the Corp., Civ. Action No. 1:05CV02102
consider a number of factors relating to relevant market or markets, upon the (EGS) and United States v. Verizon
the competitive impact of the proposed public generally and individuals Communications and MCI, Inc., Civ.
Final Judgments.91 With respect to the alleging specific injury from the Action No. 1:05CV02103 (EGS)
‘‘termination of alleged violations,’’ the violations set forth in the complaint Attachment 1—Comments Regarding
Section 8 violation in each matter here including consideration of the public the Proposed Consent Decrees
is a merger that would reduce benefit, if any, to be derived from a Submitted on Behalf of the Alliance for
competition in Local Private Line and determination of the issues at trial.’’ 92 Competition in Telecommunications
related services to certain buildings; by Because the buildings identified in the (ACTel)
restoring competition to those buildings, proposed Final Judgments are the only
the proposed remedy terminates the Comments Regarding the Proposed
ones in which competition is likely to
violations. With respect to ‘‘provisions Consent Decrees in United States v.
be lessened as a result of the mergers, SBC Communications, Inc. and AT&T
for enforcement and modification,’’ the the impact of entry of the proposed
proposed Final Judgments contain the Corp. (Civil Case No. 05–2102) and
Final Judgments will be to restore any United States v. Verizon
standard provisions that have been competition lost as a result of the
effective in numerous other cases Communications, Inc. and MCI, Inc.
merger in Local Private Lines and (Civil Case No. 05–2103)
brought by the United States. In related services. Customers for Local
particular, the proposed Final Private Line and related services Submitted on Behalf of the Alliance for
Judgments, provide that the Court provided to the buildings in question— Competition in Telecommunications
retains jurisdiction over this action, and parties who might have otherwise (ACTel)
the parties may apply to the Court for
suffered injury from the violations set Thomas Cohen,
any order necessary or appropriate for
forth in the Complaints—are likely to Executive Director, Alliance for Competition
the modification, interpretation, or
have competitive choice restored to in Telecommunications.
enforcement of the Final Judgment.
them via the contemplated divestitures. Gary L. Reback,
With respect to ‘‘duration of relief
Moreover, the relief is sufficiently Carr & Ferrell LLP.
sought,’’ the proposed divestitures are
limited so that the public will not suffer
for a minimum of ten years. As On December 15, 2005, the
discussed above, this period is adequate any adverse consequences from the
proposed Final Judgments.93 No Department of Justice published in the
and appropriate given the rapidly Federal Register the Proposed Final
changing nature of technology and the conceivable benefit could arise from a
determination of these issues at trial. Judgments resolving virtually identical
industry, as well as the useful life of the Complaints filed by the United States to
divestiture assets. With respect to Based on the factors set forth in the
enjoin the acquisition of AT&T Corp. by
‘‘anticipated effects of alternative Tunney Act, the proposed Final
SBC Communications Inc., and the
remedies actually considered’’ the Judgments are in the public interest.
acquisition of MCI, Inc. by Verizon
alternative of injunctions blocking the Pursuant to Section 16(d) of the Communications, Inc. The respective
proposed mergers would likely have Tunney Act, the United States is Complaints characterize the former
prevented the firms in question from submitting the public comments and its acquisition as creating ‘‘the nation’s
realizing literally billions of dollars in Response to the Federal Register for largest provider of telecommunications
efficiencies. Such an extreme remedy is publication. Our response is also being services,’’ and the latter transaction as
unwarranted given the relatively small provided to each of the commenters. creating ‘‘one of the nation’s largest
magnitude of the competitive problem After the comments and the United providers of telecommunications
and the availability of a divestiture States’ Response to Comments are services.’’ Complaints at ¶1. Among all
remedy that will completely resolve it. published in the Federal Register, the of the overlaps and increases of
With respect to ‘‘whether its terms are United States will move this Court to concentration in telecommunications
ambiguous,’’ no term in either proposed enter the proposed Final Judgments. products, services and assets that the
Final Judgment is ambiguous. Among transactions procedure, and
other things, the assets to be divested Respectfully submitted, notwithstanding the complaints and
are specified down tot he individual Laury E. Bobbish, protests of consumer and business
building addresses. Finally, with respect Assistant Chief. customers at both the state and Federal
to ‘‘any other competitive Lawrence M. Frankel, level, the Department of Justice’s
considerations bearing upon the (D.C. Bar No. 441532), Trial Attorney. challenge to the proposed transaction is
adequacy of such judgment,’’ none casts U.S. Department of Justice, Antitrust limited to the effect of a single
Division, Telecommunications and Media duplicative product offering.
90 AT&T, 552 F. Supp. at 151. Enforcement Section, 1401 H Street, NW., Specifically, the Complaints seek to
91 The Court shall consider ‘‘the competitive Suite 8000, Washington, DC 20530, enjoin both transactions, because they
impact of such judgment, including termination of ‘‘will substantially lessen competition’’
alleged violations, provisions for enforcement and
Telephone: (202) 514–5621, Facsimile: (202)
modification, duration of relief sought, anticipated 514–6381. in the provision and sale of ‘‘Local
Private Lines’’ (also known as ‘‘special
effects of alternative remedies actually considered,

whether its terms are ambiguous, and any other 92 15 U.S.C. 16(e)(1)(B).
access’’) to the wholesale market as well
competitive considerations bearing upon the as voice and data services that rely on
93 Conversely, an injunction against the mergers,
adequacy of such judgment that the court deems
necessary to a determination of whether the consent or a divestiture of customers as proposed by Local Private Lines, with the likely
judgment is in the public interest.’’ 15 U.S.C. COMPTEL would likely have adverse impact on the result that prices for the Lines and
16(e)(1)(A). public. services using those Lines will increase
‘‘to levels above that which would addresses only the part of the Private conclusion that the remedy cannot
prevail absent the merger(s).’’ Line that connects to a building, not the succeed. The proposed remedy fails to
Complaints ¶¶1, 25, 33. The Complaints part of the Private Line that connects to satisfy the Tunney Act even when
indicate that, absent relief, competition a carrier’s network. Hence, reviewing judged under the overly deferential
will be diminished and prices will rise the remedy ‘‘in relationship to the standard proposed by the Government.
for both wholesale and retail ‘‘Local violations that the United States has When evaluated under the standard
Private Line’’ customers. Complaints alleged in its Complaints(s),’’ 2 and required by Congress in the 2004
¶25. deferring to the Government to whatever amendments to the Tunney Act, the
These comments are directed to both extent is required by law, the remedy proposed remedy is barely worth of
cases and are timely submitted pursuant does not, and cannot logically, serious consideration.
to the Antitrust Procedures and ameliorate the harm alleged in the
Penalties Act, 15 U.S.C. 16(b)–(e) Complaints. Prior to the Acquisitions, The
(known as the ‘‘Tunney Act’’), on behalf The judicial review of the Wholesale Market Functioned
of the Alliance for Competition in Government’s settlements in these cases Effectively, Producing Low Prices
Telecommunications (‘‘ACTel’’). ACTel will constitute the first significant Any evaluation of the Government’s
members include both competitive local application of the Tunney Act since efforts in these cases to protect the
exchange carriers (‘‘CLECs’’) and Congress amended that statute in 2004. wholesale Private Line market from
interexchange carriers (‘‘IXCs’’) that buy The Congressional amendments anticompetitive injury must begin with
Local Private Lines 1 at wholesale from specifically overruled District of an understanding of the magnitude of
the merging companies. ACTel members Columbia Circuit Court of Appeals and the wholesale market and its
combine these purchased lines with District Court precedent that was importance. While the Complaint 7
additional facilities, technology, deemed overly deferential to Antitrust formally denominates the relevant
products and services to sell their own Division consent decrees.3 In response product market as ‘‘Local Private
value-added telecommunications to those decisions, Congress Lines,’’ the Complaint goes on to
services, sometimes in competition with reemphasized its intention that courts explain that SBC and Verizon refer to
the merging companies, to end user reviewing consent decrees ‘‘make an these products as ‘‘special access’’
business customers. Many of these independent, objective, and active circuits.
value-added telecommunications determination without deference to the As the Complaint points out, most
services are directed to small- and DOJ.’’ 4 Courts are to provide an office buildings are connected, or ‘‘lit,’’
medium-sized business customers. ‘‘independent safeguard’’ against only by either SBC or Verizon in their
These facts are described in the ‘‘inadequate settlements.’’ 5 Specifically, respective territories. In pricing ‘‘special
Complaints at ¶¶14, 23. the Act was amended to compel access’’ circuits, then, SBC and Verizon
ACTel members and their customers reviewing courts to consider both can frequently charge whatever the
are therefore among those that the ‘‘ambiguity’’ in the terms of the market will bear, unless the price for a
Complaints identify as suffering proposed remedy, as well as the particular circuit is constrained by FCC
competitive injury from the ‘‘impact’’ of the proposed settlements on regulations. Consequently, SBC and
transactions, and on whose behalf the ‘‘competitors in the relevant market or Verizon special access revenues, as well
Government seeks relief. ACTel agrees markets.’’ 6 as annual rates of return on special
that the harm alleged in the Complaints This is not a case in which there is access, have grown dramatically over
is accurate, demonstrable, and unless some debate about the efficacy of the the past decade. Verizon’s annual rate of
adequately remedied, ruinous. Indeed, proposed remedy. Rather, this is the return on special access was 2.14% in
ACTel members, in compliance with case in which the court documents filed 1996, but over 23% in 2003. SBC’s
Department of Justice compulsory by the Government, as well as annual rate of return on special access
process, produced documents and uncontroverted parts of the was 63.14% in 2003. Overall, according
information revealing that the proposed Government’s evidence, compel the to official comments filed by MCI at the
transactions can be expected to increase 2 This is the standard the Government claims is
FCC, special access revenues were
the cost of Local Private Lines from 20% appropriate for Tunney Act review. See FR at
approximately $3.14B in 1996, but had
to 500% depending on the metropolitan 74350. However, given that Congress amended the grown to $13.4B in 2003.
area and type of circuit being Tunney Act to overrule District of Columbia Circuit Over the years, in response to the high
purchased—if the merged parties even Court of Appeals and District Court precedent that special access prices that SBC and
was overly deferential to Antitrust Division consent Verizon charged, a robust and
continue to sell Local Private Lines to decrees, it would make a mockery of the legislation
ACTel members at all after the to impose the very narrow standard of review competitive wholesale market for Local
acquisitions. advocated by the Government. The amendments to Private Lines has emerged. In this
But while the Complaints correctly the Tunney Act compel the reviewing court to wholesale market, carriers like the
consider, inter alia, the ‘‘impact’’ of the entry of
identify the competitive harm produced judgment on ‘‘competition in the relevant market’’
ACTel members lease Local Private
by the transaction, the remedy in the See Pub. L. 108–327, 221(b)(2) rewriting 15 U.S.C. Lines from other carriers, in order to
Proposed Final Judgments fails even the 16(e). reach business customers. AT&T and
most deferential standard for Tunney No suggestion is made in the statute or legislative MCI have the largest networks, aside
Acts review. The remedy does not history that the courts should defer to either the from ‘‘Baby Bells’’ like Verizon and
Government’s identification of injury or the
prevent the elimination of competition Government’s proposed remedy to that injury. On SBC, see Complaint ¶ 17, and AT&T and
of Local Private Lines (the injury the contrary, as explained in the text following MCI have become mainstays of the
charged in the Complaints) because, footnote 2 above, the reviewing court is to conduct
an ‘‘independent, objective, and active
among other things, the remedy set forth determination without deference to the DOJ.’’
7 The two Complaints use identical paragraph
in the Proposed Judgments, unlike the numbering and virtual identical language. For ease
3 See 150 Cong. Rec., S 3617 (April 2, 2004)
of presentation, the singular is generally used
injury charged in the Complaints, (Statement of Sen. Kohl). instead of the plural throughout the rest of these
4 Id.
comments, and SBC and AT&T are generally used
1 Actually the Lines are based, but because the 5 Id.
as examples (as opposed to Verizon or MCI) but the
Complaint uses terminology of sale, these 6 See id at S 3618; Pub. L. 108–327, § 221(b)(2) comments are directed to both cases unless
comments do, as well. amending 15 U.S.C. 16(e). otherwise indicated.
wholesale market. In fact, it is doubtful most aggressive and cheapest suppliers, The Proposed Judgment Is Inconsistent
there would be a wholesale market, as well. Standard statistical analysis of With the Complaint in the Treatment of
certainly a market of the current size this bid data demonstrates that AT&T’s ‘‘Transport’’
and scope, without these two bids result in lower prices for Local
companies. Private Lines in SBC territory, and The Complaint identifies the relevant
The AT&T and MCI networks were MCI’s bids result in lower prices for product market as ‘‘Local Private
not created overnight; they were built Local Private Lines in Verizon territory, Lines,’’ and telecommunications
up over decades. Because neither AT&T regardless of the number of other services that rely on those lines.
nor MCI started from a position of local bidders offering the same circuit. In fact, Complaint ¶ 19. As the Complaint
monopoly, as Verizon and SBC did, the the data gathered by the Government’s explains, a Local Private Line is not a
business incentives and perceived investigation showed that even SBC fixed, freestanding physical product, but
opportunities of AT&T and MCI, on one itself has responded to competition from rather is more akin to a marketing
hand, and SBC and Verizon on the AT&T by lowering its own Local Private concept—a recognized service category
other, were always quite different. In Line wholesale prices. among carriers and customers.
particular, both AT&T and MCI seized Finally, the data sets gathered by the Complaint ¶ 21. It is basically a portion
upon the opportunity to capture Department of Justice also demonstrate of a carrier’s network (a circuit or group
additional revenue by leasing capacity that the larger the number of competing of circuits) that is specified
in their local networks to other offers (up to a reasonable level), the (‘‘dedicated’’) and sold to ACTel
competitive carriers. In addition, AT&T lower the price charged for a particular members and other carriers to connect
and MCI negotiated significant circuit to the acquiring purchaser. In their networks to discernible points
discounts from SCB and Verizon for the other words, these are not markets in outside of those networks. As the
circuits they leased. These discounted, which two competitors are as good for Complaint states, a Local Private Line
leased circuits, coupled with the large competition as a larger number of originates and terminates within a
networks built or acquired by AT&T and competitors would be. To the contrary, single metropolitan area. Complaint
MCI, permitted those companies to three competitors offering to sell a ¶ 13.
make very broad, low-priced offerings to particular circuit produces lower prices
the wholesale market. As a result, the that just two competitors, and four According to the Complaint, a
wholesale market for Local Private Lines competitors produces lower prices than ‘‘typical’’ Local Private Line has two
grew to an enormous size. In widely three competitors. components—‘‘local loop’’ (also called
published reports that were submitted In sum, there is good reason for the ‘‘laterals’’) and ‘‘transport.’’ Complaint
to the Department of Justice, two Department of Justice to file lawsuits to at ¶ 13. See also Proposed Final
respected analysts estimated the Local try and prevent competitive injury to Judgment § II, D; Competitive Impact
Private Line market as roughly $14B. the wholesale market for Local Private Statement, FR 74348. A ‘‘loop’’ connects
Companies that procure Local Private Lines. That market, prior to the a building to a carrier’s network. But
Lines in the wholesale market keep acquisitions, was vast, robust and that connection might not occur at the
records of competitive bids submitted to competitive. It operated efficiently, right point on the network to facilitate
them for the purchase of these Lines producing significantly lower prices the transmission of voice and data from
from other companies, specifically than the prices that SBC or Verizon the building to its desired termination
including AT&T and MCI. Many such charged, and it allocated resources point—a faraway building, for example.
bidding records, kept in the ordinary according to competitive bidding. The As the Proposed Final Judgment
course of business to select the lowest wholesale market has been producing explains, the loop only goes from a
wholesale price offered for circuits to be differentiated telecommunications building to the first splice point on a
procured, were turned over to the services at low, free-market prices to all carrier’s network used to serve different
Government in response to compulsory types of business customers, buildings. Proposed Final Judgment § II
process as part of the Government’s particularly medium-sized enterprises. F. So a ‘‘transport’’ circuit is added into
investigation of these acquisitions. Unless conditioned in a meaningful the Private Line to extend it, from the
These data sets show that AT&T and way, the proposed acquisitions will end of the loop to the right place on the
MCI are the low-price leaders in the devastate this market. But by its own carrier’s network (perhaps a switching
wholesale market for Local Private terms, the Government’s proposed facility farther away), or from one
Lines. They are not only the most remedy does not meet the competitive carrier’s network to another carrier’s
pervasive suppliers, but they are the danger. network. See Figure 1.
There may be multiple carrier acquisition of Local Private Lines.’’ See building prior to the acquisition. Only
suppliers of a particular ‘‘loop’’ and the FR 74348. The 2004 Tunney Act in these ‘‘2 going to 1’’ loop scenarios
same or different multiple carrier amendments require the reviewing court is a divestiture required. See FR at
suppliers of transport circuits that to consider the impact of the proposed 74348. See Figure 2.
connect to the loop. Increasingly, as settlement on competition in this
The Final Judgment also provides for
documents submitted to the particular market identified by the
the divestiture of certain ‘‘transport’’
Government indicate, CLECs and IXCs Government. See 15 U.S.C. 16(e); S
buy transport and loop circuits 3618. circuits—but only those attendant to the
separately from different suppliers, and But the Proposed Final Judgment does divested loops. See Proposed Judgment
combine the segments into Local Private not speak of ‘‘Local Private Lines’’ at all. § II D. The Competitive Impact
Lines for resale to end user business Rather, the Judgment requires the Statement explains that the only
customers. divestiture only of certain ‘‘loop’’ transport circuits to be divested are
The Government documents circuits, identified by the addresses of those that enable the divested loops to
sometimes focus on Local Private Lines the buildings at which the loops be connected to the network of the
and sometimes focus only on the loop originate. See Proposed Final Judgment specific carrier purchasing those loops.
portions of those Lines. For example, § II D. The Competitive Impact FR 74348. No provision is made for the
the ‘‘Relevant Product Markets’’ in the Statement explains that these are transmission of voice and data
Complaint are defined as Local Private buildings serviced pre-merger by both information from the purchasing
Lines, Complaint at ¶ 19, and the AT&T and SBC loops (or MCI and carrier’s network to another building in
‘‘Anticompetitive Effects’’ section of the Verizon loops, as the case may be). the same metropolitan area not directly
Complaint is directed to the effect of the However, not all buildings serviced by connected to that carrier’s network.
merger on ‘‘Local Private Line’’ service, merging parties are covered by the terms
Complaint at ¶ 25. Similarly, the of the Proposed Judgment. Divestiture of Merely from a review of the
explanation of the relief in the a loop circuit to a particular building is Government’s documents, it is apparent
Competitive Impact Statement speaks of required only if AT&T and SBC (or that three deficiencies in the
a remedy that will ‘‘eliminate the Verizon and MCI) were the only carriers Government’s approach prevent the
anticompetitive effects of the connected by their own loops to the proposed remedy from being effective.
EN05AP06.000</GPH>
The Proposed Final Judgment Does Not buildings * * * that are served by data predicts 1124 such buildings, but
Even Appear To Cover All ‘‘2 to 1’’ [competitive providers’] fiber-enabled the Proposed Final Judgment lists but
Loop Buildings network equipment.’’ 8 SBC similarly 38. In Los Angeles, GeoResults predicts
stated to the FCC that ‘‘GeoResults is a 6318 buildings requiring the
First, there is some ambiguity, if not reasonably reliable source, and if Government’s remedy, but the
outright error, in the discrepancy anything its data understate the Government lists only 36.
between the number of buildings the deployment of competitive fiber.’’ 9 The same discrepancy appears for the
Proposed Final Judgment identifies and GeoResults data includes buildings in cities in Verizon territory. GeoResults
what publicly available data suggests in which CLECs buy loops from SBC and data indicates there are more than 100
terms of the number of ‘‘2 to 1’’ loop Verizon, as well as buildings to which ‘‘2 to 1’’ buildings in Pittsburgh, but the
buildings affected by the mergers. CLECs physically connect with their Government has none listed. According
Ambiguity in the proposed remedy is own fiber. GeoResults may therefore to GeoResults, Philadelphia should have
one of the issues the District Court is significantly overestimate the number of almost 300 such buildings, but the
required to consider by the express ‘‘2 to 1’’ loop situations the Government lists only 12. So, making
terms of the 2004 Tunney Act Government’s remedy purports to whatever allowance is appropriate for
amendments. address. But the difference between the inclusion of leased loops in the
The building lists attached to the what the GeoResults data predicts and GeoResults data, the Government’s lists
Proposed Judgment lists only 383 the number of buildings the seem to include far two few buildings.
buildings in SBC territory and 356 Government’s remedy purports to The Government does not explain or
buildings in Verizon territory to which address is so vast as to defy such an document, for the benefit of both the
the remedy will apply. This is easy explanation. This is true for both Court and the public, how it arrived at
inconsistent with data relied upon by SBC and Verizon territory. For example, its lists of ‘‘2 to 1’’ situations.
both SBC and Verizon in Federal as to SBC territory, GeoResults data Presumably the Government started
Communications Commission indicates that in Cleveland there are with building lists tendered by the
proceedings. GeoResults, Inc., a private approximately 1630 ‘‘2 going to 1’’ merging parties, and either audited or
corporation, publishes data listing the buildings, but the Government’s list in made adjustments to these lists. While
presence and type of network the Proposed Final Judgment includes the GeoResults inclusion of leased loops
terminating equipment carriers have none. In Milwaukee, the GeoResults might account for some of the
placed in buildings. Verizon has stated, discrepancy between the GeoResults
in FCC proceedings, that the data used data and the Government lists, it
8 Verizon comments, Declaration of Verses,
by GeoResults is ‘‘recognized as an LaTaille, Jordan and Reny, July 15, 2004, FCC certainly appears likely, from the filings
industry standard by numerous national Docket 01–338, ¶¶ 22–24. AT&T made in the FCC to secure
9 Joint Declaration of Scott Alexander and
and international telecommunications Rebecca Sparks of SBC, ¶¶ 22–23, attached to Letter
clearance for its acquisition, that the
standard-setting bodies’’ and can be of Christopher Hermann of SBC to Ms. Marlene Government’s remedy does not include
EN05AP06.001</GPH>
reliably used to ‘‘identify and locate Dortch of FCC, Nov. 16, 2004, FCC Docket 01–338. all buildings that the Complaint
purports to cover. There is another more injury to competition occurs. FR At Impact Statement tries to explain this
plausible explanation for this 74348. And the Complaint expressly inconsistency by suggesting that it is
discrepancy. rejects the notion that other CLECs decrease in competition for loops (2
At the FCC, AT&T’s economic expert might build their own lateral going to 1) that creates the injury in the
filed a declaration in aid of the merging connections to these buildings. Local Private Line market. FR 74348.
companies’ claim that the proposed Complaint at ¶¶27–29. After reviewing The approach used in the Proposed
merger would not produce the the costs associated with building a Final Judgment requires the divestiture
anticompetitive effects feared by the lateral, the Complaint concludes that only of these loop segments (with
Government. The declaration sets forth ‘‘entry is unlikely to eliminate the attendant transport) that result in a ‘‘2
the total number of ‘‘2 to 1’’ buildings competitive harm that would likely to 1’’ loop situation when viewed from
in SBC territory based on AT&T internal result from the proposed merger.’’ the origin of the loop, that is, from the
records.10 That precise number is Complaint at ¶29. building. Even assuming the rather
redacted from the FCC public record, The Government needs to explain its dubious assertion that it is the decrease
but the other verbiage from the methodology to permit meaningful in competition for loops that creates the
declaration, including the expert’s judicial review. The Government papers injury in the Local Private Line market,
methodology, remain in the public are filled with precisely the ambiguity the remedial approach used in the Final
record. In the declaration, the expert that the amended Tunney Act does not Judgment (looking to the origin point of
starts with the total number of ‘‘2 to 1’’ permit. If the Proposed Final Judgment the loop by building address), will not
buildings and then makes subtractions does not address all situations in which prevent the harm alleged in the
from that total. For example, in aid of AT&T is eliminated as the only Complaint (a price increase to
his argument that all ‘‘2 to 1’’ situations facilities-based competitive alternative customers of Local Private Lines).
will not produce price increases, the to SBC for loops, the court must This is because the ‘‘remedy’’ will
expert subtracts ‘‘2 to 1’’ situations in withhold its approval of the settlements. only maintain competitive alternatives
which he argues that other CLECs might for transmissions from a building to a
The Proposed Judgment Fails to carrier’s network. But no one simply
build their own loops, even if AT&T’s
Remedy the Injury Because the calls a carrier’s network; the intended
loops are acquired by SBC. Similarly, he
Judgment Addresses Only the Building destination of a call is always another
subtracts situations in which he claims
End of Loops building, frequently connected to the
that, although AT&T is eliminated as
SBC’s only competitor, the FCC Even when the building lists are made carrier’s network by another Local
regulates the price SBC can charge for complete to conform to the Private Line that may not be covered by
the loop in question, so competitive Government’s allegations, the remedy in the terms of the Proposed Final
injury is minimized. See Carlton Dec. at the Proposed Final Judgment— Judgment. Because the Proposed Final
¶¶ 15–48. providing a divestiture for all ‘‘2 going Judgment identifies the affected ‘‘2 to 1’’
Given the large discrepancy between to 1’’ loop situations—fails to correct the Local Private Lines only from the point
publicly available data and the number competitive injury alleged in the of the loop original at the building, it
of buildings on the Government’s lists, Complaint (elimination of competition does not prevent the acquisition from
it would appear that the Government for ‘‘Private Line’’ service), and restraining competition by producing ‘‘2
made such subtractions from the total therefore fails the most deferential to 1’’ situations in the Local Private
number of ‘‘2 to 1’’ buildings to come Tunney Act review. This failure results Lines that take the call from the carrier’s
up with the lists attached to the from the fact that the remedy, unlike the network to the destination building.
Proposed Final Judgment. It appears, for injury charged in the Complaint, This is best illustrated by the example
example, that the Government addresses only the part of the Local of a corporation with main offices in a
subtracted the situations in which Private Line that connects to a building, downtown high-rise and branch offices
AT&T’s expert argued that the CLECs not the part of the Private Line that in suburban office parks in the same
would build their own loops. connects to a carrier’s network. metropolitan area. The corporation is a
But such subtractions are The Complaint explains that a customer of a CLEC. The customer’s
impermissible by the express terms of ‘‘typical’’ Local Private Line has two headquarters downtown needs to send
the Complaint. The Complaint plainly components—a ‘‘loop’’ (or ‘‘lateral’’) high-volume voice and data
states, for example, that competitive and a ‘‘transport’’ circuit. Complaint at transmissions to its branch offices in the
injury will occur whenever AT&T is the ¶13. As explained above, the ‘‘loop’’ suburbs. Before the merger, the CLEC
only ‘‘facilities-based,’’ (i.e., owning its connects the building to a carrier’s bought a Private Line from AT&T to
own line) competitive alternative to SBC network and the ‘‘transport’’ circuit service the customer and connect the
for Local Private Line connections to extends the loop from the initial splice originating building to the CLEC’s
buildings. Complaint at ¶¶25, 26. The point on the carrier’s network to other network. If AT&T were the only
Competitive Impact Statement similarly points on the carrier’s network or to facilities-based carrier serving the
states that ‘‘buildings where AT&T is other carriers’ networks. building in competition with SBC before
the only CLEC with a last-mile- The Complaints alleges that where the merger, the Final Judgment remedy,
connection’’—without limitation or AT&T is eliminated as the only in theory, would prevent the merged
subtractions—are the places where facilities-based competitor to SBC for company from extracting a higher price
Local Private Lines, the merged for the Private Line because the CLEC
10 Reply Declaration of Dennis W. Carlton and Hal company will be able to raise prices to would be able to buy the divested loop
S. Sider, May 9, 2005, as an attachment to the Joint customers of Local Private Lines itself, or lease it from the carrier that
Opposition of SBC Communications Inc. and AT&T
Corp. To Petitions To Deny and Reply Comments,
(including ACTel members), thereby buys it as a ‘‘divestiture asset’’ under the
creating an antitrust violation. Proposed Final Judgment.
filed In the Matter of Applications for Consent to

Transfer of Control of Licenses and Section 214 Complaint ¶¶25, 32–33. But the The Proposed Final Judgment also
Authorizations from AT&T Corp., Transferor, to Proposed Final Judgment orders the requires the divestiture of transport
SBC Communications Inc., Transferee, WC Docket
No. 05–65, Federal Communications Commission,
divestiture of only certain loops circuits sufficient to connect that loop’s
May 9, 2005, at ¶¶ 15–48 (hereinafter sometimes (‘‘laterals’’) with attendant transport. splice point on the AT&T network to the
‘‘Carlton Dec.’’). Final Judgment § IID. The Competitive purchasing CLEC’s network. FR 74348.
So, prior to the acquisition, the CLEC But when the voice and data facilities-based competition for the
had two Private Line choices from the transmissions leave the CLEC’s network transport circuit, then after the
downtown main office to its network, and go to the suburban office park acquisition the merged company, as the
and the CLEC continued to have two location, the Final Judgment ‘‘remedy’’ only supplier of the transport circuit, is
choices after the acquisitions. The often will be of no help. The in a position to raise the price for that
remedy can therefore be presumed transmissions would have to go from the circuit to higher than competitive levels
successful at getting the call onto the CLEC’s network over a ‘‘transport’’ under the theory of the Government’s
CLEC’s network without a price increase circuit to a splice point for the lateral Complaint. See Complaint at ¶25. The
created by a ‘‘2 to 1’’ loop situation connecting to the suburban office remedy does not address the ‘‘2 to 1’’
resulting from the acquisition. See building. Before the acquisition, if transport situation.
Figure 3. AT&T and SBC provided the only
This problem cannot be argued away based competitor for a group of only competitors on a particular
by suggesting that there is a great deal transport circuits around on SBC wire transport circuit. Indeed, the data shows
of duplicative transport circuitry in each center.11 The actual bid data submitted that AT&T and MCI are far and away the
metropolitan area. This kind of by ACTel members to the Department of leading CLEC suppliers of transport
areawide analysis would also show a Justice is even more compelling. These circuits to the wholesale market.
plethora of duplicative loops in each data sets reflect carriers that actually In short, then, although the transport
metropolitan area. But the Government have transport circuits to sell to the circuit from the carrier’s network to the
has decided that this type of areawide wholesale market (some carriers may splice point for the loop goes from two
analysis is inappropriate. Instead, the have transport circuits filled entirely by facilities-based competitors to one, the
Complaint elects to analyze each Local their own traffic). The data contains ‘‘remedy’’ will not provide relief unless
Private Line individually in order to numerous examples in which SBC and the loop circuit from the end of the
assess the effect of the mergers on AT&T (or MCI and Verizon) were the transport segment to the destination
competition. The Government conducts building also goes from ‘‘2 to 1.’’
11 SBC has admitted in the public record that
this analysis for the loop components of Frequently, however, the merger will
there are scores of wire centers in which AT&T is
the Local Private Lines on a segment-by- SBC’s only competitor. See letter from Gary L. not result in a true ‘‘2 going to 1’’
segment basis and must therefore do the Phillips of SBC to Ms. Marlene Dortch of the FCC situation for the loop segment
same for transport. A change in filed as an ex parte communication on August 12, connecting the splice point to the
methodology for transport would 2005, In the Matter of Applications for Consent to
Transfer of Control of Licenses and Section 214 building. Sometimes, for example, there
undermine the integrity of the Authorizations from AT&T Corp., Transferor, to might be only one supplier of the loop
Government’s loop analysis. SBC Communications Inc., Transferee, WC Docket to begin with, SBC, but price regulation
It is impossible to say, from the public No. 05–65, Federal Communications Commission. by the FCC prevents SBC from raising
But even this may understate the number of
record, precisely how often a ‘‘2 to 1’’ the rate on the loop to higher than
transport circuits for which AT&T and SBC are the

reduction in transport circuit providers only competitors because AT&T’s expert has also competitive levels. However, the
occurs. But this much is known. SBC admitted in the public record that the presence of connecting transport circuit is likely not
smaller competitors at other SBC wire centers does
itself has acknowledged that there are not necessarily indicate ownership of transport
under a similar FCC constraint. The
numerous situations in which AT&T is circuits in competition with SBC. See Carlton Dec. merged company could therefore raise
EN05AP06.002</GPH>
likely positioned as the only facilities- ¶54. the price of the Local Private Line from
the carrier’s network to the destination ‘‘eliminate the anticompetitive effects of situations prevents only ‘‘mergers to
building by using its ‘‘choke hold’’ over the acquisition of Local Private Lines’’ monopoly.’’ The Final Judgment remedy
the transport segment of that Line. because there are many does not prevent the competitive injury
Nor is this problem confined to a ‘‘anticompetitive effects’’ in Private Line caused by lessening competition (‘‘4 to
situation in which there is only one situations beyond ‘‘2 to 1’’ loops. 3’’ or ‘‘3 to 2’’) in highly concentrated
supplier of the loop going from the The Complaint correctly points out but not monopoly situations. For
transport segment to the building. If that AT&T competes with SBC and MCI decades, there have been those who
there are three suppliers of the competes with Verizon pervasively have argued that only ‘‘merger to
outbound loop, for example, the across the metropolitan areas at issue— monopoly’’ situations should be
divestiture remedy would not apply at not just at ‘‘2 to 1’’ buildings. Complaint remedied by the Antitrust Division, but
all. Nor would the divestiture remedy at ¶11. In fact, according to the the Division for the entire period of
apply if the two suppliers of the loop Complaint, AT&T and MCI are the most time, on the basis of sound economics,
were carriers other than both AT&T and significant competitors for SBC and has adopted both written Guidelines
SBC. (See Figure 3) In each such case, Verizon See at 17. Id. The actual bid and consistent practices that recognize
the remedy does not apply, but the data produced by wholesale purchasers the competitive injury caused by
merged company can create precisely of Local Private Lines confirms reducing competition—even if the
the anticompetitive injury identified by precisely what the Complaint charges: reduction is not the elimination of all
the Complaint because of its ‘‘choke AT&T and MCI are by far the most but a single vendor. Yet the Government
hold’’ over the transport circuit from the significant competitors of SBC and in this case does an about-face and
carrier’s network to the splice point.12 Verizon in the Local Private Lines precludes only ‘‘merger to monopoly,’’
The Government’s solution fails to market, and competition by AT&T and without any public discussion of this
remedy the injury identified in the MCI produces lower Local Private Line most significant departure from
Complaint because the solution applies, prices in all competitive situations—not established and documented
by its own terms, only to loops just ‘‘2 to 1’’ loop situations. procedures.
connecting buildings to networks, but Moreover, the actual bid data Furthermore, AT&T and MCI are the
not to transport connecting networks to produced by purchasers of Local Private most significant and effective
each other. Even assuming the relief Lines demonstrates exactly what competitors to the acquiring companies.
proposed in the Proposed Final common sense and economic theory See Complaint ¶ 17. As the Government
Judgment is effective for transmissions suggest—that four competitors offering a has long recognized, acquisitions that
to a carrier’s network, transmissions particular Local Private Line produce eliminate the most formidable
from that network to terminating lower prices than three competitors. competitors, leaving only less effective
buildings will still be subject to the ‘‘2 And three competitors produce lower or ineffective competition, are
to 1’’ choke hold because the prices than just two competitors. Of anticompetitive and must be remedied.
Government’s remedy does not include course, the data also show that two Yet in this case the Government
transport (unless it is attendant to a competitors produce lower prices than a assumes that the carrier purchasing the
divested loop for a building). single vendor, but no one could divested assets from the merging
rationally suggest that merely companies will be an effective
The Proposed Judgment Does Not addressing the latter situation will do competitive substitute for AT&T or MCI
Produce the Promised Remedy Because what the Competitive Impact Statement merely because the purchasing carrier
the Judgment Does Not Eliminate the and Complaint indicate—elimination of has a ‘‘viable, ongoing
Anticompetitive Effects of the the anticompetitive effects of the telecommunication business.’’ Proposed
Acquisitions acquisition of Local Private Lines. Final Judgment § IV H. Given that AT&T
The Government’s remedy only If the Government’s Complaint and and MCI are the most significant
addresses certain ‘‘2 to 1’’ loop Competitive Impact Statement competitors for SBC and Verizon, there
situations. The most serious problem purported to remedy ‘‘only a small is no basis for the assumption that any
with the proposed ‘‘remedy’’ is that the portion of the competitive injury caused acquiring carrier will be even a remotely
remedy simply cannot logically or to the Local Private Line market,’’ at effective competitor. All competitors are
factually ‘‘eliminate the anticompetitive least the documents would be internally not equally effective; merely giving
effects of the acquisition of Local Private consistent. But the Final Judgment customers a second choice does not
Lines,’’ the claim made in the remedy addresses only certain ‘‘2 to 1’’ mean that the second choice is
Competitive Impact Statement. See FR loop situations, while the Complaint meaningful. The Government’s prior
at 74348. The Complaint also focuses on and Competitive Impact Statement practice recognized these facts, but the
Local Private Lines, defining the claim to ‘‘eliminate’’ the anticompetitive current proposal is to the contrary.
relevant product market as ‘‘Local effects of the acquisitions on Local Finally, and most significantly, the
Private Lines,’’ not loop segments going Private Lines—claims that are not only proposed remedy denies widely
from two choices to one. Under the 2004 inconsistent with the Proposed Final accepted principles of network
amendments, Tunney Act review must Judgment, but also with the data economics that the Government has
therefore consider the impact of the gathered by the Government’s long recognized in its Guidelines and
remedy on that very market. The investigation. practices. AT&T and MCI were the most
Government’s remedy might at best The Government’s failure to address effective competitors of the acquiring
‘‘eliminate’’ certain ‘‘2 to 1’’ loop anything other than ‘‘2 to 1’’ situations, companies because of the breadth of the
situations, but the remedy does not while at the same time claiming to AT&T and MCI networks and the
‘‘eliminate’’ the anticompetitive aspects robustness of their customer base in
of the acquisitions, runs afoul of the terms of network traffic. It was these
12 The data sets submitted by ACTel members to
the Government contain numerous examples of all 2004 Tunney Act amendments. factors, not the presence of AT&T or
three situations described in the text: (a) SBC as the Moreover, the Government’s actions in MCI on a particular loop circuit, that
only supplier of a loop circuit under UNE pricing;
(b) three suppliers of a loop circuit; (c) two
these cases are a marked departure from made those companies effective
suppliers of a loop circuit, but not both SBC and long-established Antitrust Division competitors. These factors enabled
AT&T. practices. Remedying only ‘‘2 to 1’’ AT&T and MCI to offer loop and
transport circuits to wholesale And, as both an interim step and a proposed by the Government has no
purchasers at lower prices than other more complete remedy if the hope of achieving that result. At a
carriers. The fact that a ‘‘viable, ongoing Government is not going to require any minimum, facilities need to be divested
telecommunications business’’ will meaningful divestitures, the in operating units over wide areas,
purchase divested lines does not in any Government should, at a minimum, probably nationwide, and at the very
sense mean that those lines will be expressly prohibit the merged least regionwide, to enable the
offered to the wholesale market at the companies from raising prices to competitive carrier acquiring the assets
same low prices at which AT&T and anticompetitive levels in the wholesale to have even a reasonable chance to
MCI sold the lines. market for Local Private Line services. replacing the competitive pricing from
Given that the acquiring company is This is a remedy recently adopted by MCI and AT&T lost by the acquisitions.
certain to be significantly smaller than the Commonwealth of Virginia’s State And the wholesale market needs to be
AT&T or MCI (as the Complaint Corporation Commission in response to protected with interim pricing
indicates at ¶17), the only rational public protests and concerns regarding provisions while these divestitures
inference is that the prices for the lines the impact of the loss of an become competitively effective.
will go up and competition will be ‘‘independent MCI’’ on the provision of
damaged, even if two carriers present local services to mid-sized business From the perspective of remedies, the
choices on ever loop circuit. Of course, customers in Virginia. See Order acquisitions now before the Courts bear
this conclusion does not merely rest on Granting Approval, Virginia State a strong resemblance to the
rational inferences or even on the Corporation Commission, Oct. 6, 2006, Government’s controversial clearance of
allegations in the Complaint. Data at 27. Thomson’s acquisition of West
gathered by the Government during its Following a thorough staff Publishing Company a decade ago.
investigation demonstrate that AT&T investigation, public hearings and There, as here, the greatest concern was
and MCI were far and away the low written submissions, the Virginia that the acquisition would put the two
price sellers for Local Private Lines at Corporation Commission required MCI, principal competing systems (here, the
wholesale, and the prices for such lines post-merger, to continue to offer competing local networks) under
will increase enormously in the future. wholesale customers in Virginia private common ownership. There, as here,
The Government’s proposal does not line loop and transport facilities ‘‘at pre- counsel for the merging companies
remedy those facts; it does not even merger terms and conditions and at argued for piecemeal divestiture
address them. prices that do not exceed pre-merger properties, rather than something more
rates.’’ Id. The Commission made this substantial.
A Truly Effective Remedy Will Produce order applicable to both ‘‘existing and
No Loss in Efficiency In the West deal, the Government
future wholesale customers of MCI in
adopted the approach sought by the
The Complaints correctly state that Virginia’’ thereby preserving a
merging companies, requiring
AT&T’s local networks (every single wholesale market for Local Private Lines
divestiture of piecemeal properties,
loop and transport circuit in every in Virginia at competitive rates. Id. at
27. The order is to remain in effect until rather than a comprehensive set of
metropolitan area) are wholly redundant
the loss of MCI as a competitor will no properties that could be used in the
with those of SBC. Complaint ¶¶11, 12–
17. MCI’s local networks (every single longer raise rates on Local Private Lines marketplace to actually produce
loop and transport circuit in every to an anticompetitive level. Id. competitive benefits. The result, in
metropolitan area) are wholly redundant This remedy is currently in effect in terms of antitrust enforcement, was a
with those of Verizon. Even the most Virginia and must be obeyed by the wholly ineffective remedy. See, e.g.,
modest effective remedy would include merging companies. Extending the John E. Morris, How the West Was Won,
the divestiture of all of the redundant remedy nationwide would in no way The American Lawyer, September 1996.
loop and transport circuits Such a prevent the merging parties from fully The District Court ultimately approved
divestiture might at least enable the exploiting any efficiencies the merger the remedy with modifications, but
acquiring carrier to offer a significant might produce. However, a nationwide under the constraint of the Court of
competitive alternative to the merged remedy of this type would prevent the Appeals authority subsequently
corporations. merged companies from gouging their repudiated by Congress. See United
Even assuming that the mergers wholesale customers with higher than States v. Thomson Corp. and West
produce some efficiencies by combining competitive rates. Unless the merged Publishing Co., 949 F. Supp. 907 (D.D.C.
the local networks of SBC and Verizon companies have the intention to raise 1996).
with the long-distance networks of prices post-merger, it is difficult to see The American Lawyer characterized
AT&T and MCI, a divestiture of all any objection to this remedy.13 the West Settlement process as a
redundant local assets would not Conclusion ‘‘microanalysis of competition’’ in
interfere at all with the realization of the which the Government became
claimed efficiencies. It would, on the The whole point of a divestiture
remedy is to permit a free market ‘‘obsessed with the competing seedlings
other hand, produce a viable competitor and overlooked how the giants of the
for local traffic without sacrificing any solution (after the divestiture) to resolve
the concentration issues created by the forest can block out the light,’’
benefit the mergers allegedly produce. attributing this result to the actions of
To make the divestitures merger. But the divestiture remedy
Thomson’s lawyers in deftly
competitively effective, the Government 13 The FCC provided price protection to existing maneuvering the merger through the
should enable any customer under an customers under contract with the merging parties government review process.’’
old contract to the merging companies
for a short period of time after the mergers. But the

to solicit and accept new, post- FCC remedy does not preserve a competitive In the years following the
divestiture competitive offers. wholesale market. Rather, by only protecting consummation of the West acquisition,
existing contracts and not bids to new customers, prices to customers rose dramatically,
Otherwise, the divestitures will not the FCC simply postponed the date at which the
provide any benefits to existing merging parties will be able to raise their customer’s
just as critics predicted, producing
customers of the merging companies. prices. further criticism of the Division’s
decision.14 And when it came to light address the harm alleged by the DOJ in [i]t does not follow * * * that courts must
that the Division’s clearance of the deal the Complaints, entry of the PAFJs is unquestionably accept a proffered decree as
coincided with extensive political not in the public interest. Therefore, long as it somehow, and however
inadequately, deals with the antitrust and
maneuvering, criticism reached both the absent significant amendment of the
other public policy problems implicated in
largest mass circulation media 15 and PAFJs, the Court will have no option but the lawsuit. To do so would be to revert to
even the most prestigious legal to reject the PAFJs as filed. The DOJ has the ‘‘rubber stamp’’ role which was at the
publications. See, e.g., Mark Hansen, A the ability to recognize the deficiencies crux of the congressional concerns when the
Question of Influence, 83 American Bar in the PAFJs at this stage of the Tunney Act became law.
Association Journal 36, June 1997. proceedings. These comments are U.S. v. American Telephone and
There is much in the current situation intended to elucidate the short-comings Telegraph, 552 F.Supp. 131, 151 (D.D.C.
to suggest precisely these concerns— of the PAFJs and facilitate a more 1982), aff’d sub nom., Maryland v. U.S.,
the very concerns voiced by Congress is appropriate ‘‘divestiture.’’ COMPTEL’s 460 U.S. 1001 (1983).
overruling the District of Columbia members are the primary remaining In the comments that follow,
Circuit in 2004—‘‘political pressure to customers and competitors of the COMPTEL explains that the proposed
enter into a ‘sweetheart settlement.’ ’’ 16 surviving entities of the respective settlements of these mergers blindly
Department of Justice clearance of these mergers, and, therefore, have a strong ignore both the DOJ’s Merger Guidelines
telecommunication acquisitions interest in securing appropriate and Merger Remedy Guidelines. In
followed extensive lobbying by the divestiture relief. order to demonstrate that the proposed
merging companies of both the Introduction settlements serve the public interest, the
Administration and Congress. Indeed, DOJ must present a clear and
the acquisitions were brought to a head The simultaneous acquisition of the compelling explanation as to how its
and cleared by the Antitrust Divisions at nation’s largest local competitors by the proposed remedies have any hope of
two largest incumbent providers should restoring the competition that will be
a time when there was not a confirmed
have initiated one of the nation’s most lost by these dominant firms each
head of that group—when the
extensive antitrust inquiries. Instead, as acquiring their largest competitive
Administration’s designated Assistant
COMPTEL explains below, the DOJ has rivals. The remedies crafted by the DOJ
Attorney General was awaiting
failed to fully recognize the are not sufficient to restore competitive
confirmation and was subsequently
anticompetitive effects of the merger in conditions the merger would remove;
under Senatorial ‘‘hold’’ because,
the single product market for which it they do not promote competition (but
according to the press, of his more
has chosen to bring suit—the market for they do protect the largest, post-merger
serious enforcement mentality.
dedicated intra-city transmission ‘‘competitors,’’ SBC and Verizon); and
There is no reason to repeat the services, typically referred to as
problems of West/Thomson. Remedial they lack sufficient clarity and
‘‘Special Access’’ or ‘‘Local Private specificity to be enforceable. As
relief can be achieved in these cases Line’’—and has devised a remedy that
with minimum disruption and currently crafted, the proposed consent
directly conflicts with, and falls decrees are not in the public interest.
inconvenience to either the merging woefully short of, the basic tenants of its
companies or business customers. own Merger Remedy Guidelines and the II. Summary of Complaint
Attachment 2—Comments of COMPTEL mandates of Supreme Court precedent Any conventional antitrust analysis
to restore competition to the level prior begins by defining the relevant product
Pursuant to the Antitrust Procedures to the merger.
and Penalties Act (i.e., the ‘‘Tunney and geographic markets. In its
The Tunney Act governing this complaints here, however, the DOJ
Act’’),1 COMPTEL hereby files these proceeding was adopted to ensure that
comments explaining why the Proposed adopts a clear definition of only the
the settlements of civil antitrust suits by product market, while dismissing the
Amended Final Judgments (PAFJs or the Department of Justice are in the
PAFJ) resolving simultaneous importance of correctly establishing the
public interest. Congress specifically geographic market. As COMPTEL
Complaints filed by the United States to amended the Tunney Act in 2004 to
prevent the acquisition of AT&T Corp. explains, the DOJ’s failure to identify
emphasize that it expected an the relevant geographic market is one of
by SBC Communications Inc., and the independent judiciary to oversee
acquisition of MCI, Inc. by Verizon the reasons that its proposed remedy
proposed settlements to ensure that the cannot plausibly be expected to restore
Communications, Inc. do not replace the needs of the American consumer were
competition lost from the elimination of competition to pre-merger levels.
met. Implementing Congress’
AT&T and MCI as the two most unequivocal reaffirmation of the Tunney A. The Product Markets
significant competitors to SBC and Act’s requirement of independent The Government defines two product
Verizon.2 Because the PAFJs do not judicial scrutiny is critical in the review markets: (1) ‘‘Local Private Lines’’ (more
14 See, e.g., Susan M. Ryan, Cost Inflation by Page
of these simultaneous—and commonly referred to as ‘‘special
Reductions, 14 The Bottom Line: Managing Library competitively interrelated—mergers that access’’), and (2) the retail voice and
Finances, No. 1, at pp. 6–11 (2001); Douglas will reconcentrate the data telecommunications services that
McCollam, Volumes Are Giving Way to Velocity, 25 telecommunications market to a level rely on Local Private Lines. Complaint
National Law Journal, No. 46 at S1, July 14, 2003. unseen since the AT&T divesture just at ¶ 19. The DOJ describes ‘‘Local
15 See, e.g., Brooks Jackson, Moving Money
Through State Capitals, CNN, April 11, 1997;

over twenty years ago. By permitting Private Lines’’ as dedicated, point-to-
http://www.cnn.com/ALLPOLITICS/1997/04/ these mergers to occur with minimal or point circuits offered over copper and/
11Jackson/; Viveca Novak and Michael Weisskopf, no modifications to the PAFJs, the DOJ or fiber optic transmission facilities
The http://www.cnn.com/ALLPOLITICS/1997/04/ is effectively reversing that historic (copper or fiber wires), and notes that
14/time/novak.html: Mark Hansen, A Question of
Influence, 83 A.B.A.J. 36, June 1997.

divestiture. As he implemented the the Bell monopolies use the term
16 150 Cong. Rec. § 3617, supra. Tunney Act in that original AT&T case, ‘‘special access’’ to refer to this product
1 15 U.S.C. 16(b)–(e). Judge Greene admonished that: market. Complaint at ¶ 13.3
2 Although AT&T and SBC are now known as
AT&T (while Verizon retained its name after its merger names in these comments (unless otherwise 3 The term ‘‘special access’’ is a byproduct of the
acquisition of MCI), we refer to each by their pre- indicated) to avoid confusion. initial AT&T divestiture. The basic structure of the
For the first product market—Local The Complaint further explains that the extremely limited value of the
Private Lines or Special Access 4—the one ‘‘element’’ of Local Private Line ‘‘divestitures’’ the decree proposes.
DOJ provides some description of the service is the so-called ‘‘loop’’ or ‘‘last B. The Geographic Market
competition foreclosed by the merger. mile’’ which is the portion of copper—
The Complaint against SBC and AT&T, more likely, fiber—that provides the Despite its analytical significance, the
for example, notes that SBC dominates dedicated connection from one part of DOJ fails to clearly identify the relevant
this market with $4.4 billion in sales in the network to the end-user’s building. geographic market for special access
2004, as compared to AT&T’s local Complaint at ¶ 12. What is not (and the retail services that rely upon
private line revenues (as one of SBC’s explained in the Complaint is that there it). Rather, the DOJ merely notes that the
largest competitors) of $0.09 billion in are other elements of special access relevant geographic markets for both
the SBC region. Complaint at ¶ 20.5 The service that must typically be purchased product markets are ‘‘no broader than
Complaint does not indicate what in order for the special access line to be each metropolitan area and no more
portion of SBC’s $4.4 billion in sales are narrow than each individual building.’’
commercially useful. The other
to AT&T—indeed, the complaint does Complaint at ¶ 24. Importantly, as
principal element of special access
not even acknowledge that two of the COMPTEL explains below, the DOJ’s
largest purchasers of special access are service is ‘‘transport.’’ Transport is the
analysis ignores the significance of
the acquired firms—or whether any of transmission component typically used
regionwide contracting strategies in its
these circuits are then combined with to collect ‘‘loop’’ traffic at one point on analysis of geographic markets entirely,
AT&T’s own facilities and resold to the network and transport that traffic to and has designed a building-specific
other carriers or business consumers. another point on the carrier’s network.8 remedy approach without offering any
However, it is certain that these sales The second product market that the convincing explanation as to why a
are significant in size 6 and competitive Government alleges will be harmed as building-specific market definition is
implication.7 the result of this merger is the market preferred to its metropolitan area
for retail voice and data alternative.
Modified Final Judgment (MFJ) implementing the telecommunications services that rely To begin, focusing ‘‘solely on demand
AT&T divestiture was the structural separation of
AT&T’s intercity long distance operations from its on special access. The DOJ provides no substitution factors—i.e. possible
local exchange operations. In order for AT&T and discussion as tot he value of this market, consumer responses’’ 10—within the
other long distance carriers to meet the specialized or the relative market shares of the reality of the special access/Local
needs of very large business customers, they would Private Line market, it is difficult to
need to lease local transmission facilities from the
relevant firms within the territories
divested Bell Operating Companies (such as served by SBC and Verizon. This understand how the DOJ could define a
Verizon and SBC) to connect to large users. These fundamental failure in analysis makes geographic market as narrowly as an
connections were referred to as ‘‘special access’’
an appropriate Tunney Act public individual building. As an initial
because they were used to connect specific, matter, the only customers for whom
individual business customers to the long distance interest determination very difficult, if
carrier’s network and were designed to be used not impossible. While the DOJ makes no this could be true would be customers
where the customer had large volumes of data and/ effort at all to describe the size of this whose demand was individually large
or voice traffic.
market, it is clearly substantial.9 Thus, enough to stimulate alternative entry,11
4 As the DOJ notes, Verizon and SBC generally
restoring competition lost as the result but whose total demand was sufficiently
use the term ‘‘special access’’ to refer to Local
concentrated in that specific building
Private Lines. Complaint at ¶13. This term is more of the elimination of such a significant
commonly used by the industry because the for it to be willing to contract for service
competitor would likely demand a
principal use of such facilities is a wholesale input in that individual building alone.12 Yet,
to another carrier that provides retail service to the significant divestiture of a cognizable
the DOJ has made no allegation that SBC
customer. (While some business customers business unit. It is not surprising that (or Verizon) pre-merger, or post-merger,
purchase Local Private Line services, the primary the DOJ chose not to provide any
customers for Local Private Line are other carriers. engage in building specific price
Complaint at ¶23.) Because the term ‘‘special
specifics on this product market, given
access’’ better captures the predominant use of such 10 Merger Guidelines, Section 1.0.
facilities, and because it is term more commonly schedules that discourage each firm from using 11 AT&T has previously explained that it would
used by the industry, COMPTEL will generally use competitive input suppliers even when they are need over 2,016 voice grade lines (which is the
the term in these comments in place of the DOJ’s available. Notably, the DOJ’s competitive analysis voice grade equivalent of a small fiber-system
‘‘Local Private Line’’ nomenclature. completely ignores the competitive symbiosis known as an OC–3—in an individual location in
5 Similar allegations are made against Verizon between SBC and Verizon that the mergers will order to justify building facilities into that location.
and MCI. create. AT&T Petition for Rulemaking To Reform
6 While we do not know with specificity the 8 For example, a carrier might use a loop- Regulation of Incumbent Local Exchange Carrier
actual dollar volume of AT&T’s purchases of SBC transport-loop service connecting Georgetown Rates For Interstate Special Access Services, Reply
special access, we do know that they have a University’s Law School on Capitol Hill with its Declaration of Janusz A. Ordover & Robert D. Willig
minimum commitment level of $765 million in main campus in Georgetown (2 ‘‘end points’’ with on Behalf of AT&T Corp. at ¶ 29, filed with the
special access purchases form SBC. See AT&T ex transport in the middle). Alternatively, a wireline Federal Communications Commission in RM–10593
parte at 5, filed with the Federal Communications carrier might provide only transport (i.e., no loops on January 23, 2003.
Commission in RM–10593 November 9, 2004. A to a retail customer) between a cell site tower and 12 Most customers do not typically contract for
copy of AT&T’s submission is attached as Appendix a mobile telephone switching center. special access-based services on a building-by-
A. 9 For instance, AT&T earned $22.6 billion in building basis. Rather, as SBC has explained to the
7 COMPTEL explains later in these comments that business revenue in 2004. The fact that FCC, ‘‘the overwhelming majority of special access
the proposed merger creates a unique approximately 1⁄3 of the nation’s total access lines circuits are purchased by customers that bargain for
interrelationship between Verizon and SBC. By are in the territory served by SBC suggests that the substantial term, volume, and overlay discounts.’’
acquiring the special access contracts of AT&T and value of retail voice and data communications that SBC Reply Comments at 26, filed with the Federal
MCI (the largest purchasers of special access), rely on private lines provided by AT&T are worth Communications Commission in the Matter of
Verizon and SBC will become one of each other’s approximately $7 billion. SBC’s retail business Special Access Rates For Price-Cap Local Exchange
largest competitors and customers. Because both revenues from voice and data communications are Carriers, WC Docket No. 05–25 on July 29, 2005
Verizon and SBC must rely heavily on inputs (i.e., likely to be equally as large as AT&T’s. Commenters (internal citations omitted). Moreover, [t]hese
special access) acquired from one another to should not, however, have to estimate this contract tariffs vary in their scope, covering a single
compete with each other, both carriers have built- information. It needs to be provided by DOJ to MSA, multiple MSAs, or SBC’s entire service
in supply mechanisms that monitor the competitive permit an appropriate review of the PAFJs. The territory.’’ SBC Comments at 53 n.176 filed with the
output of the other, providing a very real danger of Verizon/MCI PAFJ is equally deficient in providing Federal Communications Commission in In the
coordinated pricing. In addition, special access necessary data to perform a meaningful competitive Matter of Special Access Rates For Price-Cap LECs,
contracts have volume-discounted pricing analysis. WC Docket No. 05–25 on June 13, 2005.
discrimination.13 Nor is COMPTEL competitors would not be as effective at ‘‘sunk’’ aspect of the high capital costs
aware of any evidence that would constraining the post-merger firm’s that are characteristic of competitive
support a geographic market definition prices to customers, because the merged fiber deployment are additional entry
that narrow and the Competitive Impact firm will control the price of a critical barriers.17
Statement filed with the PAFJs does not input. Complaint at ¶ 25. According to Importantly, however, these and the
provide any such evidence. Indeed, in the Complaint, this anticompetitive other barriers the DOJ identifies are
COMPTEL’s experience, the fact that effect (reduced competition in a limited similar for all transmission facilities,
Verizon and SBC offer special access number of buildings) will not be limited regardless of whether they are ‘‘loops’’
service on state or regionwide volume to the market for ‘‘raw’’ special access or ‘‘transport;’’ and the inability of entry
discount schedules suggests that it is service (unadorned transmission to defeat a post-merger price increase in
more likely that the appropriate services), but will also distort prices in the metropolitan area is just as much
geographic market is actually broader the market for ‘‘finished’’ (actually more) of a danger than the
than the metropolitan area alleged by telecommunications services (i.e., threat of building-specific price
the DOJ (and cannot plausibly be switched voice or managed data/
considered to be as small as an Internet service) that use private lines as such clear economies of scale. First, as defendants’
witnesses explained, higher levels of demand allow
individual building).14 As explained by a critical input. Complaint at ¶ 26. As efficient use of high-capacity facilities and
former DOJ and FCC chief economist we discuss below, however, the PAFJs technologies which provide transmission service at
Joseph Farrell: not only do not remedy this progressively lower unit costs. Second, the process
anticompetitive effect, but rather may by which the network is configured allows for the
15. I understand that, today, SBC’s pricing fullest utilization of these high-capacity, low-cost
does not fully respond to such granular actually exasperate it. facilities. Finally, defendants supply the entire
competitive conditions, building by building, The Merger Guidelines are primarily spectrum of communications services, and through
and that SBC is content to price well above concerned with entry from the the networking principle, demand for all those
CAPs [Competitive Access Providers] where perspective of whether it is reasonable services is concentrated or pooled so that it can be
it does face CAP competition and offers transmitted and switched over the same facilities.
to expect that a post-merger, unilateral This last phenomenon is referred to by economists
substantial discounts in return for region- increase in price would be met with as ‘‘economies of scope’’. Economies of scope exist
wide commitments to give SBC not simply a entry that is timely enough, reasonably when it is cheaper to produce two or more goods
large amount of business but a large share of or services together than to produce each one
the carrier’s business.
likely, and on a sufficient scale to defeat
separately. Southern Pac. Communications Co. v.
16. Such a pricing practice links special the hypothetical price increase. In the American Tel. & Tel. Co., 556 F. Supp. 825, 861–
access pricing in different buildings, and— Complaints, the DOJ states that other 862 (D. D.C. 1982). As notes above, with SBC’s
while it persists—argues for a region-wide carriers are unlikely to replicate AT&T’s acquisition of AT&T, the pre-divestiture AT&T has
been substantially reconstituted. Furthermore, the
market definition because (as I explain last mile connections into the few FCC has found that ‘‘Scale economies, particularly
below) it can make region-wide buildings for which the merged firm has when combined with sunk costs and first-mover
concentration a more important determinant consented to make unused capacity advantages * * * can pose a powerful barrier to
of competitive behavior and overall pricing available. The DOJ explains that carriers entry. If entrants are likely to achieve substantially
than concentration and entry possibilities decide whether to build last mile small levels of sales than the incumbent, then with
specific to a building or route.15 scale economies their average costs will be higher
facilities based on several factors: than those of the incumbent, putting them at a
C. Anticompetitive Effect a. The proximity of the building to the potentially significant costs disadvantage to the
incumbent. Profitable entry may not be possible if
In two brief paragraphs, the DOJ CLEC’s existing network retail prices are close to the incumbent’s average
posits that the primary anticompetitive interconnection points; costs. The greater the extent and size of the scale
effects of the two largest local Bell b. The capacity required at the economies throughout the range of likely demand,
monopolies acquiring their two largest customer’s location (and thus the the higher the barrier they pose.’’ In the Matter of
revenue opportunity); Review of the Section 251 Unbundling Obligations
competitors will be felt in those few of Incumbent Local Exchange Carriers, Report and
buildings where the number of carriers c. The availability of capital; Order on Remand, 18 FCC Rcd. 16978 at ¶ 87
serving the buildings with their own d. The existence of physical barriers, (2003), vacated in part (on other grounds), aff’d in
fiber or copper transmission facilities such as rivers and railbeds, between part and remanded sub nom. United States Telecom
the CLEC’s network and the Association v. Federal Communications
will decline from two to one. The DOJ Commission, 359 F.3d 554 (D.C. Cir. 2004), cert.
explains that even though other customer’s location; and den. sub nom. AT&T Corporation v. United States
competitors might still be able to resell e. The ease or difficulty of securing Telecom Association, 125 S. Ct. 316 (2004).
private lines from SBC, these the necessary consent from building 17 The existence of high, or proportionately high,
owners and municipal officials. sunk costs is generally recognized as a barrier to

entry. See, e.g., Larson, An Economic Guide to
13 Normally, the DOJ would only define Complaint at ¶ 27. COMPTEL does not Competitive Standards in Telecommunications
geographic markets this narrowly if a ‘‘hypothetical disagree that the point listed above are Regulation, I CommLaw Conspectus 31, 52 (January
monopolist’’ could identify and price differently to barriers to entry; nor does COMPTEL 2000) (‘‘if entry requires the incurrence of capital
buyers in these buildings. See Merger Guidelines, costs, and a ‘high’ proportion of these are sunk costs
Section 1.22 ‘‘Geographic Market Definition in the
disagree that entry—by either the last
for entrants, then entry barriers exist.’’ (c.f., Bolton,
Presence of Price Discrimination.’’ mile or transport facilities—would not Brodley, and Riordan, Predatory Pricing: Strategic
14 Although the correct geographic market be sufficient or sufficiently timely to Theory and Legal Policy, 88 Geo. L.J. 2239, 2265
definition is probably the entire SBC or Verizon defeat a post-merger increase in price. (August, 2000) (‘‘if challenged by new entry, the
region, for purposes of this filing, COMPTEL will However, COMPTEL must point out incumbent will rationally disregard such [sunk]
adopt the largest geographic market asserted by the costs in its pricing decisions rather than lose the
DOJ in its Complaint (the metropolitan area) when
that the entry barriers the DOJ identifies
business. The entrant * * * must now incur such
evaluating the adequacy of the DOJ’s remedy. are by no means exhaustive. It is well costs, and therefore faces risk of underpricing by an
Complaint at ¶ 24. recognized that dedicated, high-capacity incumbent with sunk costs. Thus, as a result, sunk
15 Statement of Joseph Farrell attached to the
telecommunications networks are costs may act as an entry barrier, giving the
Opposition of Global Crossing filed with the characterized by substantial economies incumbent the ability to raise price above the
Federal Communications Commission in In the competitive level.’’) The FCC has specifically found
Matter of SBC/AT&T Merger, WC Docket No. 05– of scale and scope.16 Moreover, the that ‘‘[s]unk costs, particularly when combined
65 on April 25, 2005. For the convenience of the with scale economies, can pose a formidable barrier
DOJ, COMPTEL includes Professor Farrell’s 16 In one of the early antitrust cases, this Court to entry.’’ In the Matter of Review of the Section 251
observations regarding the proper geographic determined with respect to the local private line Unbundling Obligations of Incumbent Local
market definition. A copy of the Statement is service offered by AT&T pre-divestiture, ‘‘that there Exchange Carriers, Report and Order on Remand, 18
attached hereto as Appendix B. are three reasons for defendants having achieved FCC Rcd. 16978 at ¶ 88.
increases. (As COMPTEL has explained, Wireless Corp. et al., No. 1:04CV01850, nation’s two largest incumbents, much
the DOJ has not offered any evidence Proposed Final Judgment (D.D.C. less do the divestitures even hint at
that building-specific pricing by SBC November 3, 2004). Similarly, in U.S. v. addressing the heightened threat of
and Verizon is the norm). Consequently, WorldCom, Inc. and Intermedia coordinated pricing resulting from SBC
while the DOJ has recognized that the Communications, DOJ required and Verizon becoming each other’s
conditions for post-merger price WorldCom to divest all Intermedia largest customer and competitor.
increases are present, it has failed to assets, except for the voting interest in The DOJ’s Merger Remedy Guide
fashion any reasonable remedy that Digex, as an ongoing, viable business to makes clear that the preferred course to
would prevent such increases from prevent the substantial lessening of restore competition is to divest
occurring. competition in the market for Tier 1 sufficient assets to replace the
Internet backbone services. Again, the competition lost by the merger,
III. The Proposed Divestitures Will Not recognizing that such divestitures will
Restore Competition required divestiture included customer
contracts, operational support systems likely require more than mere physical
The formal policy guidance to the and each of the aforementioned assets assets:
Antitrust Division regarding merger among a host of others. U.S. v. Divestiture must contain at least the
remedies is contained in the Antitrust WorldCom, Inc. and Intermedia minimal set of assets necessary to ensure the
Division Policy Guide to Merger Communications, No. 1:00CV02789, efficient current and future production and
Remedies [‘‘Merger Remedy Guide’’].18 Proposed Final Judgment (D.D.C. distribution of the relevant product and
In this policy statement, the Antitrust November 17, 2000). See also U.S. v. thereby replace the competition lost through
Division sets forth broad principles that the merger. The Division favors the
SBC Communications Inc. and divestiture of an existing business entity that
it claims will guide its decisions to seek Ameritech Corp., No. 99–0715,
remedies to offset potential harms to has already demonstrated is ability to
Proposed Final Judgment (D.D.C. March compete in the relevant market. An existing
competition resulting from mergers. A 23, 1999). (DOJ required divestiture of business entity should possess not only all
controlling policy principle is that an entire business including the assets the physical assets, but also the personnel,
‘‘restoring competition is the ‘key to the listed above). Most recently, only one customer lists, information systems,
whole question of antitrust remedy.’ ’’ 19 year prior to the present mergers being intangible assets, and management
Importantly, the goal of restoring infrastructure necessary for the efficient
field with the DOJ, the DOJ was production and distribution of the relevant
competition is not a policy choice made
perfectly willing to follow its own product.22
by the DOJ. Rather, it follows from the
counsel in the case of Qwest—another The goal of a divestiture is to ensure that
guidance provided by the Supreme
large incumbent local exchange carrier, the purchaser possesses both the means and
Court that ‘‘relief in an antitrust case
but substantially smaller than either the incentive to maintain the premerger
must be efffective to redress the competition in the market(s) of concern.23
violations and ‘to restore competition’ SBC or Verizon—seeking to acquire
Allegiance Telecom in a bankruptcy Divestiture of an operating, on-going
[and that] * * * [c]omplete divestiture business redresses the antitrust
is particularly appropriate where asset proceeding. There, the DOJ signed a
consent decree with Qwest that required violations and restores competition in
or stock acquisitions violate the the affected market.24 Significantly, the
antitrust laws.’’ Ford Motor Co. v. Qwest to entirely divest itself of all of
Allegiance’s in-region business.20 ‘‘divestitures’’ required by the consent
United States, 405 U.S. 562, 573 (1972); decrees are not real divestitures at all
accord United States v. E.I. du Ponte de A key question underlying the DOJ’s
approach here is simply ‘‘what (as the term is used to effect a
Nemours & Co., 366 U.S. 316, 331 ‘‘structural remedy’’ in the Merger
(1961); California v. American Stores happened?’’ Why is the guidance of its
Merger and Remedy Guidelines— Remedy Guide). Rather, the proposed
Co., 495 U.S. 271, 280–81 (1980). decrees call only for a ten-year lease of
The DOJ has followed this policy and guidance to which the DOJ has
consistently adhered in merger after the defendant’s unused fiber capacity—
precedent time and time again in capacity that is dormant cannot be made
divestitures across various industries merger, involving firms far smaller than
those being combined here—no longer useful without substantial additional
including telecommunications. In investment—and which only connects
previous telecommunications mergers relevant to its analysis? 21 As we explain
below, the divestitures required under to buildings where the available revenue
in which the DOJ has negotiated is already locked into long-term
remedies, the divested assets included the proposed final judgments cannot
plausibly restore the competition lost by contracts with the defendants, most
not just network infrastructure, but also likely through a contract tying the
customer contracts, business and the simultaneous acquisition of the
nation’s two largest competitors by the service in the named building to the
customer records and information,
customer’s requirements in other
customer lists, accounts, leases, patents,
20 Ultimately, Qwest was out-bid in a bankruptcy locations. This temporary lease of the
licenses, and operational support
auction by XO Communications and the consent defendants’ unused capacity to a carrier
systems—in essence complete operating decree was not filed. The proposed consent decree that has neither the scale nor scope of
businesses. For example, in U.S. v. is provided here as Appendix C to illustrate a
the defendants cannot restore the level
Cingular Wireless Corp. et al., DOJ divestiture approach more consistent with the
public interest than that to which the DOJ has of competition lost by the acquisition of
required the divesture of AT&T
acquiesced here. AT&T and MCI.
Wireless’s entire mobile wireless 21 COMPTEL is not so naı̈ve as to believe that the
business in the identified geographic massive size of the merged entities in these A. A Building-Specific Remedy Is
markets to prevent the substantial proceedings is necessarily unrelated to the Insufficient
lessening of competition for mobile Government’s approach. Mergers concentrate
political capital in a manner comparable to their To begin, although the DOJ was
wireless services. See U.S. v. Cingular amalgamation of economic power—a fact Senator unable to define the relevant geographic
Tunney well recognized ‘‘[i]ncreasing concentration market with precision—concluding only

18 Antitrust Division Policy Guide to Merger
of economic power, such as occurred in the flood that it was no smaller than an
Remedies, U.S. Department of Justice, Antitrust of conglomerate mergers, carries with it a very
Division, October 2004. Available at http:// tangible threat of concentration of political power.
22 Merger Remedy Guide at 12.
www.usdoj.gov/atr/public/guidelines/205108.htm Put simply, the bigger the company, the greater the
19 Id., citing United States v. E.I. du Pont de 23 Merger Remedy Guide, at 9.
leverage it has in Washington.’’ 119 Cong. Rec. 3451
Nemours & Co., 366 U.S. 316, 326 (1961). (Feb. 6, 1973). 24 Id.
individual building and no larger than competition from AT&T and MCI (a precommit capital (to acquire a fiber-
a metropolitan area, the DOJ’s ‘‘remedy’’ proposition with which we disagree, for lease from the defendants) to serve these
assumes that individual buildings are other reasons that we describe here), buildings without already having a
the appropriate measure. Moreover, the unless other entrants also enjoyed the customer under contract, when the DOJ
proposed final judgments only apply in same discounts achieved by AT&T and recognizes more generally that an
those relatively few buildings where the MCI for the special access circuits used entrant would not otherwise take such
merging parties control the only to form the complete bid for all of the a risk? Moreover, the economic
facilities serving the building (i.e., customer’s locations, the level of disincentive is even greater in these
where because of the merger, the competition in the metropolitan area buildings because the entrant knows
number of facility-paths to the building would be harmed and prices would be that the capital it would be committing
will go from 2-to-1). Notwithstanding expected to rise. would be to acquire capacity at levels
the lack of any explanation of why only that neither the incumbent (SBC and
the ‘‘2:1’’ buildings are of concern (as B. The Lease of Unused Capacity Does Verizon) nor the largest competitors
opposed to circumstances where Not Restore Competition (AT&T or MCI) were able to sell. The
competitive choice collapses from 3:2 Another remarkable feature about the DOJ’s Merger Remedies Guide
for instance), the DOJ’s focus on a proposed consent decrees is that they recognizes that ‘‘in markets where an
building-specific remedy assures higher only require the defendants to lease the installed base of customers is required
prices to retail customers. unused capacity they may have in order to operate at an effective scale,
As noted earlier, COMPTEL is installed to a particular building—i.e., the divested assets should either convey
unaware of any market evidence that fiber strands that today lie dormant, that an installed base of customers to the
suggests that customers make would require substantial additional purchaser or quickly enable the
purchasing decisions—or that carriers investment to activate, and which quite purchaser to obtain an installed
make pricing decisions—on a building- possible exceed the known demand in customer base’’ 26
by-building basis. If customers do not the building to which they are Additionally, in its Merger
make their decisions that way, and committed. Guidelines, among the factors the DOJ
carriers do not price their services that The DOJ correctly recognizes the lists that are likely to ‘‘reduce sales
discretely, there is no reasoned basis to ‘‘CLECs will typically build into a opportunities’’ to a post-merger entrant
conclude that the remedy can restore particular building after they have is ‘‘any anticipated sales expansion by
competition when the market has been secured a customer contract of sufficient incumbents in reaction to entry, either
incorrectly defined so narrowly. size to justify the anticipated generalized or targeted at customers
In COMPTEL’s experience, customers construction costs for that building.’’ approached by the entrant, that utilizes
make their purchasing decisions for Complaint ¶ 28. In other words, the prior irreversible investments in excess
much broader areas that generally most common arrangement is for production capacity.’’ 27 Here, while the
conform to the areas that the facilities to be installed only after a ‘‘divestiture asset’’ is unused capacity, it
incumbents use to calculate volume customer has made a contractual is not even all the unused capacity the
discounts. Even if one assumes that a commitment of sufficient duration and post-merger firm will possess; so it is
relatively (compared to our experience) magnitude to justify the cost. hardly unthinkable that the merged firm
narrow market definition of a single Remarkably, although the DOJ would not be easily able to eliminate
metropolitan area is appropriate, the recognizes this circumstance, it has any sales opportunity for the
only way to restore the competition lost proposed a remedy that effectively prospective entrant (assuming such a
by the mergers is to divest all of the assumes the opposite. sales opportunity could even exist on a
AT&T and MCI network assets that In each of the buildings identified by building-specific basis)—especially
serve each metropolitan area. Only if given that the new entrant (even if it
the DOJ, there are only two networks
that were to occur, could the purchasing acquired the unused capacity for free)
available to customers (that of AT&T
entrant be assured of the opportunity to will still have to incur the costs of
and MCI and that of the incumbent).
offer customers service package with a negotiating building access, laying fiber
Following the DOJ’s accurate
similar footprint as provided by the within the building, and lighting the
observation that competitors generally
former competitors, AT&T and MCI. fiber. Yet, in this context, the DOJ has
Notably, AT&T and MCI were two of do not deploy capital speculatively, it is
likely that AT&T and MCI constructed not required the defendants to divest a
the largest purchasers of wholesale single customer—or even to waive the
special access services in the territories their lateral connections only after
obtaining a contract with the customer termination penalties associated with
served by SBC and Verizon and, as any contract that includes service in the
such, were able to take advantage of sufficient to recover the costs of
construction.25 As such, it is unlikely identified buildings.28
SBC’s and Verizon’s volume discount
pricing strategies to achieve lower that there is sufficient uncommitted C. A 10-year Lease is Not a Divestiture
special access prices than other demand in any of these buildings to
justify a competitor incurring the cost to Above we emphasize the fact that
competitors. Because large end-user CLECs are unlikely to install capacity to
customers typically contract for retail access the building to become a ‘‘third’’
option. particular building until after the
services at multiple locations, AT&T customer is locked into a contract
and/or MCI were able to bid on such One obvious question is why should
the DOJ presume that an entrant will suggests that the customer demand in
contracts using a blend of their own the buildings where AT&T has installed
facilities and the heavily discounted 25 The FCC has found that large business
special access facilities they leased from customers ‘‘demand extensive services using
26 Merger Remedy Guide at 10.
SBC and Verizon. Consequently, even if
27 Merger Guidelines, Section 3.3.

multiple DS3s or OCn loops typically offered under
leasing the unused capacity that exists long-term arrangements which guarantee a 28 So called ‘‘fresh look’’ requirements would at
at some of the customer’s locations to substantial revenue stream over the life of the least permit the customers using the productive
contract.’’ In the Matter of Review of the Section capacity that the DOJ is permitting the merged firms
other entrants (a term called for by the 251 Unbundling Obligations of Incumbent Local to retain to consider shifting their demand to the
proposed consent decrees) was able to Exchange Carriers, Report and Order on Remand, 18 unused capacity that the DOJ would have the
replicate the facilities-based FCC Rcd. 16978 at ¶ 303 (2003). merged firms divest.
fiber are unlikely to be available to an DOJ would identify an entry barrier (like IV. The Proposed Remedy Increase the
entrant because of the customer’s building access), and then propose a Likelihood of Coordinated Pricing
contractual commitments. A second remedy to create new entry while A. ILEC Exclusionary Contracts Are a
implication is that an entrant is unlikely leaving the prospective entrant to still Barrier To Entry and Facilitate
to want to lease dark fiber from the negotiate that entry barrier. Collusion Between Post-Merger SBC and
defendants (as assumed by the proposed Post-Merger Verizon
consent decrees) precisely because the D. The Remedy Is Not Clear and
new entrant to the building will not Enforceable COMPTEL has already shown that the
have its own pre-committed customers. DOJ has not adequately described all the
Among the broad, ‘‘guiding barriers to entry in the Local Private
Whether the entrant leases the unused
capacity required to be divested by the principles’’ in the Merger Remedy Line market. As we have noted, most
proposed settlement—or whether it Guide is the notion that an antitrust private lines include a transport
constructs the facility new, the remedy should be clear and enforceable. component as well as a loop
economic condition recognized by the This is also a new requirement for the component.31 Moreover, most private
DOJ remains the same. Entrants are Court to analyze with respect to consent lines are purchased by carriers, which
unlikely to commit capital to serve an decrees under the Tunney Act—whether combine these private lines with
individual building unless a customer its terms are ambiguous, and therefore, intelligence and other network facilities
has already committed to cover the costs whether it is enforceable. The present and features to create finished services
of that capital expansion. The fact that consent decree is so vague and that are then sold to retail customers.
some dark fiber may have been obtained ambiguous as to be virtually Thus, what little facilities competition
through the proposed ‘‘divestiture’’ does unenforceable. that exists in the special access/Local
not substantially lessen this capital Private Line market is provided by other
As an initial matter, almost all—if not carriers for other carriers. The barriers
expenditure—there remain significant all—of the critical provisions of these
costs to access the customer and activate that these entrants—who compete
consent decrees are subject to directly against SBC and Verizon—face
the fiber so that it is capable of subsequent agreement among the
providing services. are enormous. The DOJ only lists some
parties. The elements of the divestiture of the ‘‘natural’’ economic barriers to
The DOJ appears unwilling to
leases that are subject to ‘‘agreement’’ entry. There are other, artificial barriers
appreciate the comparability between
capital expenditures incurred as between the parties—pricing, splice that have been erected by the Bell
construction costs and capital point access, and access to dark fiber companies, including defendants SBC
expenditures incurred as long-term transport—are among the most and Verizon.
contentious issues in arbitrations held The most notable features about the
leasehold acquisition costs. The fact is
pursuant to the Telecommunications special access market are that: (1) The
that competitors generally do not deploy
Act of 1996. History has shown that SBC and Verizon still maintain a
capital on speculation. If they do not
competitive entrants are typically monopoly over the market; even the
have a contract for a satisfactory level of
unsuccessful ‘‘negotiating’’ with the Bell competitive carriers with the largest
demand at a particular location, then
companies, frequently having to resort networks must buy over 90% of their
they typically will not spend capital to
to binding arbitration under the total special access circuits (Local
provide facilities to that location.
Private Lines) from the incumbents; (2)
The risk to invested capital used to Telecommunications Act, 47 U.S.C. 252,
in the most populous markets, SBC and
activate any leased fiber from the even to implement basic
Verizon are no longer price regulated by
defendants is particularly acute. The interconnection and lease rights the FCC; and (3) almost all of the special
DOJ’s consent decrees only require a guaranteed by the statute and the FCC’s access circuits sold by SBC and Verizon
relatively short lease commitment of 10 rules implementing the statute.30 The are sold under ‘‘optional pricing
years, without any renewal option. After PAFJs do not divest independent plans.’’ 32
the lease expires, the merged companies operations that have the incentive and These optional pricing contracts are
will once again control the assets ability to be willing wholesalers to other relevant to this proceeding for three
supposed to be ‘‘divested,’’ with the competitive providers; rather, the reasons: (1) They are important to
entrant that has leased these facilities decrees portend the same seeds for understand in order to understand
having no clear option. In addition, litigation that have plagued the proper geographic market definition; (2)
without full transfer of assets, Telecommunications Act of 1996 for a they are an ongoing barrier to facilities-
prospective lessees will have no rights
decade (and which ultimately produced based competitive entry into the Local
to access any building without first
these mergers in the first instance). Private Line/special access market
obtaining permission from the landlord
because they severely foreclose access to
or property manager of the building.
This, again, makes the ability of the through the diverse fiber strand). However, there is 31 Indeed, AT&T has explained that 40,000 of its
lessee to serve potential customers nothing in the terms of the consent decrees that local business customers require the lowest
contingent on its ability to overcome an requires the post-merger firm to provide ‘‘diverse’’ capacity private line service—DS1 service. The vast
fiber. Rather, the decree only requires a minimum majority of these customers—about 65%—are
entry barrier that the DOJ has
of 8 strands to be divested. It appears that the post- served via combinations of loops and transport. See
recognized and that the defendants have merger firm could technically comply with the AT&T Presentation, CC Docket No. 01–338, October
overcome.29 It is remarkable that the decree, while limiting the prospective purchaser’s 7, 2002, at p. 10.
32 These ‘‘optional pricing plans’’ are an essential
ability to win sales by only divesting fiber strands
29 There is a related, yet somewhat technical, feature of the special access market that needs to
in the same sheath.
point that should also be considered. The merged 30 See The Role of Incentives for Opening be understood in order to understand why entry of
firms almost certainly each have route diversity the proposed consent decrees is not in the public
Monopoly Markets: Comparing GTE and RBOC
(e.g., fiber coming in the front door and going out interest. To this end, COMPTEL has included with
the back door). This is a valuable feature because Cooperation With Local Entrants (1999) (ILECs that its comments a detailed analysis of SBC’s optional
it allows the carrier to protect its customer against do not cooperate with entrants attract less pricing plan, prepared by former DOJ and FCC chief
service disruptions from fiber cuts (if the fiber competitive entry) available at http:// economist Joseph Farrell. Dr. Farrell’s pricing plan
coming into the building is cut, the carrier can econpapers.repec.org/paper/wpawuwpio/ analysis is included as Appendix D to these
simply ‘‘re-route’’ the customer’s communications 9907004.htm. comments.
customers and distort entry decisions; for the densest metro areas the FCC no Given that courts, as well, have
and (3) the continued existence of these longer regulates the Bells’ special access recognized the potential for
contracts will make it even less likely rates, the Bells have used this pricing anticompetitive foreclosure effects in
that the proposed remedy will allow a flexibility to raise their ‘‘month-to- these so-called ‘‘bundled rebate’’ or
new firm to take the place of AT&T— month’’ or non-OPP prices for special ‘‘bundled discount’’ plans, the DOJ
even if all of AT&T’s in-region assets access. The resulting effect is that needs to determine what percentage of
were divested. customers—almost all of whom are the wholesale (carrier) and retail
The key feature of these optional retail competitors with the Bells (Local markets for special access are foreclosed
pricing plans is that in order to get Private Lines/special access circuits are by the contracts at issue. COMPTEL
‘‘discounts’’ on circuits for which they critical inputs to all wireline and believes this number will be
have no competitive alternative (the vast wireless telecommunications services)— significant.37 The D.C. Circuit has held
majority of their circuits) customers cannot afford to pay higher prices when that exclusionary conduct by a
(like the pre-merger AT&T and MCI, and their competitors (including the Bell monopolist is more likely to be
COMPTEL’s members) must commit to affiliates) are purchasing at a anticompetitive than ‘‘ordinary’’
purchasing the majority of their total ‘‘discount.’’ The word ‘‘discount’’ is in exclusionary conduct achieved through
circuit volumes from the Bell quotations because the discounts are non-monopoly means (i.e., agreements
companies—including circuits for discounts off the month-to-month tariff among competitors).38 Moreover, the
which a cheaper competitive alternative price, so the Bell can still charge a Third Circuit has held that contracts
may be available. In other words, monopoly profit maximizing price almost identical to the Bell OPP’s, when
because only the incumbent can supply (through its OPP) by establishing a used by a monopoly, were
all of any customer’s Local Private Line ‘‘supra-monopoly’’ price as the non-OPP anticompetitive and exclusionary in
demand, the incumbent can condition alternative. violation of the antitrust laws.39 The
the availability of discounts on certain The most important thing to consider Supreme Court has held that a market
circuits (majority, for which no when trying to conceptualize how the share over 65% is sufficient to establish
competitive alternative is available) on optional pricing plans work, is that the a prima facie case of monopoly power.40
the customer’s commitment to transfer incumbent—by exchanging ‘‘discounts’’ It is certainly the case that SBC and
the ‘‘competitively sensitive’’ portion of on products for which demand is Verizon would be considered
its demand to the incumbent. inelastic (customers have no alternative) monopolies, pre-merger, in the special
In this respect, the optional pricing for commitments to not buy from access market—regardless whether the
plans—which are pervasive—act to competitors on products for which the market is defined as a building or
foreclose circuit demand from potential customer could choose a competitor— metropolitan area.41 Thus, an inquiry
competitors of the incumbents for Local gets to set the minimum scale of entry
Private Line services.33 This feature— for his competitors. Thus the incumbent the monopoly (pre-entry) price is $1.00 and the
contracts that foreclose sales can pick demand over a large customer buys 100 units. Further suppose that a
competitor is capable of providing 25 units at a
opportunities to rivals—is yet another geographic region as the inelastic price of 99 cents, thereby threatening to undercut
factor that the DOJ, in its Merger product (on which discounts are the monopolist. In response, the monopolist could
Guidelines, has identified as making offered), or the incumbent could decide offer the customer the choice of buying 75 units at
to ‘‘discount’’ lower capacity circuits $1.05 per unit, or buying all 100 units for 99 cents
post-merger entry less likely.34 per unit. As a result, the customer now faces a price
However, the DOJ has chosen not to (for which the incumbent’s ‘‘first from the monopolist for the 25 ‘‘in play’’ units of
eliminate this entry barrier for the mover’’ status and scale/scope $20.25, or 81 cents per unit. The competitor is
prospective IRU purchaser. economies give it a tremendous unable to meet this price, and is excluded from the
advantage over new entrants) as the market.’’ Id. at 7–8.
Another feature of these contracts is 37 SBC notes that the ‘‘overwhelming majority’’ of
that customers that cannot meet their basis on which it will foreclose demand
its special access circuits are sold under term and
volume commitments must pay high from rivals. Regardless, though, the end volume contracts. See n. 11, supra. Verizon has
‘‘termination’’ penalties. While result is that the incumbent is able to stated that 85% of its access sales were under some
customers do not like these contracts, raise the costs of its competitors by form of discount contract. Verizon Comments at 22
expanding the scale on which they filed with the Federal Communications
they have little choice but to sign Commission in WC Docket No. 05–25 on June 13,
them.35 Because, as noted previously, would have to enter, or raising the size 2005.
of the discount they would have to offer 38 United States v. Microsoft Corp., 253 F.3d 34,
33 See, e.g., ‘‘Quantity-Discount Contracts as a to make their customer indifferent 70 (D.C. Cir. 2001) (Microsoft’s exclusionary
Barrier to Entry,’’ T. Randolph Beard, PhD, George between buying from the incumbent, contracts violated Section 2 (of the Sherman Act)
S. Ford, PhD, Lawrence J. Spiwak, Esq., Phoenix and/or by limiting its competitors ‘‘even though the contracts foreclose less than the
Center Policy Paper No. 20 (November 2004). 40–50% share usually required in order to establish
Available at http://www.phoenix-center.org/
ability to expand quickly (by foreclosing a § 1 violation.’’)
ppapers.html demand).36 39 LePage’s Inc. v. 3 M, 324 F.3d 141 (3d Cir.
34 ‘‘Factors that reduce sales opportunities to 2003) (‘‘The principal anticompetitive effect of
entrants include * * * (b) the exclusion of an Matter of Special Access Rates for Price Cap Local bundled rebates as offered by [the defendant] is that
entrant from a portion of the market over the long Exchange Carriers, WC Docket No. 05–25 on June when offered by a monopolist they may foreclose
term because of vertical integration or forward 13, 2005. portions of the market to a potential competitor
contracting by incumbents * * *.’’ Merger 36 See, e.g., Declaration of Michael D. Pelcovits on who does not manufacture an equally diverse group
Guidelines, Section 3.3. Behalf of WorldCom (as MCI was formerly known) of products and who therefore cannot make a
35 ‘‘Discount pricing plans offered by ILECs at 7 filed with the Federal Communications comparable offer’’).
40 American Tobacco Co. v. United States, 328
further reduce the ability of CLECs to compete and Commission in In the Matter of AT&T Petition for
result in higher prices. Even where a CLEC may Rulemaking to Reform Regulation of Incumbent U.S. 781, 797 (1946).
offer a competing special access service (at a Local Exchange Carrier Rates for Interstate Special 41 Only 3 years ago, AT&T—the best-situated
substantial discount to the ILEC offering), WilTel Access Services, RM–10593. (‘‘Less than fully special access customer (with the largest
may not use that CLEC in many cases because it can exclusive contracts can similarly be exclusionary competitive local network in any Bell region)—was
incur a lower incremental expense by committing where they tie up sufficient volume to prevent dependent on the incumbents for 93% of its DS1-
additional services to an existing ILEC plan even smaller competitors from achieving minimum level transport and 65% of its DS3-level access. See
though the overall unit cost from the ILEC may be viable scale.’’) Pelcovits also uses the following Reply Declaration of Janusz A. Ordover and Robert
higher.’’ Declaration of Mark Chaney in support of example to explain the pricing disadvantage at D. Willig on Behalf of AT&T Corp., In the Matter
the Comments of WilTel at ¶ 6 filed with the which competitors that cannot match the of AT&T Petition for Rulemaking to Reform
Federal Communications Commission in In the incumbent’s scale or scope are placed: ‘‘Suppose Regulation of Incumbent Local Exchange Carrier
into what proportion of special access proposed settlements together, it has mechanism to detect and punish
services are sold under the contracts ignored the important interrelationships cheating in the retail market, as any
described above should be sufficient to between the mergers and the level of significant increase in inputs purchased
have enough information to determine competition. The Tunney Act Reform, can indicate that the competitor is
that as long as the defendants are however, does not allow this same experiencing an increase in retrial
allowed to use these contracts, the DOJ’s luxury. Rather, the DOJ is required to demand as the result of a decline in
proffered remedy has no legitimate hope demonstrate than ‘‘the impact of entry retail price.
of restoring competition lost through the of such judgment upon competition in Alternatively, the post-merger
mergers. the relevant market or markets dominant firms have no less of an
* * * 42’’ resolves the anticompetitive information advantage in wholesale
B. The Proposed PAFJs Will markets. Because the post-merger AT&T
effects identified in the Complaints.
Affirmatively Facilitate Collusion The DOJ, in its Merger Guidelines, and Verizon have such a significant
Between SBC and Verizon notes that a significant potential portion of wholesale demand under
However, there is one remaining anticompetitive effect of mergers occurs such contracts, they are also in a
aspect to the contracts discussed above when the mergers increase the ability of position to notice decreases in demand
that independently compels the DOJ to the remaining firms in the market to from other wholesale customers at old-
reject the PAFJs and require a more coordinate in ways that harm AT&T or old-MCI ‘‘on-net’’ locations.
complete divestiture. The effect of the consumers. The DOJ notes that Reduced purchases by other wholesale
contracts, post-merger, will be to ‘‘[c]ertain market conditions that are market customers could easily and
enhance the ability for the merged firms conducive to reaching terms of efficiently alert the post-merger
to engage in interdependent coordination also may be conducive to incumbent to wholesale market
coordination. Post-merger each firm is detecting or punishing deviations from cheating.
the other’s largest in-region competitor those terms.’’ Merger Guidelines, Once the dominant firm has detected
and largest out-of-region supplier. This Section 2.1. wholesale or retail market cheating, it
new reality, in conjunction with the COMPTEL submits that these can then perfectly signal, through either
OPP contracts—which enforce input conditions are fully satisfied in the case price responses by its own CLEC in the
dependence on the dominant firm— of the present mergers and the PAFJs do other Bell’s region, or through output
leads naturally to increased not remedy these conditions because restrictions—quality disruptions from
coordination through the increased they do not restore the competitive its ILEC to the ‘‘maverick’’ CLEC.
ability of each dominant firm to monitor condition to pre-merger levels. The Finally, these contracts ensure that the
each competitor for ‘‘cheating’’ and to complaints recognize that AT&T and post-merger firms have a government-
thereby better facilitate coordination. MCI are each among the largest sanctioned defense to collusion.
The Competitive Impact Statements do competitors to both SBC and Verizon. Unlike the pre-merger AT&T and MCI,
not address, let alone explain, how Complaints at ¶ 8. The inescapable these post-merger companies will never
coordinated effects will be prevented by conclusion from this fact is that post- complain about the unreasonable
the very limited relief proposed by the merger, both SBCA and Verizon will be restrictions these contracts place on
PAFJs. Effectively, four very large the largest competitor to the other. their ability to use competitive
competitors, two of whom (AT&T and Significantly, however, each pre-merger facilities—they perfectly know this is
MCI) had every incentive to seek to carrier (i.e., AT&T and MCI) has the intended effect of the contracts.
grow share and pursue entry have been explained to the FCC that it is bound by Moreover, they also know that if they
reduced to two historic monopolies volume discount contracts to SBC and just stay ‘‘captive’’—as is reasonable—
whose incentives are much more to Verizon that effectively require that then they can take any increase in
protect existing monopolies than they each purchase most of its special access private line rates as a signal/excuse to
are to aggressively compete. services from its rival (SBC and Verizon) raise retail rates. Since they can expect
or be harmed by the loss of discounts the same consideration where they are
C. The Proposed Settlements Should Be based on regionwide commitments.43 the input monopolist and dominant
Evaluated Together What is even more important going retail firm, they have an incentive to
There is no question that the forward is that the contracts do not just provide the same consideration as an
acquisition of AT&T and MCI by SBC act to discourage the new ‘‘out-of- out-of-region competitor. This is a
and Verizon, respectively, will region’’ competitors from using other significant risk of harm to the public
substantially lessen competition in the competitive carriers, but the contracts interest, because most
provision and sale of ‘‘Local Private act as a disincentive for the post-merger telecommunications services that the
Lines’’ (also known as ‘‘special access’’) out-of-region competitors to use their post-merger firms will sell in each
to the wholesale market, as well as voice own networks. Thus, the contracts serve other’s ILEC regions (local, long
and data services that rely on Local to cement the two post-merger firms’ distance, voice, data, and wireless) rely
Private Lines, with the likely result that interdependence, and provide a ready- in large part on ‘‘Local Private Line’’
prices for the Lines and services using made excuse as to why they cannot/will service as a critical input.
those Lines will increase ‘‘to levels not compete aggressively on price in Finally, although it is pretty clear how
above that which would prevail absent either wholesale input markets or in the existing contracts enhance both
the merger(s). Complaints ¶¶1, 25, 33. retail business or wireless markets. firms’ incentives and ability to
The Complaints conclude that, absent Moreover, these commitment contracts coordinate post-merger, what may not
relief, competition will be diminished for wholesale inputs constitute a perfect be so clear is how the feckless remedy
and prices will rise in both the structure further enhances the ability of
the post-merger firms to limit
42 15 U.S.C. 16(e)(1)(B) (emphasis added).

wholesale and retail local private line
markets. Complaints ¶25. Although the 43 See,generally, AT&T and MCI filings in FCC competition. The ‘‘divestiture assets’’
RM–10593 and WC Docket No. 05–25. Attachments are most likely to be interesting/
DOJ has asked the Court to review the 4 and 5 are representative of the pre-merger firms’
concern over their dependence on SBC and Verizon
valuable to a firm that already has a
Rates for Interstate Special Access Services, FCC special access—a dependence that was only significant network in the divestiture
RM–10593, at ¶ 30. magnified by the bundled rebate contracts. market. As the DOJ explains,
‘‘[p]urchasers that are already offering competitor,44 it seems likely that AT&T discreet bids at the locations where DOJ
similar services in or near the and Verizon will be the natural higher seems to expect price discrimination.
metropolitan area are more likely to be bidders for the excess capacity in each Conclusion
viable competitors than other potential other’s territory.
purchasers.’’ Competitive Impact COMPTEL has demonstrated that the
The further expansion of AT&T and
Statement at p. 6 of 12. Moreover, the PAFJs do not even begin to remedy, and
Verizon’s out-of-region presence in the may even exacerbate, the public interest
government strongly prefers a single other’s in-region territory through the
purchaser. Id. Finally, the terms of the harms caused by the elimination of the
addition of excess capacity only two largest competitive carriers by the
‘‘assets’’ themselves are fairly unique— increases the means for non-detectable
10 yr leases for non-revenue-producing two largest incumbent monopolies.
signaling and closer coordination. For Accordingly, the Court will be required
excess capacity; the ‘‘purchaser’’ would example, instead of cutting prices in to reject the PAFJs, because they cannot
still have to undertake significant Verizon’s incumbent territory to signal satisfy the Tunney Act unless modified
investment to use the assets by disapproval of Verizon’s pricing in to: (1) Include all of the acquired
obtaining building access, laying AT&T’s incumbent region, AT&T can competitors’ in-region assets as a whole
additional inside wire/conduit, then just take steps that make it look like it business—with customers, employees,
‘‘lighting’’ the fiber, and even after all is preparing to activate the excess and assets; and (2) eliminate both post-
that, the government is not requiring the capacity in the discreet out-of-region merger firms’ ability to offer ‘‘bundled
defendants to let customers in the buildings. In fact, the parties may find rebate’’ style pricing to any customer,
affected buildings out of their contracts it useful to signal entirely through including their own long-distance and
so a purchaser could start earning wire less affiliates.
revenue immediately. Thus, because the 44 ‘‘Because a single such connection may cost
Respectfully submitted,
‘‘assets’’ are structured to be attractive to hundreds of thousands of dollars to build and light, Jonathan D. Lee, Mary C. Albert.
a purchaser who has a greater ability to CLECs will typically only build in to a particular
building after they have secured a customer
COMPTEL, 1900 M Street, NW., Suite 800,
‘‘warehouse’’ capacity then a ‘‘typical’’ contract of sufficient size and length to justify the Washington, DC 20036–3508, (202) 296–
anticipated construction costs for that building.’’ 6650.
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Appendix B—Statement of Joseph positioned to provide. The 9. These considerations suggest that
Farrell Commission’s rulemaking does not special access is a relevant antitrust
April 25, 2005. substitute for competitive analysis of the product market. More subtle issues arise
1. I am Professor of Economics and proposed merger. in geographic market definitions, as I
Chair of the Competition Policy Center discuss next.
Special Access Market
at the University of California, Berkeley, Geographic Market Definition
4. Firms such as Global Crossing build
where I am also Affiliate Professor of
facilities over which they offer business Granular Analysis
Business. In 1996–1997 I served as Chief
customers a range of 10. From the point of view of final
Economist at the FCC. In 2000–2001 I
telecommunications and data services. demand-side substitution, the natural
served as Deputy Assistant Attorney
In general however they do not build and correct market definition is likely to
General and chief economist at the US
facilities all the way to customers’ be extremely localized. A business
Department of Justice Antitrust
premises. Rather, they procure last-mile located in a certain building and
Division. I am Fellow of the
connections, known as special access, wishing to procure telecommunications
Econometric Society and former
from ILECs such as SBC and in some services is unlikely to substitute special
President of the Industrial Organization
cases from competitive access providers access to a different building in
Society. From 2001 to 2004 I served on
(CAPs), including AT&T. response to a small but significant and
the Computer Science and
5. In its region, SBC can offer special nontransitory increase in the price of
Telecommunications Board of the
access to essentially all major business special access services to its building.
National Academics of Science. My
premises. No CAP can offer access to a For a business with established
curriculum vitae is attached as
large percentage of such premises. premises, such substitution would
Appendix 1.
However, I understand that AT&T offers involve costly relocation. Perhaps some
2. I have been asked by counsel for
special access connections to businesses seeking new premises might
Global Crossing to comment on likely
substantially more buildings than can seek out buildings to which special
competitive effects on special access of
any other CAP.2 access is more competitively supplied,
the proposed merger between SBC and
6. I further understand that, whatever but it is unlikely that this effect would
AT&T. Neither time nor data availability
may be the case in consumer markets, be strong enough to change the
permits a full analysis, but in this
intermodal (wireless or cable) presumption that the correct geographic
declaration I identify some concerns
alternatives are not generally regarded market based on demand-side
that, in my view, the Commission and
as viable alternatives to special access substitution would be highly localized,
its staff should fully investigate. In
by Global Crossing and similarly as is the case with many
particular I offer a preliminary
situated firms, nor by their customers. telecommunications markets. For the
economic analysis of region-wide
7. Unbundled network elements do same reason, the direct customers of
merger effects in the presence of
not generally offer a viable, special access (such as Global Crossing)
percentage-of-requirements contracts
independently priced, alternative way do not find special access to different
such as I understand SBC uses in
for Global Crossing or its customers to geographical points to be worthwhile
special access.
acquire the last-mile connection, substitutes, as they are trying to serve
3. Of most direct concern is the
because of the FCC’s decision not to particular customers in particular
elimination of the horizontal
require unbundling of network elements locations.
competition between SBC and AT&T
unless used primarily for local 11. It is legitimate and often helpful
where both offer facilities-based special
competition.3 to aggregate such highly granular
access to a building or other
8. I also understand that the markets when they face the same
appropriately granular geographic
Commission has treated special access competitive conditions. But of course
market that is not so served by several
as a market in itself.4 that condition can be affected by the
other carriers.1 While the granular
geographic market definition is the most pattern and structure of competitor’s
2 I also understand that AT&T is a major reseller
pricing and other competitive behavior.
obvious, it must be supplemented (not of SBC special access. While the role of resellers in 12. One natural form of competitive
replaced) by a region-wide market competition is not straightforward, it certainly need
not be null, especially when incumbents offer behavior would be for SBC and any
definition and analysis capable of CAPs who can provide special access to
volume discounts, and the Commission should
assessing the competitive effects of such investigate the extent to which resellers a particular building to compete,
a loss of competition in the presence of collectively, and AT&T in particular, may constrain perhaps by bidding, on terms specific to
a loyalty or volume pricing program SBC’s effective pricing in ways that promote
that building.
such as I understand that SBC offers, competition and consumer welfare.
3 Unbundled Access to Network Elements: 13. With that form of competition, the
linking competition in different granular Review of the Section 251 Unbundling Obligations geographic market definition based on
markets. In addition, vertical concerns of Incumbent Local Exchange Carriers, WC Docket demand substitution by end users
arise, especially given the Commission’s 04–313, CC Docket 01–338, 2005 FCC LEXIS 912 at would be the correct framework in
pending special access rulemaking. All 64 (March 14, 2005).
4 See Special Access Rates for Price Cap Local
which to analyze the effects of a merger
of these concerns demand much more such as this one between SBC and a
Exchange Carriers: AT&T Corp. Petition for
scrutiny in the light of adequate data, Rulemaking to Reform Regulation of Incumbent leading CAP.
which the Commission is well Local Exchange Carrier Rates for Interstate Special
positioned to demand and analyze, and Access Services, 20 FCC RCD 1994 (2005); Biennial Regulatory Review—Telecommunications
important parts of which SBC and Performance Measurements and Standards for Service Quality Reporting Requirements; AT&T
Interstate Special Access Services; Petition of U S Corp. Petition to Establish Performance Standards,
AT&T are likely to be uniquely West, Inc. For a Declaratory Ruling Preempting Reporting Requirements, and Self-Executing
State Commission Proceedings to Regulate U S Remedies Need to Ensure Compliance by ILECs

1 In their public interest statement, SBC and West’s Provision of Federally Tariffed Interstate with Their Statutory Obligations Regarding Special
AT&T suggest that the markets where both offer Services; Petition of Association for Local Access Services, 16 FCC Rcd 20896 (2001); Local
special access are served by multiple others, but the Telecommunications Services for Declaratory Exchange Carriers’ Rates, Terms and Conditions for
specific facts they cite concern geographic areas far Ruling; Implementation of the Non-Accounting Expanded Interconnection Through Physical
broader than buildings. A full inquiry into Safeguards of Sections 271 and 272 of the Collocation for Special Access and Switched
appropriate granularity is evidently needed. Communications Act of 1934, as amended; 2000 Transport, 12 FCC Rcd 18730 (1997).
14. In that framework, one would precisely the share of routes served by access rule-making is a reason not to
identify geographic markets (buildings, CAPs in aggregate (denote q in the consider the effect of this proposed
for instance) in which SBC does not model), turns out in that model to be a merger on the special access market.) In
compete with AT&T, markets in which constraint on SBC’s (discounted, i.e., this sense as well as the more
SBC faces competition only from AT&T, effective) pricing p even on monopoly substantive sense above, the two
and markets in which SBC faces routes, if SBC pursues a pricing strategy geographic market definitions must both
competition from AT&T and from one, of the kind described. It is in this sense be pursued at this stage, and are not
two or more other CAPs. The analysis of that a region-wide geographic market alternatives in the sense that the
competitive effects would then proceed definition is appropriate. Commission can simply choose one.
separately for each of these classes of 18. I do not suggest that my 22. SBC’s pricing policies might also
highly granular market. simplified, incomplete formal model is change as a result of changes in
the final or only answer. Rather, it competitive conditions over time, or
Regional Analysis
illustrates that when a dominant firm’s even as a result of a change in thinking
15. I understand that, today, SBC’s pricing policies link competition across by SBC’s management. Thus, while it
pricing does not fully respond to such routes, a simple route-level competitive would certainly be wrong to analyze the
granular competitive conditions, analysis, which inevitably misses such merger only on a granular basis, as if
building by building, and that SBC is links, can readily yield wrong SBC’s actual current policies were off
content to price well above CAPs where predictions for pricing, while a region- the radar screen, it would also be wrong
it does face CAP competition and offers wide competitive analysis can help by to analyze the merger only on a region-
substantial discounts in return for incorporating analysis of such links. wide basis, or as if those policies were
region-wide commitments to give SBC certain to be permanent.
not simply a large amount of business Using Both Approaches
but a large share of the carrier’s 19. The analysis above indicates that, Competitive Effects of SBC–AT&T
business. Thus Global Crossing reports to capture both the effects of limited Merger in Special Access
that: potential for end-user substitution Analysis With Granular Markets
‘‘Typically, SBC will structure volume across addresses, and also the effects of
23. For many office buildings in-
commitments in terms of a percentage of the pricing practices that link (perhaps
special access customer’s embedded base of region, SBC is at present the only
quite widely separated) buildings,
circuits, or its current annual spend. Special provider of special access. The merger
intelligent geographic market definition
access customers must commit to spend at would nevertheless have a competitive
in this transaction involves using at
least 90% of their current spend in the effect in those granular markets if the
following year or maintain 90% of its least two definitions: one highly
merger eliminates an important
embedded circuit base with SBC in order to granular (perhaps as granular as
potential of entry by AT&T; that is, if
be eligible for volume discounts,’’ 5 individual office buildings), the other
AT&T is an especially likely entrant.
corresponding to the geographic scope
and that, as a result, ‘‘SBCV chooses not AT&T is a large customer of special
of SBC’s pricing practices, i.e., region-
to meet its competitors’ rates.’’ 6 access and supplier of enterprise
16. Such a pricing practice links wide.7
network services, and one likely
special access pricing in different 20. These are not alternative means of
mechanism through which entry into
buildings, and—while it persists— analysis. As always, definitions should
special access (that is, the construction
argues for a region-wide market not pre-empt analysis; but an analysis
of special access facilities) could occur
definition because (as I explain below) that uses geographic market definition
is via the customer’s enterprise network
it can make region-wide concentration a must consider both of these definitions
services provider deciding to build its
more important determinant of or risk overlooking important effects.
21. Because it is at least plausible (see own facilites to bypass SBC’s special
competitive behavior and overall access charges. It therefore is credible a
pricing than concentration and entry below) that SBC’s reported pricing
practices are exclusionary, it priori that AT&T would be an especially
possibilities specific to a building or likely entrant into granular special
route. presumably is comparably plausible that
the Commission’s separate inquiry into access markets that are currently
17. This does not mean that customers monopolies. Such a view would be
can substitute across routes, nor that the special access market will constrain
SBC’s ability to sustain those practices. reinforced if (a) the majority of non-
only carriers who offer special access ILEC coinstruction of special access
region-wide (which indeed would mean If so, then the granular, perhaps even
building-by-building geographic market facilites is by an enterprise network
only SBC) are ‘‘in the market.’’ Rather, services provider to its customer’s
a region-wide geographic market definition would become relatively
more appropriate. On the other hand if premises, and (b) AT&T has a
definition is likely to be a sensible way persistently high share of the enterprise
of summarizing the competitive impact SBC’s pricing practices survive (whether
or not because they are benign), the network services market. Both of these
of CAP presence at multiple locations, conditions are consistent with my
as I describe in a simple formal model region-wide geographic market
definition remains the natural way to general understanding of the market, but
in the technical appendix below. In that the data required to examine them in
model I show how the price paid by capture potentially important
competitive effects. Thus a choice of detail is not publicly available; I urge
special access customers on SBC the Commission and its staff to obtain
monopoly routes (denoted p in the one of these geographic market
definitions would pre-judge the this data and perform this analysis.
model) depends on the percentage of 24. For a substantial number of other
routes that are SBC monopolies. The Commission’s treatment of SBC’s
buildings, I understand, AT&T and SBC
aggregate share of CAPs, or more pricing policies. (As I discuss below,
are the only two alternative providers of
none of this is to suggest that the

special access. For businesses in such a
5 In the matter of SBC Communications Inc. and pendency of the Commission’s special
building, or for the telecommunications
AT&T Corp. Applications for Transfer of Control:
Comments of Global Crossing, at 14 (April 25, 7 I understand that this may correspond to RBOC carriers (such as Global Crossing) who
2005). ‘‘footprints’’ such as Ameritech’s not (yet) reflecting compete to serve them using special
6 Id. at 17. mergers into the current SBC. access, this is a merger from duopoly to
monopoly, which should surely raise a 30. In the technical appendix, I offer 36. Because the model is preliminary
very strong concern at the Commission. a simple preliminary model to help and incomplete, and the necessary data
25. As usual, such concerns could be understand the role of CAP competition is not publicly available, I view it as
assuaged to some degree if entry were in constraining prices when the illustrating an at least initially plausible
likely to be timely and sufficient to dominant ubiquitous firm, SBC, offers region-wide mechanism through which
deter or repair any competitive volume discounts large enough to be the loss of a special access competitor
problems. Given the large sunk costs tempting, based on share commitments causes a ‘‘unilateral effect’’ price
involved, that it is unlikely to be the big enough to be constraining. increase by the dominant firm, given
case, but Commission analysis of 31. The model assumes that SBC’s pricing policies broadly akin to SBC’s.
previous entry decisions by AT&T as discounted price is constrained by This buttresses the argument that the
well as by others could confirm this. special access customers’ ‘‘break-out’’ Commission should carefully consider
26. There may be other buildings option of instead buying from CAPs region-wide geographic markets as well
where SBC and AT&T both offer special wherever they offer a better price, and as granular markets.
access, and one other CAP (such as MCI) paying SBC’s undiscounted price where Special Access Competition, Special
does so; 8 as to such buildings, this is a there are no CAPs (or where SBC offers Access Regulation, and Leverage
‘‘three-to-two’’ merger, which should a better price on a granular basis,
although the model predicts, consistent 37. Whatever its legal status, any
also raise significant concerns.9
with what I understand is the evidence, suggestion that the Commission should
27. If the granular market accurately
that this is not the pattern). ignore competitive concerns in special
describes competition, then it should be
32. That break-out alternative is more access because it has a pending
possible for the Commission to quantify rulemaking on the topic makes no sense
the likely effects of such changes. In appealing the higher is the gap between
from a general policy or economic
particular, it would be possible (with the percentage of buildings where there
viewpoint. If the merger harms special
suitable data from the parties) to study are CAPs and the percentage of business
access competition, no decision likely to
average special access prices with and that a customer can give to CAPs
be contemplated by the Commission in
without route-level competition. without losing its SBC volume discount.
the rulemaking proceeding can restore
28. However, such a study will As a result, the loss of a special access
such competition.
underestimate competitive effects— competitor through merger makes the 38. To be sure, the Commission might
perhaps drastically so—if SBC pursues break-out alternative less appealing find some policies to implement. But
a geographically averaged pricing policy (given SBC’s volume threshold for most policies would be available with or
supported by discount plans that link discounts) and thus allows SBC to raise without the competition lost by merger,
competitive conditions across different its discounted price without losing so their availability does not change that
routes. In the extreme, if SBC prices business. fact that losing competition is harmful.
uniformly without regard to route-level 33. In the model, one can (recognizing 39. Furthermore, if the rulemaking
competitive conditions, but its overall that it is very preliminary) calculate the proceeding might (or might be thought
price level is sustained above the likely competitive effect of the loss of apt to) involve price regulation of
competitive level by its localized CAP such as AT&T. In the model, that special access, that will create (or
monopoly power in some routes, then effect is proportional to the change in strengthen) incentives for leverage that
such a cross-section study would miss the fraction of buildings that are served the merger would simultaneously
the effect. Rather, in that case, one must by one or more CAPs. That is, it is facilitate; such regulation could even be
analyze competitive conditions across proportional to the fraction (Dq in the prompted by the loss of special access
as well as within granular markets to model) of buildings served, pre-merger, competition due to the merger.10
understand these effects and correctly by SBC and AT&T alone. 40. With greater horizontal market
predict the competitive consequences of 34. In this model, if one can assume power in special access, and with a
a merger, as I discuss next. that SBC’s volume commitment much stronger position in enterprise
requirement and its undiscounted price network services following its
Analysis With Region-Wide Market do not change with the merger, the acquisition of AT&T, SBC will in any
29. Presumably SBC implements its overall average price effect from the event have increased incentives to raise
discount plan in the expectation that it merger is equal to that fraction Dq, times special access prices to downstream
will affect customers’ behavior. The the difference between SBC’s enterprise network service providers (or
effect is that a customer will undiscounted price and the CAP price. generally special access customers) such
(sometimes) pass up lower CAP prices This appears to be about as strong as, or as Global Crossing.
in a particular building in order to meet arguably stronger than, the average 41. The effect of such a price increase,
its SBC volume commitment. That competitive effect of the merger-to- holding fixed the retail price charged by
behavior, or the pricing plan that monopoly aspects of the merger would SBC’s downstream affiliate, would be in
induces it, links competitive conditions be in the granular mode of competition. part be to shift business from
across the separate buildings or other 35. Because the model predicts that a independent downstream providers to
highly granular (what would otherwise pricing policy like that attributed to SBC SBC’s downstream affiliate; this is more
be) geographic markets. Customer can create very strong competition likely to happen, and the alternative
behavior then cannot be properly among CAPs even at different locations, outcome of the customers dropping out
understood, nor competitive conditions it may make entry incentives very weak of the market is less likely to happen, if
examined, on a purely granular basis. even where SBC is charging prices well SBC’s downstream affiliate is larger and
above cost. If so, entry would be more attractive to customers, as will be
unlikely to repair or deter
8 There may well be other buildings where MCI
provides the only competition to the ILEC, which anticompetitive effects in a timely 10 I am not suggesting (see my article cited below)
will be important in analyzing a merger involving fashion. Again, this is not an analysis that regulation of a bottleneck is the only condition
MCI. that leads to incentives for leverage into an
9 By stopping here, I do not mean to suggest that ready for prime time: Instead, it unregulated, competitive or potentially competitive
four-to-three mergers are unproblematic, but the illustrates why further analysis is complement. Rather, it is one well-established
basic point should be clear by now. needed. condition that predictably does so.
the case post-merger. Thus this service level rather than at the special lead to a region-wide (or similar)
component of the incentive will grow access level.11 geographic market definition being more
stronger with the merger. 44. Increased incentives for leverage, informative than one based narrowly on
42. Another part of the effect will be in turn, will lead either to harm to consumer substitution; (c) there may
simply to raise market prices competition in downstream markets well also be vertical issues, especially if
downstream; this is likely to be the such as enterprise network services, or the state of competition in special
primary effect if (as I understand) to vertical regulation to try to stop such access is problematic; and (d) the
customers face significant portability or leverage, or quite possibly to both. Commission should vigorously
45. Opinions can differ on the right investigate these concerns, including
switching costs. This gives SBC more
degree of vertical restraint to impose on demanding the data with which to
profits, the larger the market share of its
dominant firms with incentives for investigate them, and a general
downstream affiliate. Again, this
leverage, and I am not expressing a regulatory proceeding on special access
indicates that the incentive for price
position here on whether special access cannot replace the investigation of
increases to independent downstream
prices should be regulated or whether
firms will grow with the proposed merger-specific competitive effects.
vertical regulation such as non-
merger. This incentive must be set discrimination should be imposed. Technical Appendix: Pricing with
against the potential elimination of 46. For the reasons above, I conclude Share-Contingent Discounts
double marginalization internally. that (a) the proposed merger involves a
43. There may also be an incentive for loss of direct horizontal facilities-based Consider the following market
non-price discrimination, especially if competition in special access; (b) the structure. A dominant firm, S, offers
SBC fears that its special access pricing geographic market definition and the service at all locations. It sets a price p*
may be regulated, since that will create competitive analysis involve and a discounted price p that it gives to
an incentive for regulatory bypass by consideration of SBC’s pricing policies each customer who buys at least a
taking rents at the enterprise network for special access, and this could well fraction 1¥e of its volume from it.12
−1 1
(1 − ε ) p = [0.9] (1 − ε ) p + ε pc  ; this yields ε = 1+ 9p c
p  . If p c ≈ p then ε ≈ 0.15
2
Rivals (CAPs) collectively offer erc+(1¥e)r. unchanged: 13

service at a fraction q <1 of all locations. In reality, different customers may Dp = ¥(1 ¥ e)¥1(p* ¥ pc)Dq
They set a price rc; I discuss the make different choices, but for a simple
determination of rc below, but for Perhaps more usefully, we can plug the
model, consider limit pricing by S so formula for p into the expression epc +
simplicity I assume that it is the same that all customers choose the latter
for all CAPs. (1 ¥ e) p for the average price p actually
option. (There would be no point in the paid, yielding p = (1 ¥ q) p* + q pc. This
Each customer needs to buy service at discount program if all customers chose
a number of locations, and I assume that is the same average price as would be
the former option.) At least given q and paid if (a) there were no linkages among
service is available from CAPs p*, S presumably wants to maximize p,
(collectively) at a fraction q of these locations; (b) S priced at p* at its
subject to keeping customers on the
locations. I assume that the dominant monopoly locations; and (c) customers
discount program, which implies:
firm’s volume condition for the paid pc at locations with CAPs. We then
have Dp = (p* ¥ pc) [¥Dq].
discount, that the customer buy at least
(1 − θ ) p * + ( θ − ε ) pc
a fraction 1¥e of its volume from S, is p= If (in the world with discount pricing)
binding, which means (assuming rc <r) 1− ε S expects that many customers will not
that e <q. Note that since the customer is offered break out and pay p*, but will instead
Thus the customer has two buying CAP service at q locations but will not manage to the discount and limit their
strategies. First, it could buy from CAPs buy it at more than e of them, CAPs at purchases from CAPs so as to avoid p*
wherever they offer service, but must different locations actually compete and pay p instead, then p* plays the
then pay S the undiscounted price r* in with one another. This is a possible role of a penalty inducement to manage
the fraction 1¥q of case where there is reason why, I understand, a single CAP to the discount scheme as well as a
no CAP. This ‘‘break-out’’ strategy leads offering special access to a building market price for break-out customers in
to an average price paid of: otherwise served only by SBC will price monopoly buildings. Thus it appears
qrc+(1¥q)r*. well below SBC, not just below as that S has an incentive to set p* above
Alternatively, the customer can would presumably be the case the monopoly level pm, roughly in
‘‘manage to the discount’’ and limit its (adjusting for quality) without the proportion to the fraction of customers
procurement from CAPs to a fraction volume pricing. who manage to the discount rather than
e <q of locations, so that it pays the From the formula for p one can derive break out. On the other hand, pc reflects
discounted price r in the remaining the effects on the average price paid if artificial inter-location competition as
cases. This leads to an average price a merger removes a CAP and q thus described above, as well as any intra-
paid of: falls, assuming that p* and e remain location competition from the presence
EN05AP06.019</GPH>
11 For a recent discussion of a range of leverage 12 As noted above, Global Crossing reports that customers via CAPs. where e is such that (see
incentives, and the link with regulation of a SBC’s volume commitment plans specify 90% of equation above).
bottleneck, see Joseph Farrell and Philip Weiser, previous-year in-region special access spend. In 13 One of the ways in which this model is
‘‘Modularity, Vertical Integration, and Open Access order to meet such a commitment, assuming for preliminary and incomplete is that it does not
Policies: Towards a Convergence of Antitrust and
simplicity that there is no growth, the customer model SBC’s choice of those variables.
Regulation in the Internet Age,’’ Harvard Journal of
would have to serve no more than a fraction e of
EN05AP06.018</GPH>
Law and Technology 17:1 (Fall 2003), 85–135.
of multiple CAPs at a building, so pc may tend substantially to lessen tend substantially to lessen competition
will be decreasing in (q ¥ e)/q. competition in any relevant market, in any relevant market, Qwest and
The net effect of the discount pricing Whereas, the Department has Allegiance hereby consent and agree,
program on the average price paid is identified no competitive concerns with pursuant to the terms of the Stipulation
thus not obvious from this preliminary Qwest’s proposed acquisition of attached hereto as Exhibit 1, to the entry
analysis, but to the extent that p* > pm Allegiance in Metropolitan Statistical of a Final Judgment, in the form
and/or that pc is below the average Areas located outside of Qwest’s local attached hereto as Exhibit 2.
oligopoly price that would emerge exchange service franchise areas,
under granular competition, the Whereas, Allegiance is in bankruptcy 4. The Department will conduct its
program apparently exacerbates the and a prolonged delay in resolving its investigation of Qwest’s proposed
average competitive effect of a loss in q, status could be detrimental to acquisition of Allegiance via Civil
i.e. the average competitive effect of a Allegiance’s customers, employees, and Investigative Demands (‘‘CIDs’’) rather
merger. business, as well as to competition in than Second Requests and will not
The model also seems to suggest that the telecommunications business, oppose the closing of the Transaction on
such a program may be exclusionary, in Whereas, Qwest and Allegiance desire April 8, 2004, or any time thereafter.
the sense of making entry even by an that the closing of a potential 5. Qwest and Allegiance will fully
equally efficient CAP unprofitable even transaction between Qwest and
comply with CIDs for documents and
though the incumbent S prices well Allegiance not be unnecessarily delayed
interrogatories issued by the
above cost. The gross return to entry is beyond April 8, 2004,
pc times the probability that a CAP will Whereas, Qwest and Allegiance desire Department, will produce the requested
make a sale. In the simple model, that to reach an agreement with the information on a rolling basis, and will
probability is e/q < 1. That is, despite Department prior to the bankruptcy use their best efforts to complete
pricing well below the incumbent S, a auction regarding the Department’s production by March 5, 2004. Qwest
CAP will sometimes (perhaps often) lose antitrust investigation and the and Allegiance will produce any
business to S. Although this is not a disposition of the In-Region Assets individual issued a CID for oral
deep or complete analysis, I believe it is should the Department conclude that testimony, and will use their best efforts
enough to establish that the possible Qwest’s acquisition of the In-Region to make any such individual available
anticompetitive effect of such a pricing may tend substantially to lessen within 10 days after issuance of the CID.
plan is a question well worth competition, and 6. The Department will use its best
investigating, and that competitive Whereas, the Department believes that efforts to complete its investigation by
analysis of the proposed merger should the undertakings of Qwest and the later of (a) April 8, 2004, or (b) 30
not assume with certainty that these Allegiance under the proposed Final
days after Qwest and Allegiance have
pricing practices will survive the Judgment would be sufficient to remedy
both fully complied with CIDs for
Commission’s policy response to such any potential anticompetitive
consequence of Qwest’s acquisition of documents and interrogatories issued by
an investigation.
Allegiance, the Department, but in the event that the
Appendix C—Agreement Now, therefore, Qwest, Allegiance, Department has neither closed its
Whereas, Quest Communications and the Department agree that the investigation nor filed a complaint as of
International, Inc., a Delaware following provisions shall apply if the the date the Transaction is
corporation (‘‘Qwest’’), and Allegiance U.S. Bankruptcy Court for the Southern consummated, Qwest and Allegiance
Telecom, Inc., a Delaware corporation District of New York, pursuant to 11 will abide by the Hold Separate
(‘‘Allegiance’’), have entered into an U.S.C. 363, approves an agreement by provisions contained in Paragraphs
Asset Purchase Agreement dated as of which Qwest acquires all, or V.A–V.L. of the Stipulation, attached
December 18, 2003 pursuant to which substantially all, of the assets of hereto as Exhibit 1, until such time as
Qwest agreed to purchase substantially Allegiance (‘‘the Transaction’’): the Department notifies Qwest and
all of the property, assets, licenses, and 1. Qwest and Allegiance will not close Allegiance that it has decided not to
rights that Allegiance uses to provide the Transaction prior to April 8, 2004. challenge the proposed Transaction.
telecommunications services to business 2. If at any time after April 1, 2004,
the Department concludes that Qwest’s 7. Until the Department competes its
customers,
Whereas, Qwest intends to bide for acquisition of the In-Region Assets from investigation, Qwest and Allegiance
the assets of Allegiance at the Allegiance may tend substantially to shall not, without the Department’s
bankruptcy auction scheduled to be lessen competition in any relevant consent, sell, lease, assign, transfer, or
held on February 12 and 13, 2004, in the market, and the Assistant Attorney otherwise dispose of any of the
U.S. Bankruptcy Court for the Southern General has authorized the filing of a Divestiture Assets, as defined in
District of New York, complaint in federal district court Paragraph II.D of the Proposed Final
Whereas, the United States alleging the same, Qwest and Allegiance Judgment attached hereto as Exhibit 2,
Department of Justice (‘‘Department’’) agree not to contest that determination except as in the ordinary course of
has opened a preliminary inquiry into or any other allegations contained in the business.
Qwest’s proposed acquisition of Department’s complaint, provided that William Kokasky,
Allegiance to investigate whether Qwest and Allegiance shall have been Wilmer, Culter & Pickering, Attorney for
Qwest’s acquisition of Allegiance’s afforded a reasonable opportunity to Qwest
assets used to serve telecommunications meet with and be heard by the Deputy
Marimichael O. Skubel,
customers in five Metropolitan Assistant Attorney General or Assistant
Kirkland & Ellis LLP, Attorney for Allegiance.
Statistical Areas—Denver, Colorado; Attorney General within the Department
Minneapolis, Minnesota; Portland, responsible for this matter prior to such Lawrence M. Frankel,
Oregon; Phoenix, Arizona; and Seattle, determination being made. Attorney, Telecommunications & Media
Washington—located largely or wholly 3. In the event that the Department Section, Antitrust Division, United States
within Qwest’s local exchange service determines that Qwest’s acquisition of Department of Justice.
franchise areas (‘‘In-Region Assets’’) the in-region assets from Allegiance may
United States District Court, District of business and customer records and the revenues and responsibilities under
Columbia information, customer lists, credit the contract. The term also includes any
records, deposits, accounts, and historic business and customer records and
United States of America, Plaintiff, v.
and current business plans associated information, customer lists, credit
Qwest Communications International
with the provision of records, accounts, and historic and
Inc. and Allegiance Telecom, Inc. telecommunications services to current business plans associated
Defendants. customer locations in the In-Region exclusively with provision of service via
Civil Action No. MSAs or with marketing to potential such contracts.
Filed: customers in the In-Region MSAs; G. ‘‘In-Region MSAs’’ means the
(3) All types of real property and following Metropolitan Statistical Areas
Hold Separate Stipulation and Order
personal property, equipment, (MSAs): Denver, Colorado; Minneapolis,
It is hereby stipulated and agreed by inventory, office furniture, fixed assets Minnesota; Phoenix, Arizona; Portland,
and between the undersigned parties, and furnishings, supplies and materials Oregon; and Seattle, Washington.
subject to approval and entry by the located in the In-Region MSAs; H. ‘‘Shared Systems’’ means all
Court, that: (4) All licenses, permits and operating and related systems acquired
I. Definitions authorizations issued by the Federal by Qwest from Allegiance pursuant to
Communications Commission or any 11 U.S.C. 363 that (a) are predominantly
As used in this Hold Separate other federal, state or local regulatory used in connection with the provision
Stipulation and Order: body used in the provision of of telecommunications services to
A. ‘‘Acquirer’’ or ‘‘Acquirers’’ means telecommunications services in the In- customers in markets outside of the In-
the entity or entities to whom Region MSAs; Region MSAs, including, but not limited
defendants divest the Divestiture Assets. (5) All intellectual property rights that to, order entry, provisioning, billing,
B. ‘‘Qwest’’ means defendant Qwest are used to provide telecommunications network monitoring, and other systems,
Communications International Inc., a services in the In-Region MSAs. and (b) are not capable of being divided
Delaware corporation with its Intellectual property rights comprise all between the divested and retained
headquarters in Denver, Colorado, its patents, licenses, sublicenses, trade businesses.
successors and assigns, and its secrets, know-how, computer software
subsidiaries, divisions, groups, and related documentation, drawing, II. Objectives
affiliates, partnerships and joint blueprints, design, technical and quality The Final Judgment filed in this case
ventures, and their directors, officers, manuals, and other technical is meant to ensure defendants’ prompt
managers, agents and employees. information defendants supply to their divestiture of the Divestiture Assets for
C. ‘‘Allegiance’’ means defendant own employees, customers, suppliers, the purpose of remedying the effects
Allegiance Telecom, Inc., a Delaware agents or licensees, or other intellectual that the United States alleges would
corporation with its headquarters in property, including all intellectual otherwise result from Qwest’s
Dallas, Texas, its successors and assigns, property rights under third party acquisition of the Divestiture Assets.
and its subsidiaries, divisions, groups, licenses. Intellectual property rights will This Hold Separate Stipulation and
affiliates, partnerships and joint be provided to the extent they are Order ensures, prior to such
ventures, and their directors, officers, capable of being transferred to a divestitures, that the Divestiture Assets
managers, agents, and employees. purchaser either in their entirety, or remain economically viable and ongoing
D. ‘‘Divestiture Assets’’ means all through a license or sub-license; business concerns that will remain
assets, tangible and intangible, acquired (6) All leases, contracts, agreements, independent and uninfluenced by
by Qwest from Allegiance pursuant to and commitments with third parties Qwest, and that competition is
11 U.S.C. 363, that are used by used primarily in connection with the maintained during the pendency of the
Allegiance to provide provision of telecommunications ordered divestitures.
telecommunications services in the In- services in the In-Region MSAs; and
Region MSAs, except for Excluded (7) All transport facilities physically III. Jurisdiction and Venue
Assets. The term ‘‘Divestiture Assets’’ located in whole or in part within In- The Court has jurisdiction over the
shall be construed broadly to Region MSAs including all interests, subject matter of this action and over
accomplish the complete divestiture of contracts, and associated rights acquired each of the parties hereto, and venue of
assets to ensure that the divested assets by Qwest from Allegiance pursuant to this action is proper in the United States
are sufficient to operate a viable ongoing 11 U.S.C. 363. District Court for the District of
telecommunications business and E. ‘‘Excluded Assets’’ means: (a) all Columbia.
includes, but is not limited to: Excluded Customer Contracts; (b) all
(1) All switches, routers, transport, transport facilities between MSAs IV. Compliance With and Entry of Final
and associated collocation facilities outside of the In-Region MSAs; and (c) Judgment
located in the In-Region MSAs, and all Shared Systems. A. The parties stipulate that a Final
interconnection agreements used in F. ‘‘Excluded Customer Contract’’ Judgment in the form attached hereto as
connection with the provision of means any single contract with a Exhibit A may be filed with and entered
telecommunications services customer (a) that covers by the Court, upon the motion of any
(telecommunications herein includes telecommunication services provided to party or upon the Court’s own motion,
transmission using the IP protocol) to locations within, as well as outside, the at any time after compliance with the
customers in the In-Region MSAs, and In-Region MSAs, (b) for which the requirements of the Antitrust
all interests, contracts and other majority of the services are provided Procedures and Penalties Act (15 U.S.C.
associated rights in those facilities, that outside the In-Region MSAs (with 16), and without further notice to any
were acquired by Qwest from Allegiance ‘‘majority’’ measured by an objective party or other proceedings, provided
pursuant to 11 U.S.C. 363; measure approved by the United States that the United States has not
(2) All contracts with customers to in its sole discretion), and (c) for which withdrawn its consent, which it may do
provide telecommunications services to it would be impossible or impractical at any time before the entry of the
locations within the In-Region MSAs, for Qwest and the Acquirer(s) to divide proposed Final Judgment by serving
notice thereof on defendants and by Order, defendants will inform the I. Defendants’ employees with
filing that notice with the Court. United States of the steps defendants primary responsibility for the operation
B. Defendants shall abide by and have taken to comply with this Hold of the Divestiture Assets shall not be
comply with the provisions of the Separate Stipulation and Order. transferred or reassigned to other areas
proposed Final Judgment, pending the B. Qwest shall take all steps necessary within the company except for transfer
Judgment’s entry by the Court, or until to ensure that (1) the Divestiture Assets bids initiated by employees pursuant to
expiration of time for all appeals of any will be maintained and operated as defendants’ regular, established job
Court ruling declining entry of the independent, ongoing economically posting policy. Defendants shall provide
proposed Final Judgment, and shall, viable and active competitors in the the United States with ten (10) calendar
from the date of the filing of this telecommunications business; (2) days notice of such transfer.
Stipulation with the Court, comply with management of the Divestiture Assets J. Defendants shall appoint a person
all the terms and provisions of the will not be influenced by Qwest (except or persons to oversee the Divestiture
proposed Final Judgment as though the to the extent necessary to carry out Assets, subject to the approval of the
same were in full force and effect as an Qwests’s obligations under this Order or United States, and who will be
order of the Court. as required by applicable law); and (3) responsible for defendants’ compliance
C. Defendants shall not consummate the books, records, competitively with this section. This person shall have
the transaction sought to be enjoined by sensitive sales, marketing and pricing complete managerial responsibility for
the Complaint herein before the Court information, and decision-making the Divestiture Assets, subject to the
has signed this Hold Separate concerning production, distribution or provisions of this Final Judgment. In the
Stipulation and Order. sales of products or services by or under event such person is unable to perform
D. This Stipulation shall apply with any of the Divestiture Assets will be his duties, defendant shall appoint,
equal force and effect to any amended kept separate and apart from Qwest’s subject to the approval of the United
proposed Final Judgment agreed upon other operations. States, a replacement within ten (10)
in writing by the parties and submitted C. Defendants shall use all reasonable working days. Should defendant fail to
to the Court. efforts to maintain and increase the appoint a replacement acceptable to the
E. In the event (1) the United States United States within this time period,
sales and revenues of the services
has withdrawn its consent, as provided the United States shall appoint a
produced or sold by the Divestiture
in Section IV(A) above, or (2) the replacement.
Assets, and shall maintain at current or
proposed Final Judgment is not entered K. Unless informed otherwise by the
previously approved levels for 2005,
pursuant to this Stipulation, the time person with managerial responsibility
whichever are higher, all promotional,
has expired for all appeals of any Court for the Divestiture Assets, Qwest shall
advertising sales, technical assistance,
ruling declining entry of the proposed provide the Divestiture Assets at no
marketing and merchandising support
Final Judgment, and the Court has not costs with the following: (a) Any
for Divestiture Assets.
otherwise ordered continued services provided via Shared Systems,
D. Qwest shall provide sufficient
compliance with the terms and and (b) transport over interexchange
working capital and lines and sources of
provisions of the proposed Final facilities acquired by Qwest from
credit to continue to maintain the
Judgment, then the parties are released Allegiance pursuant to 11 U.S.C. 363
Divestiture Assets as economically
from all further obligations under this that are not included in the Divestiture
viable and competitive, ongoing
Stipulation, and the making of this Assets.
businesses, consistent with the
Stipulation shall be without prejudice to L. Defendants shall take no action that
requirements of Sections V(A) and (B).
any party in this or any other would interfere with the ability of any
proceeding. E. Defendants shall take all steps
necessary to ensure that the Divestiture trustee appointed pursuant to the Final
F. Defendants represent that the Judgment to complete the divestiture
divestitures ordered in the proposed Assets are fully maintained in operable
condition at no less than its current pursuant to the Final Judgment to an
Final Judgment can and will be made, Acquirer or Acquirers acceptable to the
and that defendants will later raise no capacity and sales, and shall maintain
and adhere to normal repair and United States.
claim of mistake, hardship or difficulty M. This Hold Separate Stipulation
of compliance as grounds for asking the maintenance schedule for the
Divestiture Assets. and Order shall remain in effect until
Court to modify any of the provisions consummation of the divestiture
contained therein. F. Defendants shall not, except as part
required by the proposed Final
of a divestiture approved by the United
V. Hold Separate Provisions Judgment or until further order of the
States in accordance with the terms of
Court.
Until the divestitures required by the the proposal Final Judgment, remove,
Final Judgment have been sell, lease, assign, transfer, pledge or Dated:
accomplished: otherwise dispose of any of the Respectfully submitted,
A. Defendants shall preserve, Divestiture Assets. For Plaintiff
maintain, and continue to operate the G. Defendants shall maintain, in United States of America
Divestiture Assets as independent, accordance with sound accounting Lawrence M. Frankel,
ongoing, economically viable principles, separate accurate and D.C. Bar No. 441532, U.S. Department of
Justice, Antitrust Division, 1401 H Street
competitive businesses, with complete financial ledgers, books and NW., Suite 8000, Washington, DC 20530,
management, sales and operations of records that records that report on a (202) 514–4298.
such assets held entirely separate, periodic basis, such as the last business For Defendant
distinct and apart from those of Qwest’s day of every month, consistent with past Qwest Communications International Inc.
other operations. Qwest shall not practices, the assets liabilities, expenses,
William Kolasky,
coordinate its marketing or terms of sale revenues and income of the Divestiture D.C. Bar No. 217539, Wilmer Cutler &
of any products or services with those Assets. Pickering, 2445 M Street, NW., Washington,
sold under any of the Divestiture Assets. H. Defendants shall take no action DC 20037, (202) 663–6357.
Within ten (10) days after the entry of that would jeopardize, delay, or impede For Defendant
the Hold Separate Stipulation and the sale of the Divestiture Assets. Allegiance Telecom, Inc.
Marimichael O. Skubel, the Clayton Act, as amended (15 U.S.C. (4) All licenses, permits and
D.C. Bar No. 294934, Kirkland & Ellis LLP, 18). authorizations issued by the Federal
655 Fifteenth Street NW,, Washington, DC Communications Commission or any
20005, (202) 879–5034. II. Definitions
other federal, state or local regulatory
Order. As used in this Final Judgment: body used in the provision of
It is so ordered by the Court, this ll day A. ‘‘Acquirer’’ or ‘‘Acquirers’’ means
of llllll.
telecommunications services in the In-
the entity or entities to whom Region MSAs;
lllllllllllllllllllll defendants divest the Divestiture Assets.
United States District Judge. (5) All intellectual property rights that
B. ‘‘Qwest’’ means defendant Qwest are used to provide telecommunications
Communications International Inc., a services in the In-Region MSAs.
United States District Court District of Delaware corporation with its
Columbia Intellectual property rights comprise all
headquarters in Denver, Colorado, its patents, licenses, sublicenses, trade
United States of America, Plaintiff, v. successors and assigns, and its secrets, know-how, computer software
Qwest Communications International subsidiaries, divisions, groups, and related documentation, drawing,
Inc., and Allegiance Telecom, Inc., affiliates, partnerships, and joint blueprints, design, technical and quality
Defendants. ventures, and their director, officer, manuals, and other technical
manages, agents, and employees. information defendants supply to their
Civil Action No. C. ‘‘Allegiance’’ means defendant
Filed: [Date Filed] own employees, customers, suppliers,
Allegiance Telecom, Inc., a Delaware
agents or licensees, or other intellectual
Final Judgment corporation with its headquarters in
property, including all intellectual
Whereas, plaintiff, United States of Dallas, Texas, it successors and assigns,
property rights under third party
America, filed its Complaint on April, and its subsidiaries, divisions, groups,
licenses. Intellectual property rights will
2004, affiliates, partnerships and joint
be provided to the extent they are
Whereas, plaintiff and defendants, ventures, and their directors, officers,
capable of being transferred to a
Qwest Communications International managers, agents, and employees.
D. ‘‘Divestiture Assets’’ means all purchaser either in their entirety, or
Inc. (‘‘Qwest’’) and Allegiance Telecom, through a license or sub-license;
Inc. (‘‘Allegiance’’), by their respective assets, tangible and intangible, acquired
by Qwest from Allegiance pursuant to (6) All leases, contracts, agreements,
attorneys, have consented to the entry of and commitments with third parties
this Final Judgment without trial or 11 U.S.C. 363, that are used by
Allegiance to provide used primarily in connection with the
adjudication of any issue of fact or law, provision of telecommunications
and without this Final Judgment telecommunications services in the In-
Region MSAs, except for Excluded services in the In-Region MSAs; and
constituting any evidence against or (7) All transport facilities physically
admission by any party regarding any Assets. The term ‘‘Divestiture Assets’’
shall be construed broadly to located in whole or in part within In-
issue of fact or law; Region MSAs including all interests,
Whereas, defendants agree to be accomplish the complete divestiture of
assets to ensure that the divested assets contracts, and associated rights acquired
bound by the provisions of this Final by Qwest from Allegiance pursuant to
Judgment pending its approval by the are sufficient to operate a viable ongoing
telecommunications business and 11 U.S.C. 363.
Court; E. ‘‘Excluded Assets’’ means: (a) all
Whereas, the essence of this Final includes, but is not limited to:
(1) All switches, routers, transport, Excluded Customer Contracts; (b) all
Judgment is the prompt and certain
and associated collocation facilities transport facilities between MSAs
divestiture of certain rights or assets by
located in the In-Region MSAs, and outside of the In-Region MSAs; and (c)
the defendants to assure that
interconnection agreements used in all Shared Systems.
competition is not substantially
connection with the provision of F. ‘‘Excluded Customer Contract’’
lessened;
Whereas, plaintiff requires defendants telecommunications services means any single contract with a
to make certain divestitures for the (telecommunications herein includes customer (a) that covers
purpose of remedying the loss of transmission using the IP protocol) to telecommunications services provided
competition alleged in the Complaint; customers in the In-Region MSAs, and to locations within, as well as outside,
and all interests, contracts and other the In-Region MSAs, (b) for which the
Whereas, defendants have represented associated rights in those facilities, that majority of the services are provided
to the United States that the divestitures were acquired by Qwest from Allegiance outside of the In-Region MSAs (with
required below can and will be made pursuant to 11 U.S.C. 363; ‘‘majority’’ measured by an objective
and that defendants will later raise no (2) All contracts with customers to measure approved by the United States
claim of hardship or difficulty as provide telecommunications services to in its sole discretion), and (c) for which
grounds for asking the Court to modify locations within the In-Region MSAs, it would be impossible or impractical
and of the divestiture provisions business and customer records and for Qwest and the Acquirer(s) to divide
contained below; information, customer lists, credit the revenues and responsibilities under
Now therefore,. before any testimony records, deposits, accounts, and historic the contract. The term also includes any
is taken, without trial or adjudication of and current business plans associated business and customer records and
any issue of fact or law, and upon with the provision of information, customer lists, credit
consent of the parties, it is Ordered, telecommunications services to records, and accounts, and historic and
Adjudged and Decreed: customer locations in the In-Region current business plans associated
MSAs or with marketing to potential exclusively with provision of service via
I. Jurisdiction customers in the In-Region MSAs; such contracts.
This Court has jurisdiction over the (3) All types of real property and G. ‘‘In-Region MSAs’’ means the
subject matter of and each of the parties personal property, equipment, following Metropolitan Statistical Areas
to this action. The Complaint states a inventory, office furniture, fixed assets (MSAs): Denver, Colorado; Minneapolis,
claim upon which relief may be granted and furnishings, supplies and materials Minnesota; Phoenix, Arizona; Portland,
against defendants under Section 7 of located in the In-Region MSAs; Oregon; and Seattle, Washington.
H. ‘‘Shared Systems’’ means all provided in a due diligence process instance it is demonstrated to the sole
operating and related systems acquired except such information or documents satisfaction of the United States that the
by Qwest from Allegiance pursuant to subject to the attorney-client or work- Divestiture Assets will remain viable
11 U.S.C. 363 that (a) are predominantly product privileges. Defendants shall and the divestiture of such assets will
used in connection with the provision make available such information to the remedy the competitive harm alleged in
of telecommunications services to United States at the same time that such the Complaint. The divestitures,
customers in markets outside of the In- information is made available to any whether pursuant to Section IV or
Region MSAs, including, but not limited other person. Section V of this Final Judgment,
to, order entry, provisioning, billing, C. Defendants shall provide the (1) Shall be made to an Acquirer (or
network monitoring, and other systems, Acquirer(s) and the United States Acquirers) that, in the United States’s sole
and (b) are not capable of being divided information relating to the personnel judgment, has the intent and capability
between the divested and retained involved in the production, operation, (including the necessary managerial,
businesses. development and sale of the Divestiture operational, technical and financial
Assets to enable the Acquirer(s) to make capability) of competing effectively in the
III. Applicability offers of employment. Defendants will business of telecommunications services; and
A. This Final Judgment applies to (2) Shall be accomplished so as to satisfy
not interfere with any negotiations by
the United States, in its sole discretion, that
Qwest and Allegiance, as defined above, the Acquirer(s) to employ any defendant none of the terms of any agreement between
and all other persons in active concert employee whose primary responsibility an Acquirer (or Acquirers) and defendants
or participation with any of them who is the production, operation, give defendants the ability unreasonably to
receive actual notice of this Final development and sale of the Divestiture raise the Acquirer’s costs, to lower the
Judgment by personal service or Assets. Acquirer’s efficiency, or otherwise to
otherwise. D. Defendants shall permit interfere in the ability of the Acquirer to
B. Defendants shall require, as a prospective Acquirer(s) of the compete effectively.
condition of the sale or other Divestiture Assets to have reasonable I. Upon the Acquirer(s)’s request and
disposition of all or substantially all of access to personnel and to make upon commercially reasonable terms
their assets or of lesser business units inspections of the physical facilities of and conditions, Qwest will, for a
that include the Divestiture Assets, that the business to be divested; access to reasonable transitional period following
the purchaser of those assets agrees to any and all environmental, zoning, and divestiture, provide Acquirer(s) with (a)
be bound by the provision of this Final other permit documents and any services provided via Shared
Judgment, provided, however, that information; and access to any and all Systems; and (b) any interexchange
defendants need not obtain such an financial, operational, or other services or transport over interexchange
agreement from the Acquirer(s). documents and information customarily facilities acquired by Qwest from
IV. Divestitures provided as part of a due diligence Allegiance pursuant to 11 U.S.C. 363
process. that are not included in the Divestiture
A. Defendants are ordered and E. Defendants shall warrant to all Assets.
directed, within 75 calendar days after Acquirers of the Divestiture Assets that J. To the extent leases, contracts,
the filing of the Complaint in this each asset will be operational on the agreements, intellectual property rights,
matter, or five (5) days after notice of the date of sale. licenses or commitments with third
entry of this Final Judgment by the F. Defendants shall not take any parties that are acquired by Qwest from
Court, whichever is later, to divest the action that will impede in any way the Allegiance pursuant to 11 U.S.C. 363
Divestiture Assets in a manner obtaining of necessary regulatory and would otherwise be Divestiture
consistent with this Final Judgment to approvals, or operation or divestiture of Assets are not assignable or transferable,
an acquirer acceptable to the United the Divestiture Assets. or such contracts (except for customer
States in its sole discretion. The United G. Defendants shall warrant to the contracts), agreements, rights, licenses
States, in its sole discretion, may agree Acquirer(s) of the Divestiture Assets that or commitments cover more than one
to an extension of this time period of up there are no material defects in the MSA, including at least one MSA that
to three thirty-day periods, not to environmental, zoning, licenses or other is not an In-Region MSA, then Qwest is
exceed ninety (90) calendar days in permits pertaining to the operation of not obligated to assign or transfer such
total, and shall notify the Court in such each asset, and that following the sale contracts, agreements, rights, licenses or
circumstances. Defendants agree to use of the Divestiture Assets, defendants commitments. In that event, or in the
their best efforts to divest the will not undertake, directly or event that Qwest rejects any executory
Divestiture Assets as expeditiously as indirectly, any challenges to the contract pursuant to 11 U.S.C. 365
possible. environmental, zoning, licenses or other which the Acquirer deems necessary to
B. In accomplishing the divestiture permits relating to the operation of the operate a viable ongoing
ordered by this Final Judgment, Divestiture Assets. telecommunications business in the In-
defendants promptly shall make known, H. Unless the United States otherwise Region MSAs, Qwest shall use its best
by usual and customary means, the consents in writing, the divestiture efforts to obtain for the Acquirer the
availability of the Divestiture Assets. pursuant to Section IV, or by trustee equivalent of the services or other rights
Defendants shall inform any person appointed pursuant to Section V, of this that would have been provided but for
making inquiry regarding a possible Final Judgment, shall include the entire said non-assignment, non-transfer, or
purchase of the Divestiture Assets that Divestiture Assets, and shall be rejection.
they are being divested pursuant to this accomplished in such a way as to satisfy
Final Judgment and provide that person the United States, in its sole discretion, V. Appointment of Trustee
with a copy of this Final Judgment. that the Divestiture Assets can and will A. If defendants have not divested the
Defendants shall offer to furnish to all be used by the Acquirer(s) as part of a Divestiture Assets within the time
prospective Acquirers, subject to viable, ongoing telecommunications period specified in Section IV(A),
customary confidentiality assurances, business. Divestiture of the Divestiture defendants shall notify the United
all information and documents relating Assets may be made to one or more States of that fact in writing. Upon
to the Divestiture Assets customarily Acquirers, provided that in each application of the United States, the
Court shall appoint a trustee selected by research, development, or commercial in the Divestiture Assets, together with
the United States and approved by the information. Defendants shall take no full details of the same.
Court to effect the divestiture of the action to interfere with or to impede the B. Within fifteen (15) calendar days of
Divestiture Assets. trustee’s accomplishment of the receipt by the United States of such
B. After the appointment of a trustee divestiture. notice, the United States may request
becomes effective, only the trustee shall F. After its appointment, the trustee from defendants, the proposed Acquirer
have the right to sell the Divestiture shall file monthly reports with the or Acquirers, and other third party, or
Assets. The trustee shall have the power United States and the Court setting forth the trustee if applicable additional
and authority to accomplish the the trustee’s efforts to accomplish the information concerning the proposed
divestiture to an Acquirer[s] acceptable divestiture ordered under this Final divestiture, the proposed Acquirer or
to the United States at such price and Judgment. To the extent such reports Acquirers, and any other potential
on such terms as are then obtainable contain information that the trustee Acquirer. Defendants and the trustee
upon reasonable effort by the trustee, deems confidential, such reports shall shall furnish any additional information
subject to the provisions of Sections IV, not be filed in the public docket of the requested within fifteen (15) calendar
V, and VI of this Final Judgment, and Court. Such reports shall include the days of the receipt of the request, unless
shall have such other powers as this name, address, and telephone number of the parties shall otherwise agree.
Court deems appropriate. Subject to each person who, during the preceding C. Within thirty (30) calendar days
Section V(D) of this Final Judgment, the month, made an offer to acquire, after receipt of the notice or within
trustee may hire at the cost and expense expressed an interest in acquiring, twenty (20) calendar days after the
of defendants any investment bankers, entered into negotiations to acquire, or United States has been provided the
attorneys, or other agents, who shall be was contacted or made an inquiry about additional information requested from
solely accountable to the trustee, acquiring, any interest in the Divestiture defendants, the proposed Acquirer or
reasonably necessary in the trustee’s Assets, and shall describe in detail each Acquirers, any third party, and the
judgment to assist in the divestiture. contact with any such person. The trustee, whichever is later, the United
C. Defendants shall not object to a sale trustee shall maintain full records of all States shall provide written notice to
by the trustee on any ground other than efforts made to the Divestiture Assets. defendants and the trustee, if there is
the trustee’s malfeasance. Any such G. If the trustee has not accomplished one, stating whether or not it objects to
objections by defendants must be such divestiture within six months after the proposed divestiture. If the United
conveyed in writing to the United States its appointment, the trustee shall States provides written notice that it
and the trustee within ten (10) calendar promptly file with the Court a report does not object, the divestiture may be
days after the trustee has provided the setting forth (1) the trustee’s efforts to consummated, subject only to
notice required under Section VI. accomplish the required divestiture, (2) defendants’ limited right to object to the
D. The trustee shall serve at the cost the reasons, in the trustee’s judgment, sale under Section V(C) of this Final
and expense of Qwest, on such terms why the required divestiture has not Judgment. Absent written notice that the
and conditions as the United States been accomplished, and (3) the trustee’s United States does not object to the
approves, and shall account for all recommendations. To the extent such proposed Acquirer or upon objection by
monies derived from the sale of the reports contain information that the the United States, a divestiture
assets sold by the trustee and all costs trustee deems confidential, such reports proposed under Section IV or Section V
expenses so incurred. After approval by shall not be filed in the public docket shall not be consummated. Upon
the Court of the trustee’s accounting, of the Court. The trustee shall at the objection by defendants under Section
including fees for its services and those same time furnish such report to the V(C), a divestiture proposed under
of any professionals and agents retained United States who shall have the right Section V shall not be consummated
by the trustee, all remaining money to make additional recommendations unless approved by the Court.
shall be paid to Qwest and the trust consistent with the purpose of the trust.
shall then be terminated. The The Court thereafter shall enter such VII. Financing
compensation of the trustee and any orders as it shall deem appropriate to Defendants shall not finance all or
professionals and agents retained by the carry out the purpose of the Final any part of any purchase made pursuant
trustee shall be reasonable in light of the Judgment, which may, if necessary, to Section IV or V of this Final
value of the Divestiture Assets and include extending the trust and the term Judgment.
based on a fee arrangement providing of the trustee’s appointment by a period
the trustee with an incentive based on requested by the United States. VIII. Hold Separate
the price and terms of the divestiture Until the divestiture required by this
and the speed with which it is VI. Notice of Proposed Divestiture
Final Judgment has been accomplished
accomplished, but timeliness is A. Within two (2) business days defendants shall take all steps necessary
paramount. following execution of a definitive to comply with the Hold Separate
E. Defendants shall use their best divestiture agreement, defendants or the Stipulation and Order entered by this
efforts to assist the trustee in trustee, whichever is then responsible Court. Defendants shall take no action
accomplishing the required divestiture. for effecting the divestiture required that would jeopardize the divestiture
The trustee and any consultants, herein, shall notify the United States of ordered by this Court.
accountants, attorneys, and other any proposed divestiture required by
persons retained by the trustee shall Section IV or V of this Final Judgment. IX Affidavits
have full and complete access to the If the trustee is responsible, it shall A. Within twenty (20) calendar days
personnel, books, records, and facilities similarly notify defendants. The notice of the filing of the Complaint in this
of the business to be divested, and shall set forth the details of the matter, and every thirty (30) calendar
defendants shall develop financial and proposed divestiture and list the name, days thereafter until the divestiture[s]
other information relevant to such address, and telephone number of each has been completed under Section IV or
business as the trustee may reasonably person not previously identified who V, defendants shall deliver to the United
request, subject to reasonable protection offered or expressed an interest in or States an affidavit as to the fact and
for trade secret or other confidential desire to acquire any ownership interest manner of its compliance with Section
IV or V of this Final Judgment. Each documents in the possession, custody, XIII. Expiration of Final Judgment
such affidavit shall include the name, or control of defendants, relating to any Unless this Court grants an extension,
address, and telephone number of each matters contained in this Final this Final Judgment shall expire ten
person who, during the preceding thirty Judgment; and years from the date of its entry.
days, made an offer to acquire, (2) To interview, either informally or
expressed an interest in acquiring, on the record, defendants’ officers, XVI. Public Interest Determination
entered into negotiations to acquire, or employees, or agents, who may have Entry of this Final Judgment is in the
was contacted or made an inquiry about their individual counsel present, public interest.
acquiring, any interest in the Divestiture regarding such matters. The interviews Date: _______
Assets, and shall describe in detail each shall be subject to the reasonable
contact with any such person during Court approval subject to procedures of
convenience of the interviewee and Antitrust Procedures and Penalties Act, 15
that period. Each such affidavit shall without restraint or interference by U.S.C. 16.
also include a description of the efforts defendants.
defendants have taken to solicit buyers lllllllllllllllllllll
B. Upon the written requests of a duly United States District Judge.
for the Divestiture Assets, and to
provide required information to authorized representative of the Appendix D—Reply Declaration of
prospective purchasers, including the Assistant Attorney General in charge of Joseph Farrell
limitations, if any, on such information. the Antitrust Division, defendants shall
submit written reports or interrogatory Before the Federal Communications
Assuming the information set forth in
responses, under oath if requested, Commission
the affidavit is true and complete, any
objection by the United States to relating to any of the matters contained In the Matter of Special Access Rates for
information provided by defendants, in this Final Judgment as may be Price Cap Local Exchange Carriers
including limitation on information, requested.
[WC Docket No. 05–25]
shall be made within fourteen (14) days C. No information or documents
of receipt of such affidavit. obtained by the means provided in this AT&T Corp. Petition for Rulemaking to
B. Within twenty (20) calendar days section shall be divulged by the United Reform Regulation of Incumbent Local
of the filing of the Complaint in this States to any person other than an Exchange Carrier Rates for Interstate
matter, defendants shall deliver to the authorized representative of the Special Access Services
United States an affidavit that describes executive branch of the United States, [RM No. 10593]
in reasonable detail all actions except in the course of legal proceedings
defendants have taken and all steps to which the United States is a party Reply Declaration of Joseph Farrell on
defendants have implemented on an (including grand jury proceedings), or Behalf of CompTel
ongoing basis to comply with Section for the purpose of securing compliance I. Qualifications
VIII of this Final Judgment. Defendants with this Final Judgment, or as
shall deliver to the United States an otherwise required by law. 1. I am Professor of Economics,
affidavit describing any changes to the Affiliate Professor of Business, and
D. If at the time information or Chair of the Competition Policy Center
efforts and actions outlined in documents are furnished by defendants
defendants’ earlier affidavits filed at the University of California at
to the United States, defendants Berkeley. Among other non-university
pursuant to this section within fifteen represent and identifying in writing the
(15) calendar days after the change is professional activities, I was Chief
material in any such information or Economist at the FCC in 1996–1997,
implemented. documents to which a claim of
C. Defendants shall keep all records of President of the Industrial Organization
protection may be asserted under Rule Society in 1996, Editor of the Journal of
all efforts made to preserve and divest
26(c)(7) of the Federal Rules of Civil Industrial Economics in 1995–2000,
the Divestiture Assets until one year
Procedure, and defendants mark each Deputy Assistant Attorney General and
after such divestiture has been
pertinent page of such material, chief economist at the Antitrust
completed.
‘‘Subject to claim of protection under Division of the U.S. Department of
X. Compliance Inspection Rule 26(c)(7) of the Federal Rules of Justice in 2000–2001, and member of
A. For the purposes of determining or Civil Procedure,’’ then the United States the National Academies of Science,
securing compliance with this Final shall give defendants ten (10) calendar Computer Science and
Judgment, or of determining whether days notice prior to divulging such Telecommunications Board in 2001–
the Final Judgment should be modified material in any legal proceeding (other 2004. I am a Fellow of the Econometric
or vacated, and subject to any legally than a grand jury proceeding). Society and a member of the Editorial
recognized privilege, from time to time XI. No Reacquisition Board of the journal Information
duly authorized representatives of the Economics and Policy.
United States Department of Justice, Defendants may not reacquire any
including consultants and other persons part of the Divestiture Assets during the II. Overview
retained by the United States, shall, term of this Final Judgment. 2. I begin by explaining why
upon written request of a duly XII. Retention of Jurisdiction incumbent termination charges and
authorized representative of the certain kinds of optional volume or
Assistant Attorney General in charge of This Court retains jurisdiction to loyalty discounts are likely to
the Antitrust Division, and on enable any party to this Final Judgment exacerbate problems arising from well-
reasonable notice to defendants, be to apply to this Court at any time for known barriers to entry, especially
permitted: further orders and directions as may be when the inducement for customers to
(1) Access during defendants’ office necessary or appropriate to carry out or subscribe to these optional plans
hours to inspect and copy, or at the construe this Final Judgment, to modify includes raising the price of the
United States’s option, to require any of its provisions, to enforce alternative, e.g., setting excessive basic
defendants provide copies of, all books, compliance, and to punish violations of rates for month-to-month service. I then
ledgers, accounts, records and its provisions. discuss the use of price and cost
information for assessing competition in discounted prices in other plans) can when the carrier joins the MVP by
this market, and comment in particular also be above competitive levels. taking a carrier’s previous three months’
on the Declaration of Dr. William Moreover, when a monopoly offers billing for qualified services (defined as
Taylor. proportional or relative discounts off its virtually all SBC transport services)
undiscounted prices in order to induce multiplied by four.
III. Effects of ILEC Contracts on
Competition customers to agree to exclusionary 6. Carriers receive the MVP discount
provisions, it has an incentive to set the on services purchased up to their
3. Economic and structural barriers to undiscounted price above even the MARC. The discount does not apply to
competitive entry into the special access monopoly level (because, rather than services purchased in excess of the
market are well known and well simply deterring demand, an increase MARC unless the MARC is increased.
documented. Ordover and Willig above the monopoly level steers The MARC can be increased (semi-
summarized several such barriers in a customers into the discount plans and annually, by a minimum of 5%), but
declaration submitted along with also brings the discount prices closer to cannot be decreased during the term of
AT&T’s petition that launched this the monopoly level).2 Thus, even if they the MVP.
proceeding.1 Special access services are have other efficiency rationales, such 7. The MVP requires carriers to
characterized by economies of scale and pricing schemes put an additional purchase at least 95% of their SBC
sunk costs, as well as substantial wedge into the incentive for the transport services from SBC’s interstate
incumbent first-mover advantages such customer to contract with a competitive tariff, restricting their purchases of
as rights-of-way and building access. As carrier whose long-run cost is below the UNEs to less than 5%. (Recent tariff
a result, competitive entry generally has ILEC’s price.3 They thus weaken entry contract filings include a higher
been restricted to the highest capacity as a constraint on an incumbent’s requirement of 98%).5
services provided in dense metropolitan overall price level, whether or not they
areas. Any further impediments to 8. If a carrier fails to meet the MARC,
fall into standard antitrust categories it must either continue the contract and
entry, such as the ILEC contract such as predatory pricing or tying.
provisions I describe below, exacerbate pay a shortfall penalty equal to the
these inherent economic and 5. ILECs have implemented such difference between its MARC and the
operational barriers. pricing schemes in their special access actual amount spent, or terminate its
4. Among such incremental tariffs. SBC’s ‘‘Managed Value Plan’’ contract and pay a termination penalty.
impediments to entry would be (a) (‘‘MVP’’) Tariff is an example. The MVP For example, if the carrier terminates
excessive charges (typically payable by is an umbrella plan. Customers during year 3 of the plan, it pays 12.5%
the customer) for terminating ILEC purchasing a wide range of special of the MARC for the remainder of year
service, (b) commitments to purchase access products can include several 3 and the remaining years of the
some minimum amount from the such purchases in the MVP, which agreement. The customer is also billed
incumbent, with substantial penalties provides discounts in addition to term for any nonrecurring charges that were
for non-compliance, and (c) any and volume discounts contained in their waived under the MVP agreement.
provisions such as volume or loyalty underlying tariffs from which customers 9. The termination penalty requires
discounts under which a special access purchase the special access circuits that repayment of all MVP discounts
consumer pays the ILEC more for they include in the MVP. The MVP received in the six months preceding
something else (such as service at discounts increase each year (9% in the the termination date plus a specified
another location) if it uses an entrant 1st year, 11% in the 2nd, 12% in the percentage of the MARC for the
rather than ILEC special access in one 3rd, 13% in the 4th, and 14% in the 5th remainder of the term (10% if in year 1
location. For many customers on a year). Carriers must spend at least $10 or year 5, otherwise 12.5%). The table
discount plan, the basic month-to- million annually on SBC special access below lays out the termination penalties
month tariff may be the next-most services to be eligible.4 The MVP for a carrier with a MARC of $20 million
preferred alternative. When the basic establishes a ‘‘Minimum Annual that terminates its agreement at the
month-to-month plan specifies prices Revenue Commitment’’ (MARC) that the beginning of a year. The table assumes
significantly above the competitive carrier must maintain with SBC for the that a discount was earned in each of
level, these discounted prices (and five-year term. The MARC is established the previous 6 months.
Discount
Current MVP Percent of Re- Remaining
earned in Total Penalty
Year in which termination occurs discount rate maining com- commitment
previous 8 penalty (in months)
(percent) mitment due due
months
1 ............................................................... 9 $0 10.0 $10,000,000 $10,000,000 6.0

2 ............................................................... 11 900,000 12.5 10,000,000 10,900,000 6.5
3 ............................................................... 12 1,100,000 12.5 7,500,000 8,600,000 5.27
4 ............................................................... 13 1,200,000 12.5 5,000,000 6,200,000 3.7
1 In the Matter of AT&T Corp. Petition for Professor Borenstein shows that such discounts do Economic Review, June 1987, 77(3), pp. 388–401.
Rulemaking To Reform Regulation of Incumbent not lower prices overall but rather implement a See also Joseph Farrell, ‘‘Deconstructing Chicago on
Local Exchange Carrier Rates for Interstate Special transfer from non-discount customers to discount Exclusive Dealing,’’ Antitrust Bulletin, forthcoming,
Access Services, RM No. 10593. Declaration of customers, with almost no effect on average price available at http://repositories.cdlib.org/iber/cpc/
Janusz A. Ordover and Robert D. Willig in support or on the seller’s profit. Moreover, if entitlement to
CPC05-053/. In particular, I explain there why
of AT&T’s Petition, at ¶ 38–45. the discount is based on agreeing to exclusionary
discounts to customers in return for signing
2 The economics of price-setting once a subset of terms, such arrangements further harm consumers
customers become entitled to a percentage discount in the long run. In price flex areas, even basic tariffs exclusive or exclusionary contracts may not make
off a list price are analyzed by Borenstein, Severin, are unregulated, and the rates in these tariffs can the customers better off.
1996. ‘‘Settling for Coupons: Discount Contracts as be, and have been, increased by the ILEC. 4 If the customer has a national footprint, it must
Compensation and Punishment in Antitrust 3 The basic economics here were explored in the
meet the $10 million minimum in each SBC region.
Lawsuits,’’ Journal of Law & Economics, University well-known article by Aghion, Philippe and Bolton, 5 See e.g.. SWBT Tariff FCC No. 73, Section 41.31.
of Chicago Press, vol. 39(2), pages 379–404. Patrick. ‘‘Contracts as a Barrier to Entry,’’ American
Discount
Current MVP Percent of Re- Remaining
earned in Total Penalty
Year in which termination occurs discount rate maining com- commitment
previous 8 penalty (in months)
(percent) mitment due due
months
5 ............................................................... 14 1,300,000 10.0 2,000,000 3,3000,000 2.0
10. The Remaining Commitment Due 12. Once a MVP agreement is signed, 53% discount off SBC’s (pre-MVP)
is calculsted as the MARC over the the marginal price of special access prices of $10 million. In other words,
remaining years of the contract times services for special access spending up the rival must beat a price that is less
the penalty rate (labeled ‘‘% of to the MARC is zero, because a customer than half of the ILEC’s pre-MVP price.
Remaining Commitment Due’’). The that misses the MARC is required to 15. Thus in some circumstances a
total penalty is the sum of the make up the shortfall by paying a customer switching a part of its business
Remaining Commitment Due and any penalty. The marginal price if the total to a non-ILEC provider could lose not
discount earned in the previous 6 spending is above the MARC is SBC’s only the discount on the portion
months. In the first two years of the rate before the MVP discount is switched, but also the MVP discount on
contract, the penalty amounts to more deducted (unless the MARC is the portion that remained with the ILEC.
than 50% of the annual MARC. In the increased). Because the MARC cannot When the competitor cannot win the
last year, it falls to about 15% of the be decreased, a customer whose demand entire business (if, for example, it has
annual MARC. In addition to this does not grow cannot switch to a loops to some but not all of the
penalty, the customer may incur competitive carrier for part or all of its customer’s locations), it is effectively
termination penalties specified in the special access spending without foreclosed from serving that customer.
underlying tariff for the services incurring significant penalties. 16. As a result, the MVP and similar
included in the MVP. In some cases, 13. A customer with increasing pricing plans can have the effect of
these penalties amount to 40% of the expenditures on special access may find requiring a competitive carrier to beat a
monthly recurring rate over the it economical to use a competitor to marginal price that is well below the
remaining term of the tariff.6 serve its new demand. Consider the average price that special access
example of a customer that entered into customers pay the ILEC. That is, the
11. The MVP is structured in a way
an MVP agreement with a MARC of $20 ILEC can charge a price (11.8% below
that can make it unprofitable for a
million. Suppose that the customer its pre-MVP price) that is well above a
competitor to win any modest portion of
established business in a new area, competitive carrier’s cost, and the
a customer’s business, even if the
requiring special access services worth competitor will nevertheless find it
incumbent’s price exceeds the
$10 million in that area. The carrier unprofitable to enter on a small scale,
competitor’s long-run cost. Essentially,
could either include this new demand because the customer is penalized on its
it sets up an automatic and sometimes
for special access service in its MARC, inframarginal SBC business for giving
drastic price cut for any portion of the
increasing the MARC by $10 million, marginal business to the competitor.8
customer’s business that the customer is
and then receive the 11.8% average 17. The effects of the MVP are
considering switching to a competitor.
discount on this new commitment; or magnified when the underlying tariffs
For example, consider a customer that
else it could go to a competitor that for the special access services purchased
spends $20 million on special access
would only need to offer the 11.8% by a customer contain similar discounts
services supplied by SBC. The customer
discount off SBC’s pre-MVP prices to and penalties. To illustrate, consider
can either (1) sign the MVP contract and
match the discount offered by the MVP Southwestern Bell Telephone
purchase $20 million in special access
plan. Company’s DS1 Term Payment Plan
services from SBC or (2) purchase 20% 14. However, if this $10 million in
of its services from a CLEC and 80% (DS1 TPP).9 The base payment in the
new growth in the network occurs at the TPP is circuit-specific—it requires
from SBC. In scenario (1), the carrier same time as a reduction of $2 million
receives an average of 11.8% discount commitments to specific circuits for the
in the customer’s original footprint, then term of the contract. But competing
(ignoring discounting) from SBC over the situation changes. In this case, the
the length of the contract,7 thus its total carriers often have a considerable
first $2 million of the new growth amount of customer churn. For such
expenditure is $17.64 million per year. would cost the customer nothing if it
In scenario (2), the carrier would not be customers, SBC offers an option (the
used SBC, since the customer had a DS1 High Capacity Service Portability
able to enter into an MVP agreement commitment to spend $20 million on
because the MARC is based on 100% of Commitment) that waives the specific
SBC’s special access services. If all the
historical revenues. Thus, for the 80%of new business went to SBC, the MARC 8 Like many exclusionary strategies, this can be
its special access requirements that it could be increased to $28 million and defeated if entrants can realistically enter on a large
purchased from SBC, the customer the discounted payment would be scale and serve all (or a sufficient set of) customers.
would spend $16 million. The carrier $24.696 million. If the customer wanted Thus it is exclusionary only if that is unrealistic.
would save money in this scenario only to use a non-ILEC provider for the entire
It is my understanding that after years of
if the competitive carrier charged less policymakers encouraging CLEC entry, CLECs still
$10 million of new growth business, it directly address only a very limited set of buildings.
than $1.64 million for the remaining would still have to maintain the $20 See Review of the Section 251 Unbundling
20% of the customer’s demand, a million MARC commitment and, with Obligations of Incumbent Local Exchange Carriers,
discount of 59% off SBC’s $4 million $18 million spent on special access
CC Docket No. 01–338, Report and Order and Order
price before MVP discounts. on Remand and Further Notice of Proposed
purchased from SBC, it would not
Rulemaking, 18 FCC Rcd. 16978, 17155, n.856

receive any MVP discount. Thus, it (2003). (‘‘Both competitive LECs and incumbent
6 Southwestern Bell Telephone Company, Tarffic LECs report that approximately 30,000, i.e.,
would pay $20 million to SBC. Using
F.C.C., No. 72, 2nd Revised Page 7–68.3.5. between 3% and 5% of the nation’s commercial
7 The 11.8% average discount is the arithmetic the non-ILEC provider would be lower office buildings, are served by competitor-owned
mean of the discounts of 9%, 11% 12%, 13% and cost only if its total price for the new fiber loops.’’).
14%, offered in each of the five years of SBC’s MVP. growth was less than $4.7 million, a 9 Tariff F.C.C. No. 73, Section 7.2.
circuit termination penalties described offered by the ILECs artificially increase sufficient information to verify his
above, allowing customers to add and a customer’s cost of switching, and raise calculations.
remove circuits without penalty. Instead competitors’ costs of acquiring 24. Dr. Taylor adjusted Special Access
of circuit-specific commitments, the customers. Revenue as reported in the ARMIS
customer commits to a level of DS1 21. It is a tempting fallacy to think records to remove DSL revenues using
channel terminations. The Portability that optional discount plans cannot be data he obtained from Verizon on its
Commitment lasts for three years. The harmful simply because consumers DSL revenues for 2002–2004.16 These
commitment level is 100% of the total select them voluntarily. The claim that DSL revenues are not part of the public
DS1 channel terminations in service in voluntary discounts cannot harm record, and Dr. Taylor does not include
the month preceding the start of the consumers assumes that basic month-to- the data he obtained from Verizon in his
agreement. This includes DS1 under month rates are not affected, but in fact, Declaration. In addition, he removed
term commitments and month-to-month once an ILEC has contracted with some DSL revenues for years prior to 2000
arrangements. of its customers for a percentage based on the observed growth of DSL
18. Each month, the total number of discount off the month-to-month tariff, revenues in the years of which he had
2, 3, 5, and 7 year DS1 TPP Channel it has an incentive to raise the latter data. Without the underlying data, it
Terminations for the previous month above the level that it would have was not possible to judge whether his
will be calculated and measured against chosen otherwise.11 In the longer term, calculations were correct or whether the
the commitment level. If this total is less exclusionary contracts can be expected extrapolation was reasonable.
than 80% of the commitment level, then to harm competition and customers, 25. Dr. Taylor relied on the number of
the customer is billed a shortfall penalty whether or not they decrease prices in access lines reported in ARMIS 43–08,
equal to the difference between 80% of the short run. columns fj and fk.17 The ARMIS Report
the CL and the actual number purchased instructions require carriers to calculate
times the non-recurring charge. If this IV. Dr. Taylor’s Analysis Cannot Show the number of special access lines as
total is more than 124% of the CL, then That ILECs Lack Market Power follows:
the customer is billed an adjustment 22. Dr. William Taylor has submitted ‘‘The number of 64 kbps or equivalent
factor equal to the difference between a report 12 arguing that price data show digital special access lines terminated at the
124% of the CL and the actual number that Verizon lacks market power. The customer designated premises: * * * Where
purchased times the non-recurring basic syllogism is that average revenue DS–3 or DS–1 service is provided without
charge.10 The customer may increase its per unit measures have fallen, hence individual 64 kbps circuit terminations,
CL by submitting a written request, and multiply the number of DS–3 terminations by
prices have fallen, hence there is no
is likely to do so given the ‘‘growth 672 and the number of DS–1 terminations by
market power. Unfortunately, each step 24 when calculating the value for this
penalty’’ that applies if it does not
of this syllogism is fallacious. As a column.’’ 18
promptly commit its unexpected
preliminary matter, I examine Dr.
demand growth to SBC. For DS1 and DS3 lines that are provided
19. If the customer terminates the Taylor’s claim that the average revenue
per special access line has fallen over with individual 64 Kbps circuit
Portability Commitment or wants to terminations,19 the ARMIS data appear
decrease the CL prior to the end of the time. Next, I examine the first part of his
syllogism, that reductions in the average to provide a reasonable measure of
3-year commitment, termination capacity as represented by voice grade
liabilities apply. The termination revenue per line imply that prices of
special access products have fallen. equivalent lines. For DS1 and DS3 lines
liability is calculated as the decreased that are provided without individual
number of channel terminations Finally, I analyze the second part of his
syllogism, that reductions in price circuit termination, the ARMIS data
multiplied by the prevailing month-to- would appear to overestimate the line
month recurring rate multiplied by the imply the absence of market power.
count since it assumes that the entire
number of months remaining in the 1. Flaws in the Average Revenue per capacity is used, whether or not it is, in
portability commitment. Line as a Measure of Price fact, used. That is, a customer who
20. To supply a portion of the services needs only 12 DS0s worth of capacity,
a customer has placed in the MVP 23. Dr. Taylor claims that ‘‘various
measures of average revenue per circuit but who but buys a DS1 because it is
umbrella, a competitor may have to
have fallen even as the demand for less costly than 12 DS0s, is assumed to
reduce its rates to make up for payments
special access services has purchase 24 DS0s if the ILEC is not
such as the shortfall penalty and/or
increased.’’ 13 After describing six asked to provide individual circuit
termination liability specified in the
limitations 14 of his chosen price terminations. Accordingly, the average
DS1 TPP. These payments are in
measure, the average revenue per line, revenue per voice-grade equivalent is
addition to the penalties in the MVP.
he concludes: ‘‘Nevertheless, even with artificially reduced.
Together, the penalties in all the tariffs
those caveats, the picture that emerges 26. I do not have the data to verify
for services that a customer switches to
from the ARMIS average revenue per this downward bias in Dr. Taylor’s
a competitor are likely to be high
line data is quite clear: Average revenue estimate of the ‘‘price.’’ Nor can I verify
enough to make the customer
per line has decreased over the 1996– that this bias has not increased over
unprofitable for the competitor to win,
2004 period and decreased faster during time, contributing, at least in part, to Dr.
even when the ILEC’s overall level of
the pricing flexibility period (2001– Taylor’s finding that the average
prices for special access is above the
2004).’’ 15 Dr. Taylor did not include revenue per line has fallen over time.
competitor’s long-run cost. Again, these
Since data communications lines often
provisions, and others like them in the
do not need individual 64 Kbps
various term and volume discount plans 11 SeeBorenstien, supra.
12 Declaration of William E. Taylor on Behalf of terminations, and since data
10 Because only 2, 3, 5, and 7-year commitments Verizon, In the Matter of Special Access Rates for
are counted when the shortfall penalty is Price Cap Local Exchange Carriers, WC Docket No. 16 TaylorDeclaration at ¶ 18.
calculated, the portability commitment penalizes 05–25. Henceforth, Taylor Declaration. 17 TaylorDeclaration at footnote 10.
13 Taylor Declaration, at ¶ 9. 18 FCC Report 43–08.
carriers who have a large portion of their DS1 in
14 Taylor Declaration, at ¶ 15.
month-to-month or 1-year commitments, thus 19 A 64 Kbps line is equivalent in capacity to a
providing incentive to enter into longer contracts. 15 Taylor Declaration at ¶ 16. voice grade circuit.
communications grew more rapidly and 168 voice-grade circuits are now recession and the telecommunications
than voice communications during the needed to carry the new calling volume. industry meltdown.’’ 23
period at issue, there was likely an The consumer could order another DS1 36. But DS–1 and DS–3 lines are not
increase in the fraction of lines for for an additional $365, and use the commodities supplied by price-takers
which the ARMIS reporting requirement additional 24 voice-grade circuits to with upward-sloping supply curves. A
resulted in an overcount of special carry the additional traffic. recession or a telecommunications
access lines. If so, the ARMIS line count Alternatively, the consumer could meltdown may lower demand but there
would grow at a faster rate than would replace the 6 DS1s with a DS3, set up is no clear reason to believe it raises
be warranted by the actual growth in 168 channel terminations on the DS3 demand elasticity or lowers the
demand for capacity. The calculated and obtain the same quality of service incremental cost of supplying such
average revenue per ARMIS line would that he would have obtained on 7 DS1s. lines. A more natural ‘‘composition
then decline more quickly than the The additional cost of the DS3 would be effect’’ explanation of this price
average revenue per unit of capacity only $100 ($2,290 for the DS3 less reduction is available. Since DS1 lines
actually demanded. $2,190 for the 6 DS1s already in place). are sold at different prices (with lower
27. In sum, Dr. Taylor’s conclusions The DS3 would be less expensive than prices for longer term commitments and
regarding the decline of the average 7 DS1s, even though a large fraction of larger volumes purchased), a shift in
revenue per line over time cannot be the DS3 was left idle. demand from high price contracts to
verified with the data available to me. low price contracts can result in a
32. If the DS3 were provided with
There are sound reasons for believing reduction in average revenue per line
individual circuit terminations, the
that at least a part of the reduction may even though no prices were reduced.
ARMIS record would reflect 168 special
be due to ARMIS reporting conventions The same plausible explanation applies
access lines, and the average revenue
but this portion of the reduction cannot to DS3 lines. Thus one cannot conclude
per unit would be $13.63 for a price
be quantified with the available data. that Dr. Taylor’s partial disaggregation
28. Much of Dr. Taylor’s analysis reduction of 10.4%. Thus this ARMIS
of all special access lines into DS1 and
focuses on ‘‘various measures of the record would show a relatively modest DS3 lines repairs the flawed average
average revenue per circuit.’’ 20 Dr. reduction in price even though no revenue measure.
Taylor asserts that this is a reasonable prices had been reduced. 37. For reasons described above,
proxy for price: ‘‘Average revenue per 33. If the DS3 were provided without when customers upgrade from multiple
voice-grade equivalent circuit is a individual circuit terminations, the DS0s to a DS1 or from multiple DS3s to
reasonable measure of the price that ARMIS record would reflect 672 OCn services, the decrease in average
customers actually pay for the special terminations, and the average revenue revenue per access line will
access service they receive.’’ 21 per line would be $3.41 for a much overestimate the price reduction, if any.
29. To calculate the average revenue larger apparent price reduction of 38. The limitations of measures
per voice-grade equivalent circuit, Dr. 77.6%. similar to the Average Revenue per
Taylor divides the total revenue 34. But recall that the actual change Special Access Line are well known.
obtained from the services in question in prices in this example is zero. The Indeed, in his published work on the
by the number of special access lines change in prices as measured by the long-distance market, Dr. Taylor pointed
obtained from ARMIS 43–08. As I have average revenue per ARMIS line is out several flaws with a related measure
indicated earlier, the ARMIS reporting ¥10.4% when channel terminations are of price—the Average Revenue per
convention results in an overcount of provided by the BOC. The change in Minute (ARPM) for long-distance calls.
the demand for capacity, especially for prices as measured by the average Dr. Taylor constructs a simple example
lines used for data communication. revenue per ARMIS line is ¥77.6% with two products in which ‘‘ARPM
30. The following illustrative example when channel terminations are not declines despite the fact both of the
demonstrates my earlier point that the component usage prices have
provided by the RBOC. In this example,
ARMIS measure of special access lines increased.’’ 24 Dr. Taylor constructs
the average revenue per line falls
overstates the appropriate measure of other simple examples to illustrate
regardless of the way in which ARMIS
capacity, and, as a result, contributes to deficiencies of average revenues as
records the number of lines demanded
underestimating the price per unit measures of price, and points out that
by the customer, even though no prices
capacity actually paid by customers. ‘‘while AT&T’s reported ARPM has
have fallen. In general, the change in
Suppose a DS1 is priced at $365 per declined, competition has not brought
average revenue per ARMIS line will
month, and a DS3 is priced at $2,290 benefits of lower prices to low-volume
understate the change in prices paid by
per month.22 These prices are assumed users.’’ 25
consumers, and in times of growing
to remain constant in this example. 39. In his Declaration, Dr. Taylor
Therefore, the actual change in prices in demand, overstate the reduction (if any)
in the prices paid by consumers. states that ‘‘[t]he fact that prices fell
this example is zero. much faster than GDPI–PI–X indicates
31. Consider a consumer who initially 35. Dr. Taylor tries to correct for some that competitive forces have constrained
purchases 6 DS1 circuits for a total of the limitations of average revenue per LEC special access pricing, as
charge of $2,190. If the consumer uses line by calculating separate average anticipated by the Commission’s pricing
all 144 voice-grade circuits in the 6 revenues for DS1 and DS3 lines. Shifts flexibility decision.’’ 26 To reach this
DS1s for voice traffic, the average from DS1 to DS3 circuits do not affect conclusion, Dr. Taylor compares
revenue per used circuit would be the average revenue per line for each changes in the Average Revenue per
$2,190/144 = $15.21. Suppose the category, removing one flaw in the
consumer’s calling volume increases, average revenue measure. Dr. Taylor 23 Taylor Declaration, at ¶ 29.
found that: ‘‘DS–1 and DS–3 prices fell 24 William E. Taylor and J. Douglas Zona. ‘‘An
20 Taylor Declaration, at ¶ 9. dramatically for Verizon East between Analysis of the State Of Competition in Long-
21 Taylor Declaration, at footnote 7. 2000 and 2001; in fact, they fell at a Distance Telephone Markets.’’ Journal of Regulatory
22 These are standalone monthly rates charged by Economics 11:227–255 (1997). Page 238.
much faster rate than would have been Henceforth, Taylor and Zona.
SBC in California in July 2004, as reported in the
Declaration of M. Joseph Stith, WC Docket No. 04–
required by the price cap formula. 25 Taylor and Zona, page 240.
313, Attachment 1, page 13 of 20. Possible explanations include a national 26 Taylor Declaration at ¶ 17.
Line to the changes in the Price Cap submitted by Verizon BNTR to the FCC, binding constraint on Verizon’s special
Index (PCI). This is not a useful shows that for special access lines taken access prices, contrary to Dr. Taylor’s
comparison. ILECs are required to as a whole, the actual change in prices suggestion that competition has driven
compare an Average Price Index (API) to is almost exactly equal to the reduction prices below the level required by price
the PCI, and report this comparison to required by the price cap plan, strongly cap regulation.
the FCC. Table 1 below, based on data suggesting that the price cap was a
TABLE 1.—API AND PCI FOR VERIZON (BNTR)

2002 2003 2004 2005
Total Special Access PCI ................................................................................................................ 47.88 45.73 43.40 43.47

Total Special Access API ................................................................................................................ 47.88 45.73 43.40 43.33
Source: Verizon TRP Filings.
Moreover, rates in pricing flexibility 41. But even if Dr. Taylor were correct was removed would be welfare-
areas have increased,27 suggesting that that a decline in average revenue is a increasing rather than an exercise in
competitive carriers have not been able reasonable proxy for a decline in price, market power.’’ 31 Elsewhere in the
to discipline the incumbents’ special price reductions do not prove lack of Declaration, Dr. Taylor states: ‘‘In
access prices in areas that have been market power. Even a monopoly will antitrust economics, this error—treating
deemed competitive. reduce price if marginal costs fall or if an increase from the current price as an
demand becomes more elastic. In exercise in market power—is called the
2. The Relationship between Trends in ‘‘Cellophone fallacy’’* * *’’ 32
addition a firm with decreasing, but still
Prices and Market Power However, Dr, Taylor’s analysis does not
very substantial, market power will
40. Dr. Taylor’s Declaration largely reduce prices for that reason. actually compare his measure of the
focuses on attempting to show that 42. While there are pitfalls in using BOC’s special access prices to any
prices for special access have fallen over price-cost data to make references about benchmark of cost.
time. He infers that Verizon does not the state of competition, it is clear that 45. Dr. Taylor’s comparison of the
have market power. For instance, in his in any such endeavor it logically is the average revenue per special access line
Declaration he writes: relative levels of price and cost, not the to this price reductions required under
rate of change of price, that matter. price caps provides to useful
‘‘A careful analysis of that data does not information on the relationship of prices
Moreover, the Commission is concerned
show that Verizon has been able to exercise to costs.33 Under traditional price caps,
market power. On the contrary, prices for about whether prices are just and
reasonable, not (only) with determining the price cap formula of inflation (or
individual DS1and DS3 services, as well as
average revenue per special access circuits whether firms ‘‘lack market power.’’ GDP–PI) less increase in productivity in
have fallen steadily for special access 43. In his published work on the telecommunications sector (or the X-
circuits.’’ At 6. competition in long distance markets, factor) is intended to capture the
‘‘Customers have benefited from additional Dr. Taylor has argued that competitive expected reduction in cost that would
competition and pricing flexibility as prices will allow successful firms to be achieved by the regulated firm
demonstrated by the continuing expansion of recover their forward-looking operating efficiently. As Dr. Taylor
demand volumes accompanied by continuing incremental costs including an himself points out, actual price changes
falling prices.’’ At 4. acceptable return on its investment.28 may vary dramatically from the average
‘‘The NPRM entails a second analysis that change embodied in the price cap, so
entails accessing the level of and changes in
He observed that the presence of high
operating margins supports the that differences between prices
the degree of competition in the markeplace, (especially when they are
‘‘short of conducting a burdensome market conclusion that regulated competition
has not produced substantiall consumer misrepresented by the average revenue
power analysis’’, against which the
Commission warned in ¶ 72 of the NPRM. benefits.29 Dr. Taylor also recognizes per line) and the price cap in the short
Unfortunately, after that warning, the NPRM that lower prices and increased demand run may not contain useful information
(¶ 72–111) immediately sets out precisely the can somtimes be mistakenly ascribed to on the state of competition, as indicated
information requirements and calculations competition.30 by the price-cost margin.34 In the event,
that would be necessary to undertake a 44. In his Declaration in this the cap under the CALLS plan was
market power analysis for special access Proceeding, Dr. Taylor himself never intended to represent expected
services. Fortunately, however, the evidence changes in cost, and a comparison of
recognizes the limitations of an analysis
from recent trends in quantities and prices of price changes to GDP–PI—X during the
special access services makes such an of trends in prices without information
about costs. ‘‘Treating a small but CALLs period is not helpful in
analysis unnecessary, as the primary price determining whether prices are
and quantity data show no signs of the significant nontransitory increase in
price as an exercise of market power converging to the relevant costs.
exercise of market power by incumbent
46. Dr. Taylor also suggests that
providers.* * * Using a variety of data assumes the initial prices is a
problem of allocating common costs
sources, I show that various measures of competitive market price. Suppose 10
average revenue per circuit have fallen even make direct price-cost comparison
years of price cap regulation had
as the demand for special access services has impossible. This is correct if the costs of
constrained ILEC special prices to lie
increased.’’ At 8–9. (Emphasis added). special access are predominantly
below a competitive market level. In
common costs as between special access
that case, a significant and sustained

27 Evidence supporting this point can be found in:
price increase when price cap regulation 31 Taylor Declaration at 36.
In the Matter of Special Access Rates for Price Cap
32 Taylor Declaration at footnote 21.
Local Exchange Carriers, WC Docket No. 05–25.
28 Taylor and Zona, page 230. 33 See Figure 3, and the associated discussion.
Comments of CompTel/ALts, Global Crossing North
29 Taylor and Zona, page 229. Taylor Declaration, page 9.
America, Inc., and NuVox Communications, Pages
6–9. 30 Taylor and Zona, page 237. 34 Taylor Declaration at 31.
and other services, but not if a large 22, 33–34). Additionally, mileage costs were ILEC-level economies of density. ILEC’s
fraction of the cost is the cost of twice as high in price flex MSAs ($8/mile) special access rates are also
customer-specific last-mile than under price caps ($3.90/mile).’’ 37 considerably higher than the rates
infrastructure that the customer uses for 49. A study by Mr. Joseph Stith of charged by competitive carriers.
special access. Indeed, as I have argued AT&T compares (a) special access rates Certification
elsewhere,35 a core principle of in price cap areas to the corresponding I hereby certify, under penalty of perjury,
Telecommunications Act unbundling is rates in areas where the BOCs have been that the statements and information
that the common-cost problem much granted pricing flexibility, (b) price cap contained in my declaration are correct and
less severe if one is pricing network rates to the corresponding UNE rates, true to the best of my knowledge.
elements such as loops than if one is and (c) price flexibility rates to UNE Joseph Farrell,
pricing services such as long-distance rates. He finds that ‘‘for a 10-mile circuit 29 July, 2005.
access. I understand that special access the Bells’ tariffed rates are on average,
is essentially the full bundle of services Attachment 3—Comments of Elliot
significantly above their rates for
of the loop or similar last-mile Spitzer, Attorney General, State of New
equivalent UNEs.’’ 38 Mr. Stith finds
infrastructure (perhaps together with York, on the Proposed Final Judgments
similar results for zero-mile circuits.
transport). 50. In its Comments in this In The United States District Court For
47. The BOCs have not submitted Proceeding, BellSouth Submitted a The District of Columbia
estimates of the forward-looking study by RHK showing that ILEC prices United States of America, Plaintiff, v.
economic costs of special access, substantially exceed either comparable SBC Communications, Inc. and AT&T
focusing instead on limitations of UNE rates or competitors’ rates.39 The Corp. Defendants; Judge: Emmet G.
available accounting costs in the ARMIS study reports that BellSouth’s average Sullivan
records. However, forward-looking special access prices are $240, $1,356
economic costs can be estimated using and $5,077 for DS1, DS3 and OCN [Civil Action No. 1:05CV02102]
two reasonable approaches. First, UNE circuits. The average prices for United States of America, Plaintiff, v.
rates for dedicated transport are often BellSouth’s UNE transport element for Verizon Communications Inc. and MCI,
based on forward-looking economic DS1 and DS3 circuits are reported to be Inc., Defendants; Judge: Emmet G.
costs calculated using an engineering- $141 and $623, or about half the Sullivan
economics cost proxy model. I corresponding special access prices. The
understand that high capacity UNEs [Civil Action No. 1:05CV02103]
average prices charged by competitive
(DS1s and DS3s) and perhaps especially carriers for DS1, DS3 and OCN circuits Comments of Eliot Spitzer, Attorney
EELs are the functional equivalent of are reported to be $140, $700, and General, State of New York, on the
special access, so directly relevant UNE $3,300, respectively, or about half the Proposed Final Judgments
rates exist. Second, the rates charged by corresponding Bell special access Pursuant to Section 2(b) of the
a competitive provider of special access prices. Since UNE prices are based on Antitrust Procedures and Penalties Act,
services are unlikely to be estimated forward-looking costs and 15 U.S.C. 16, Eliot Spitzer, the Attorney
systematically below its forward-looking since competitive carriers presumably General of the State of New York,
economic cost. Thus UNE rates and seek at least to cover their forward- respectfully submits the following
CLEC special access charges may be looking costs, the RHK study is comments on the Proposed Final
useful benchmarks for comparing an consistent with the conclusion that Judgments 1 (‘‘PFJs’’) in the above
ILEC’s special access rates versus BellSouth’s special access prices referenced matters.
forward-looking long-run cost. considerably exceed forward-looking
48. The record in this proceeding costs. I. Introduction
includes a substantial amount of 51. The RHK study purports to show The New York Attorney General
information on the relationship between that BellSouth has a small revenue share (‘‘AG’’) is charged with enforcing state
UNE prices and special access prices, for many categories of special access and Federal antitrust and consumer
including: services, yet it reports that BellSouth’s protection laws. The AG advocates in
‘‘In comparing special access vs. UNE prices for these services are significantly administrative and judicial proceedings
prices, Worldcom found the jDS1 UNE loops higher than the prices charged by on behalf of New York State, consumers,
were about 18% less than comparable special competing carriers, and also and the public interest generally. The
access prices and DS3 UNE loops 28% less. considerably higher than UNE rates. The AG has long advocated on behalf of
The fixed portion of transport under UNEs
study does not explain why, in an competition in the telecommunications
was about 10% less for DS1s and the fixed
DS3 transport UNE prices were actually apples-to-apples comparison, BellSouth sector in both the national and state
higher than special access. On the other is able to charge a substantial premium legal and regulatory area. The AG has
hand, major variances occurred on interoffice over its competitors, and maintain participated actively in numerous New
mileage (average DS1 UNE per mile charge prices in excess of UNE rates based on York Public Service Commission
was $1.52 vs. $13.72 for special access, and forward-looking costs. proceedings to support competition in
for DS3s it was $23.35 vs. $57.84).’’ 36 52. The evidence thus suggests that New York State and has filed comments
‘‘In Atlanta, the mileage component of a special access rates are often there as well as at the FCC on a broad
10-mile (UNE) EEL was $1.80, whereas
BellSouth charge $180 in mileage in MTM significantly above corresponding UNE range of telecommunications
special access prices or $80 under their rates. The UNE rates are based on
discount plan. Similar disparities are found forward-looking cost, incorporating 1 Department of Justice, Antitrust Division,
(unlike competitive carriers’ pricing) United States v. SBC Communications Inc. and
in Southwestern Bell and Ameritech (pp 21–
AT&T Corp.; Competitive Impact Statement,
Proposed Final Judgement, Complaint, Stipulation,

35 Joseph Farrell, ‘‘Creating Local Competition’’, 37 NuVox, Initial Comments, 10/4/04, WC 04–313,
70 FR 74334 (Dec. 15, 2005); Department of Justice,
Federal Communications Law Journal 49:1, p. 22. Antitrust Division, United States v. Verizon
November 1996, 201–215. 38 Declaration of M. Joseph Stith, WC Docket No.
Communications Inc. and MCI, Inc.; Competitive
36 Henry G. Hultquist, Worldcom, Letter to 04–313, September 30, 2004. At 17. Impact Statement, Proposed Final Judgement,
Marlene H. Dortch, 10/29/02, FCC, Docket CC 96– 39 Declaration of Stephanie Boyles, June 8, 2005. Complaint, Stipulation, 70 Fed. Reg. 74350 (Dec.
98, 98–147, 01–338 (p. 7). WC Docket No. 05–25. 15, 2005).
competition issues over the years, for the Court in reviewing the adequacy inhibit the CLEC from constructing a
including comments with both agencies of the PFJs, Congress has made this new last mile connection of its own.
regarding the proposed Verizon-MCI Court the final arbiter of the propriety MCI and AT&T have made the most
merger.2 of these mergers under the antitrust significant inroads of all competitors to
Through Verizon New York Inc., laws. The Court must ‘‘determine that Verizon and SBC in gaining access to
Verizon Communications Inc. the entry of such judgment is in the commercial buildings, by going through
(‘‘Verizon’’) provides regulated and public interest,’’ and, if it cannot so the time-consuming and costly process
unregulated telecommunications find, it must reject the PFJ unless more of laying their own competitive access
services in New York, and is the adequate provisions are made to protect lines. MCI and AT&T also lease last mile
dominant provider in multiple service the public interest. 15 U.S.C. 16(e). See, facilities from the ILECs to reach
markets from Maine to Virginia. MCI e.g., United States v. Microsoft Corp., 56 customers in buildings not reached by
Inc.’s (‘‘MCI’’) subsidiaries provide F.3d 1448, 1458 (D.C. Cir. 1995) any CLEC. In many buildings in major
telecommunications services on a (‘‘Congress, in passing the Tunney Act, commercial centers nationwide, MCI
regulated and unregulated basis in New intended to prevent ‘judicial rubber and AT&T have become key competitive
York and, since before the breakup of stamping’ of the Justice Department’s carriers, who offer customers seeking
AT&T in 1984, MCI has played a key proposed consent decree[s]’’) (reversing LPL service a choice other than the
competitive role in business, long district court’s rejection of consent incumbent ILEC. Entry into the retail
distance and local service markets. decree on other grounds). special access market by CLECs other
While SBC Communications, Inc. Taken together, these mergers will than MCI and AT&T, via laying their
(‘‘SBC’’) has had only a limited change the face of the own last-mile connections, is negligible.
competitive presence in New York, it telecommunications industry. Post- This retail competition by MCI and
provides regulated and unregulated merger these two companies will AT&T will be eliminated by the
telecommunications services and is the mergers.
overwhelmingly dominate
dominant provider in multiple service
telecommunications markets and will be B. The Mergers Will Eliminate
markets in 13 states.3 AT&T Corporation
in a position to inhibit competition, Discounted ‘‘Last Mile’’ Wholesale
(‘‘AT&T’’) provides telecommunications
customer choice and innovation. The Leasing
services on a regulated and unregulated
remedies contained in the PFJs are The ILECs lease bundled long-haul
basis in New York and is the nation’s
unlikely to constrain the merged and last-mile LPL facilities to CLECs at
largest provider of enterprise services,
entities. significant large-volume discounts,
while also establishing itself as a
leading long distance and local service There are two key areas of concern. which only AT&T and MCI can take
competitor. First, the PFJs inadequately address advantage of because of their scale and
Together, MCI and AT&T maintain local private lines, which are of major ability to make longer-term purchase
the most comprehensive local and long- importance to business customers. commitments. Thus, MCI and AT&T
haul facilities which are required by Second, the PFJs ignore the effect of the have also been essential players
major enterprise customers. Since the mergers on Internet access. For the providing competition in the wholesale
Telecommunications Act of 1996, AT&T reasons discussed below, this Court market for last mile access. MCI and
and MCI have also established should find that these mergers are not AT&T have acted as price constrainors
themselves as the most successful in the public interest and reject the PFJs. on the ILECs. MCI and AT&T have also
competitive local exchange carriers II. Local Private Lines resold the incumbent ILECs’ last mile
(‘‘CLECs’’) in New York and nation- access to other, smaller CLECs at
wide. As DOJ acknowledges, the mergers discounted rates. Without this
Telecommunications are vital to New will lessen competition substantially for secondary wholesale market offered by
York’s information-intensive economy, Local Private Lines (‘‘LPLs’’), more AT&T and MCI, smaller CLECs will no
which is the national and global center commonly know as ‘‘special access’’ longer have access to these discounted
of the financial services and other major lines. LPLs are dedicated point-to-point prices.
industries. For over a generation, circuits, that enable secure high-speed
increased competition in voice and data transfer typically used by C. The Remedy Proposed by the PFJ for
telecommunications has been the businesses and other enterprises. LPLs the ‘‘Last Mile’’ Is Inadequate
driving force behind fair prices, high are especially critical for inter-office In order to preserve some competition
quality, innovative offerings and greater communications in the financial in the retail market for last mile access,
access to services. As a result of New services industry, a key component of the Verizon-MCI PFJ requires Verizon to
York City’s economic preeminence, New York’s economy. divest a miniscule number of MCI-
increased competition for owned telecom facilities in individual
A. The Mergers Will Eliminate Facilities-
telecommunications services took hold buildings where MCI is the only telecom
Based Competition in the ‘‘Last Mile’’
here before other parts of the state and provider besides Verizon with last-mile
country, and has been the most robust. The most critical component of an connections in the building. Likewise,
The Tunney Act process can play an LPL is the ‘‘last mile,’’ i.e., the last SBC would have to divest certain AT&T
essential role in ensuring that strong stretch of the connection from the assets according to a similar scheme.
competition continues in New York and carrier’s network to the commercial These minimal divestitures will affect
nationwide. building in which the customer is only a handful of buildings in major
While the U.S. Department of Justice located. As incumbent local exchange markets—a mere 17 in all of New York
(‘‘DOJ’’) attempts to downplay the role carriers (‘‘ILEC’’), Verizon and SBC are City, and only 38 buildings throughout
often the only carriers with access to all of New York State. Although Verizon
2 See, e.g., http://www.oag.state.ny.us/

many buildings. CLECs must lease last- and MCI are competitors in many
telecommunications/telecommunications.html. mile access from these incumbents if no hundreds of buildings in New York
3 Although SBC has chosen to adopt AT&T’s
name following its merger closing, we refer to the

other provider has gained access to the State, DOJ has used an unduly narrow
two companies by their pre-merger identities to customer’s location, and if right-of-way permissive screen, which results in only
avoid ambiguity. excavation or building entry costs 38 buildings receiving limited
divestitures to address adverse favor of Verizon’s or SBC’s own services competitive potential before it even
competitive effects of the mergers. in the use of their Internet backbone. takes off.
DOJ is missing the forest for the trees. The risks associated with these trends
As a threshold matter, an individual are real and will have serious adverse 2. Verizon Offers Stand-Alone DSL Only
building cannot plausibly be a effects on competition and the public if On a Limited Basis
geographic market for antitrust unchecked. In March 2005, the FCC ordered
purposes. Indeed, here, the buildings These two transactions will result in Verizon and other carriers to allow their
are simply scattered commercial the two combined companies
existing customers who subscribe to the
locations amidst MCI’s existing network controlling over fifty percent of the
carriers’ voice and DSL service to port
in New York City and statewide. They nation’s Internet backbone.5 Recent
their phone numbers to a new voice
do not, themselves, form the critical post-merger statements by the Chief
carrier.8 In response, Verizon informed
mass needed to build a network. Nor are Executive Officers of Verizon and SBC
competing voice carriers that such
they network gateways or anchors that foreshadow the companies’ plans to
manage access to their Internet customers should be advised that
might have distinctive value. In
backbone more restrictively, by, for porting the number, and thus
consequence, any would-be competitor
example, charging a premium for terminating their Verizon voice service,
who acquired the divested MCI facilities
priority access.6 would cause their Verizon DSL service
serving these scattered buildings would
have neither the scope nor scale to be disconnected as the two services
A. DSL were inseparable.9 Subsequently, during
necessary to stand in MCI’s competitive
shoes. It is, therefore, hard to see how 1. Unbundled DSL the FCC and DOJ review of the Verizon-
this remedy could have any significant MCI merger, Verizon publicly expressed
Both Verizon and SBC offer a willingness to allow its existing
positive effect on competition beyond consumers access to the Internet
the footprint of the handful of customers in the former Bell Atlantic
through broadband connections known service territories to maintain their
individual buildings identified— as Digital Subscriber Lines (‘‘DSL’’).
assuming that the divestitures can be Verizon DSL broadband service in the
DSL service is a dedicated high speed
accomplished at all. Is the DOJ really event that they discontinued Verizon’s
digital connection to the Internet
prepared to inform the Court that the telephone service.10 However, even this
provided over the traditional copper
divestiture of access lines into these few option is not available to new Verizon
telephone lines. Verizon and SBC offer
buildings will have a competitive customers or those outside the former
DSL service to their in-region small
impact on pricing in general for LPL Bell Atlantic service territories who seek
business and residential customers over
access in either New York City or the to subscribe to stand-alone DSL at the
these standard wireline connections.7
state generally? If not, the proposed DSL is necessary for customers to use outset.11 For these customers, the only
remedy is mere window dressing. telephone wires to access high speed way to obtain VOIP with Verizon DSL
Moreover, under the PFJ, DOJ retains data services as well as voice over would be to subscribe initially to
the right, in its sole discretion, to Internet protocol (‘‘VOIP’’) services. Verizon’s voice telephony and DSL, to
exclude assets and rights.4 Thus, even Typically, Verizon and SBC bundle DSL pay the required connection charges,
the 38 buildings in New York state with their wireline voice services. This and only thereafter to jettison the
could disappear from the Verizon-MCI type of offering inhibits customers’ unwanted voice service. This
PFJ divestiture list if DOJ concludes that ability to choose a competing provider
any or all are not necessary to remedy for voice or data services. 8 FCC Docket Number WC 03–251, BellSouth
the competitive harm. In other words, Emergency Request for Declaratory Ruling, FCC 05–
For example, telephony using VOIP 78, Memorandum Opinion and Order and Notice of
the remedy is written in disappearing has the potential to be a major Inquiry, rel. March 25, 2005, 20 FCC Rcd 6830;
ink. Either the divestitures are needed to competitor to wireline telephone 2005 FCC LEXIS 1817; 35 Comm. Reg. (P & F) 1063.
remedy a likely antitrust violation or services. But stand-alone VOIP requires 9 Verizon claimed that customer identification
they are not. Surely the Court cannot be customers to secure broadband ‘‘last issues prevented it from offering wireline and DSL
services independent of each other. By contrast,
expected to decide that the public mile’’ access from another provider, Qwest Communications International Inc., the
interest is served by a decree that has typically via DSL. By only selling its smallest regional Bell operating company
the potential for its divestiture remedies DSL service bundled with its monopoly (‘‘RBOC’’), has offered stand-alone DSL for quite
to vanish. voice service, Verizon and SBC some time. See Yuki Noguchi, Merger Critics Seek
Telecom Regulation, Wash. Post, April 20, 2005, at
discourage their customers from
III. Internet Access Issues E5. The inference is inescapable that Verizon is
choosing competitive VOIP providers. deliberately stalling so as to hinder competition
The two proposed mergers raise The Verizon customer cannot give up from other VOIP providers.
antitrust concerns relating to Internet the Verizon voice service in favor of a 10 Matt Richtel, Some Verizon Customers to Get
services, concerns that are not Stand-Alone D.S.L., N.Y. Times, April 19, 2005, at
competitive VOIP provider while C7. In conjunction with the April 18, 2005
sufficiently addressed by the PFJs. keeping the customer’s Verizon DSL announcement, in a notice to CLECs, Verizon
The PFJs do not address whether broadband access. The negative effects explained that CLECs no longer had to alert
Verizon and SBC should be required to on competition are apparent, and customers that porting would result in
permanently provide unbundled, stand- disconnecting their DSL service. Instead, Verzion
indeed, may snuff out VOIP’s said that CLECs should alert customers that DSL
alone DSL service to all customers, nor service might be disconnected, and that the
do the PFJs prohibit discrimination in 5 Nicholas Economides, The Economics of the
customer should contact Verizon to determine how
Internet Backbone, NYU Law and Economics to handle the service. There still seems to be some
4 70 FR at 74365 (‘‘Lastly, with the approval of the Working Papers, Paper 4, p. 377 (2004). ambiguity whether every existing Verizon customer
6 See, e.g., Arshad Mohammed, ‘‘SBC Head seeking stand-alone DSL will actually be able to do
United States, in its sole discretion, and at the
purchaser’s option, the Divestiture Assets may be Ignites Access Debate,’’ Wash. Post., Nov. 4, 2005 so. Moreover, Verizon has not disclosed whether its
modified to exclude assets and rights that are not at D01. stand-alone DSL will be priced at a premium or at
necessary to meet the aims of this Final Judgement. 7 While other variations of DSL, used primarily by a price comparable to that of the DSL component
This will allow for minor modifications of the medium and larger business customers, do not of the bundled product.
Divestiture Assets to exclude assets that may not be share a telephone line with voice traffic, these 11 E.g., those customers formerly served by GTE
necessary in order to remedy the competitive comments focus on the residential and small before its acquisition by Bell Atlantic would not
harm.’’) business DSL market. have the option of stand-alone DSL.
constitutes a significant anticompetitive SBC/AT&T transactions, the FCC own services and charging premiums to
hurdle. required that the parties make stand- competing ISPs for providing
While retarding competitive entry by alone DSL available to customers in comparable service.16 All other traffic
VOIP providers in this manner, Verizon region without requiring the purchase of would be subjected to lower grade
has committed billions of dollars to wireline telephone services for a period service. This prospect could have
expand its fiber-to-the-premises (FTTP) of two years.14 While this condition significant anticompetitive impacts on a
network. As this expansion is recognized the competitive value of number of Internet-based services, such
completed, it will allow Verizon to stand-alone DSL, the two year time as those that rely upon video streaming,
replace its DSL service with an array of frame moots its effect. The scheduled and would alter the very nature of the
high speed products to better compete expiration of the requirements will not Internet.
with broadband and video services only cripple VOIP as a competitive The Internet backbone comprises high
offered by cable providers. Thus far, voice telephone service; the mere speed hubs, to which customer data
however FTTP is available only in prospect of such an event is likely to packets, including electronic mail and
limited areas.12 While the roll-out of inhibit investment and growth mass voice services, are sent by ISPs, and
FTTP progresses Verizon has little market VOIP providers. high speed circuits that connect the
incentive to offer stand-alone DSL— The public interest should not depend hubs to move data from one location to
particularly when refraining from doing on whether Verizon and SBC decide to another. In most instances, the data is
so hinders VOIP providers from offer stand-alone DSL of their own broken up into smaller packets to speed
competing against Verizon’s monopoly volition after the two-year requirement delivery. Because the data packets
voice product. expires. Recognizing the advantage that usually flow over multiple providers’
Indeed, Verizon’s own Annual Report Verizon and SBC derive from offering backbones before reaching their final
indicates that offering DSL and other their DSL service only as a bundled destinations, different providers’
services on an unbundled basis is not product, DOJ should have considered backbones must interconnect to deliver
likely to be a high priority for Verizon whether Verizon and SBC are likely to customer traffic.17 Thus, the Internet
at all, as the bundles themselves give eliminate DSL on a stand-alone basis as backbone provides data transport and
Verizon a competitive advantage over soon as the FCC’s merger conditions routing services, moving the data to the
other service providers. Verizon’s 2004 expire. In approving the transactions, appropriate destinations with a
Annual Report highlights the company’s DOJ should have required customer minimum of loss and delay.
‘‘continuing initiatives to more access to unbundled services for longer The primary Internet infrastructure in
effectively package and add more value than two years as a condition of its the U.S. has approximately ten major
to our products and services. Innovative approval. backbones—often referred to as ‘‘Tier 1
product bundles include local wireline providers’’—plus independent ISPs that
services, long distance, wireless and B. The Internet Backbone
use this backbone to provide services to
DSL for consumer and business retail 1. The Mergers Will Increase Internet customers.18 One source identifies MCI
customers. * * * These efforts will also Backbone Concentration and AT&T as two of the world’s top five
help counter the effects of competition The combinations of Verizon with Internet backbones.19 According to In
and technology substitution that have MCI and SBC with AT&T will Stat-MDR, a market research firm, ‘‘[a]t
resulted in access line losses in recent dramatically increase concentration of the end of 2000, 10 backbone providers
years.’’ 13 Internet backbone facilities, and will generated 92 percent of all wholesale
3. The FCC Required That Verizon and enable Verizon and SBC to exert market ISP revenues’’ in the U.S.20 In Stat-MDR
SBC Offer Stand-Alone DSL power over competing Internet service found that the three top providers in
The significance of the stand-alone providers (‘‘ISPs’’) and content 2002 were MCI with 44% of the Internet
DSL issue is demonstrated by the providers, to the detriment of backbone, Genuity with 12.5% and
merger conditions ordered by the FCC consumers.15 In recent statements, Sprint with 9.4%.21 Based on those
and various state regulators. As part of executives of both Verizon and SBC numbers, these three providers alone
the approval of the Verizon/MCI and have stated that they intend to abandon comprise two-thirds of the Internet
the established practice of equal access backbone market and yield an
12 News Release, Verizon Communications Inc., for all Internet traffic by favoring their Herfindahl-Hirshfeld Index of 2180
Verizon Brings Blazing-Fast Computer Connections without including the remaining smaller
to 5 Long Island Communities, (April 11, 2005) 14 FCC Docket No. 05–65, In the Matter of SBC
available at http://newscenter.verizon.com/ Communications and AT&T Corp. Applications for 16 See e.g., Dionne Searcey and Amy Schatz,
proactive/newsroom/release.vtml?id=90318 Approval of Transfer and Control, FCC 05–185
‘‘Phone Companies Set Off Battle Over Internet
(‘‘Verizon customers in Massapequa, Wantagh, Memorandum Opinion and Order, adopted October
Fees,’’ Wall St. Journal, Jan. 6, 2006 at A1.
Franklin Square, Port Washington and Oyster Bay 31, 2005, rel. Nov. 17, 2005, 2005 FCC LEXIS 6385; 17 Nicholas Economides, supra, p. 375. For a more
now can experience breathtaking high-speed 37 Comm. Reg. (P & F) 321; FCC WC Docket No.
Internet access as the company begins to offer its 05–75, In the Matter of Verizon Communications detailed understanding of the Internet backbone see
Verizon FiOSSM (FYE’-ose) Internet Service to Inc. and MCI, Inc. Applications for Approval of Michael Kende, The Digital Handshake: Connecting
homes here.’’). Transfer of Control, FCC 05–184, Memorandum Internet Backbones, FCC Office of Plans and Policy
13 Verizon Communications Inc., 2004 Quarterly Opinion and Order, adopted Oct. 31, 2005, rel. Nov. Working Paper No. 32 (September 2000) and
17, 2005 FCC LEXIS 6386; 37 Comm. Reg. (P & F) Nicholas Economides, supra.
Report (for the period ending September 30, 2004), 18 Data about the Internet backbone are often
pp. 20–21 (2005). See also Verizon Communications 416. The New York Public Service Commission also
Inc., 2003 Annual Report, Exhibit 13 (2004) (noting ordered Verizon to provide unbundled DSL, also for incomplete or outdated or do not specifically
that decreases in certain revenue streams were a period of two years. New York State Public identify whether the data are based on usage,
‘‘partially offset by increased demand for our DSL Service Commission, Order Asserting Jurisdiction revenue or some other measure. The merging
services’’). Last year, Verizon noted that ‘‘[a]s of and Approving Merger Subject to Conditions, Case parties were unable and/or unwilling to provide
year-end 2003, approximately 48% of Verizon’s 05–C–0237, Joint Petition (issued November 22, current data during the review of the transactions.
19 Internet Backbone Lookup Page, http://
residential customers have purchased local services 2005).

in combination with either Verizon long distance or 15 The vast majority of Internet users in the www.cybercon.com/backbone.html. The others are
Verizon DSL, or both.’’ Verizon Communications United States access the Internet infrastructure Sprint, Qwest and Level 3.
20 ISP-Planet Staff, ISP Backbone Market Forecast:
Inc., 2003 Annual Report, p. 6 (2004). By September through ISPs. While AOL is by far the largest ISP,
30, 2004, that number had increased to 53%. many smaller ISPs exist, some of whom have Flat Through 2002 at http://isp-planet.com/
Verizon, 2004 Quarterly Report (for the period customers only in limited regions. Nicholas research/2002/backbone_020123.html.
ending September 30, 2004), p. 26 (2005). Economides, supra, p. 375. 21 Id.
providers. This would be considered a approval of the GTE/Bell Atlantic Although public information
highly concentrated market. merger was conditioned, in part, on regarding Verizon’s current Internet
Tier 1 Internet backbone providers GTE’s divestiture of its Internet backbone ownership is incomplete,
achieve interconnection of their backbone.25 there can be no doubt that the
backbones through what is known as Taken together, the Verizon-MCI and opportunity to amass a dominant
‘‘peering.’’ Through peering, Tier 1 SBC–AT&T mergers would significantly Internet backbone position is a driving
providers agree to afford each other the increase concentration in the Internet force behind the company’s decision to
ability to freely move data across backbone market. Neither the FCC order acquire MCI. As the companies stated in
networks without fees in mutually nor the PFJ gave serious consideration their Application to the FCC:
beneficial arrangements. Smaller to this critical issue, and to the effect of The Verizon/MCI combination of product
backbone providers, on the other hand, these mergers on the Internet backbone. offerings will provide a stronger, and
are frequently considered free riders, as geographically broader, converged solution
2. Verizon and MCI’s Internet
they generate too little traffic to be for large enterprises. Verizon currently has
Backbones 26
peering partners. Because Tier 1 strong IP-based offerings, but they have
providers generally do not consider no- MCI, by its own acknowledgement, limited reach within its area footprint and
fee peering with small providers to be owns ‘‘one of the most extensive Verizon is not a major provider of IP-based
sufficiently beneficial, smaller providers Internet protocol backbones.’’ 27 services. MCI’s core strength is its global
often enter into fee-based agreements— Recently, MCI reported that its Internet backbone, which provides global IP
backbone network ‘‘has been recognized connectivity today, and will be able to
called ‘‘transit’’ arrangements—with provide next-generation VoIP and other IP-
Tier 1 providers. for the fourth consecutive year * * * as
based services worldwide tomorrow.30
These fee-based arrangements for the world’s most connected Internet
interconnection are not necessarily backbone playing a critical role in the But the consolidation of Verizon’s
problematic in a competitive market. movement of Internet traffic. Our assets with MCI’s Internet backbone also
However, if only a few providers control expansive IP footprint, coupled with our holds significant risks of adverse
backbone access, the resulting direct interconnections, enables our consequences to competition and
opportunity for these few to hinder the customers to reach more destinations innovation. The issues related to
operations of smaller backbone directly through our global Internet consolidation of the Internet backbone
competitors by refusing to interconnect backbone than any other were not raised by the parties in their
with them, or by imposing onerous fees communications provider.’’ 28 Joint Petition, which fails to identify: (1)
or conditions on interconnecting, has MCI’s extensive backbone thus Whether Verizon already controls a
significant anticompetitive and public represents an attractive, strategic asset. share of the Internet backbone, (2) the
interest implications. Those Tier 1 According to MCI’s 2003 Annual share of the Internet backbone held by
backbone providers would have both Report, MCI occupies: MCI, and (3) the combined share of the
the ability and incentive to, for example, a strategically important position within
Verizon/MCI assets. These risks were
charge significantly higher fees, the communications market . . . availability not addressed by DOJ in the Verizon-
prioritize their own data packets, block due to the extremely rapid growth of Internet MCI PFJ, nor by the FCC in its approvals
certain ISP transmissions, or end their usage resulting from the increasing of the transactions. These omissions are
cooperative relationships with smaller availability of high speed broadband access, striking.
the decreasing cost of all types of Internet The Court should reject the Verizon-
backbones entirely.22 access, the expanding volume of informative
Consequently, regulatory action has MCI merger unless and until Verizon
and entertaining content, the continued provides the information needed to
been necessary to preserve competition improvement in e-mail and instant
when the Internet backbone was messaging, and the ever increasing number of
make an informed decision regarding
threatened by earlier corporate personal computers, and other devices for the extent to which backbone
combinations and mergers. In 1998, accessing the Internet. Corporations and concentration will increase as a result of
when WorldCom, the owner of Internet government entities have responded by the proposed merger with MCI. Based
backbone assets, proposed to acquire developing additional applications to run on that information, together with
over the Internet that allow communications further public comment evaluating it,
MCI, then the owner of UUNet backbone and e-commerce transactions with customers,
assets, the FCC required WorldCom to the appropriateness of divestiture of
communications with employees and the
divest its backbone assets to Cable & transfer of data among offices and operating
backbone assets should be assessed.
Wireless.23 Similarly, when the FCC units.29 3. The Threat to Competition Is
considered the merger application of Concrete
Bell Atlantic and GTE (which resulted Corporation, Transferee For Consent to Transfer
Control of Domestic and International Sections 214 The consolidation of the Internet
in the formation of Verizon), the FCC
and 310 Authorizations and Applications to backbone as a result of the mergers is
weighed the public interest impact of Transfer Control of a Submarine Cable Landing not an issue in the abstract. As the
the consolidation of companies’ Internet License, Memorandum Opinion and Order, released
combined Verizon/MCI and SBC/AT&T
backbone holdings. Indeed, the FCC June 16, 2000, at ¶ 215.
move to offer more bundled product
concluded that the merging parties had 25 CC Docket 98–184, supra, at ¶ 215 (footnote
omitted) (‘‘Although we agree with the Applicants packages over their backbones—such as
‘‘not demonstrated any merger-specific
that the Internet backbone market is highly offering VOIP and video services—the
benefits to the market for Internet concentrated, we nonetheless conclude that the Bell increased need for bandwidth may
backbone services.’’ 24Accordingly, Atlantic and GTE have presented insufficient
evidence regarding how their proposed merger strain their existing systems,
22 Kende, supra, pp. 18–23. would alleviate such concentration and benefit encouraging Verizon and/or SBC to give
23 CC Docket No. 97–211—Application of consumers of long-haul data services.’’). priority to their own products. This
26 We focus on the Verizon and MCI Internet
prioritization would disadvantage
WorldCom, Inc. and MCI Communications

Corporation for Transfer of Control of MCI backbone as Verizon is the major ILEC in New York
State.
consumers who use non-Verizon/SBC
Communications Corporation to WorldCom, Inc.,
Memorandum Opinion and Order, FCC 98–225 (rel. 27 MCI, Inc., 2003 Annual Report 2 (2004). Internet service providers to access
Sept. 14, 1998). 28 MCI, Inc., 2004 Quarterly Report (for the period information and services that must
24 CC Docket No. 98–184—In re Application of ending September 30, 2004) 33 (2004).
GTE Corporation, Transferor, and Bell Atlantic 29 MCI, Inc., 2003 Annual Report 15 (2004). 30 Application, p. 17 (citations omitted).
travel across the Verizon and SBC was approved.32 SBC Chairman Edward elimination of Verizon’s and SBC’s
backbones. E. Whitacre, Jr. is one of the most vocal major competitors (MCI and AT&T),
The proposed combinations also proponents of a tiered system, stating prices can be expected to rise, and
would adversely impact other Internet that ‘‘Why should they be able to use telephone users, from large business
backbone providers who lack the my pipes? The Internet can’t be free in customers to small businesses and
capacity to offer the same panoply of that sense, because we and the cable residential customers, are likely to find
services. The more extensive offerings companies have made an investment fewer service choices. DOJ should have
would drive traffic to Verizon and SBC and for a Google or Yahoo or Vonage or analyzed the national and regional
and, moreover, increase the companies’ anybody to expect to use these pipes impact of both mergers together and, at
market share. free is nuts.’’ 33 As an Amazon.com least, required divestiture substantial
Vital public policy, therefore, requires representative said after hearing Mr. enough to create a realistic opportunity
that Verizon’s acquisition of MCI’s Whitacre’s comments, ‘‘What Mr. for industry participants to step into
Internet backbone, and SBC’s Whitacre’s interview revealed was, I MCI’s and AT&T’s competitive shoes.
acquisition of AT&T backbone, when think he said two very distinct things. Additionally, Verizon and SBC will
combined with their current Internet One is that the service providers have each have a powerful incentive to
backbone holdings, not diminish either market power. * * * and part two was, refrain from competing in each other’s
consumers’ or competitors’ equal and we intend to use it.’’ 34 Though Verizon territory and to focus on their respective
unfettered access to the Internet. waited to clear all regulatory hurdles to regions. The two telecommunications
the merger with MCI before addressing mammoths will have more to gain by
4. The Mergers Risk Creating a
the issue, its position is in line with that selling each other limited LPL access,
Discriminatory Internet Class Structure
of SBC. Verizon Chairman Ivan than by engaging in rigorous
There is a risk that, post-merger, Seidenberg recently stated that, ‘‘We competition by installing their own last-
Verizon and SBC will have Internet have to make sure they don’t sit on our mile loops in each other’s region. Even
backbones that carry their own products network and chew our capacity.’’ 35 without coordination, there is a
in first class, while competitors ride in substantial risk that each will follow its
coach, pay more or never get to ride at IV. The PFJs Undo Thirty Years of own economic interests by not
all. A combined Verizon/MCI entity Federal Telecommunication competing, as long as the other does the
would be well positioned to create an Competition Policy same. This kind of tacit collusion or
Internet infrastructure that restricts At least since DOJ commenced mutual forebearance is highly
access to the Internet backbone for antitrust enforcement action against the anticompetitive, whether or not the
countless businesses, institutions and national telephone monopoly, AT&T, parties actually agree to form a cartel.
individuals.31 At stake is nothing less over thirty years ago, resulting in the The PFJs do nothing to counter this
than the ability of Internet access breakup of ‘‘Ma Bell’’ in 1984, the substantial threat.
providers, such as Verizon and SBC, to Federal government has pursued a
limit or diminish consumers’ access to V. Conclusion
policy to encourage competition in all
Google, Vonage or any other content or sectors of the rapidly changing The Court should not give DOJ ‘‘a
service provider that does not pay its telecommunications industry. The PFJs pass’’ in its review of these important
fees. The resulting Internet ‘‘class represent a significant step backwards, mergers. The long term implications are
structure’’ would not only affect the and will likely lead to a more too important for too many people and
ability of smaller competitors to monopolistic industry in the future. businesses in New York and, indeed,
participate in the marketplace of ideas MCI and AT&T have been the leading throughout the country. Nothing in the
and services, it risks drastically altering competitors to the regional Bell PFJs is likely to preserve effective
the character of the Internet. This would companies, Verizon and SBC, in the competition at any level in the affected
not only reverse the cultural and twenty years since the AT&T monopoly markets, or to prevent the harm to the
economic revolution that the Internet was broken up. However, as a result of public that will follow the reduction in
has inspired, but also would change the these mergers, Verizon and SBC will competition. The proposed remedies
nature of the Internet, in which become vertically integrated, dominant are, at best, cosmetic. Based on the
participants compete based on the providers of local, long distance, current state of affairs, the Court should
quality of their content or services, not wireless and Internet services to reject the PFJs as insufficient and
on their ability to pay fees to the business and residential customers in contrary to the public interest.
backbone providers. large regions of the country. If these Dated: New York, New York, February 13,
As demonstrated by recent Verizon mergers proceed without stronger 2006.
and SBC statements, this danger is a remedial protections, Verizon and SBC Respectfully Submitted,
likely near-term reality. Both SBC and will be free to recreate within their Eliot Spitzer,
Bell South have publicly advocated a regions the monopoly maintained by Attorney General of the State of New York.
two tiered Internet. SBC’s public AT&T prior to 1984.36 With the By:
statements on the topic became more Jay L. Hines,
frequent after its acquisition of AT&T 32 Declan McCullagh, ‘‘Playing favorites on the
Chief, Antitrust Bureau
Net’’, CNET News.com (Dec. 21, 2005) http://
news.com.com/Playing+favorites+on+the+Net/ Mary Ellen Burns,
31 By way of example, there exists today a process
2100-1028_3–6003281.html. Special Counsel, Public Advocacy Division.
known as ‘‘tagging,’’ which allows a provider to use
rule-based and policy-based filtering to limit the
33 Arshad Mohammed, ‘‘SBC Head Ignites Access Jay L. Himes,
flow of data packets. If packets are ‘‘tagged,’’ the Debate,’’ Wash. Post., Nov. 4, 2005 at D01.
34 McCullagh, supra note 31.
network recognizes the class of service and priority premature to rely on such alternatives to substitute
35 Dionne Searcey and Amy Schatz, ‘‘Phone

assigned it for real-time delivery to ensure a high for the competition that MCI and AT&T have
quality of service. Using tagging, Verizon could Compnies Set Off Battle Over Internet Fees,’’ Wall offered. These competitors do not play a significant
assign a higher transit priority—first class status— St. Journal, Jan. 6, 2006 at A1. role in business markets, having inadequate market
to data packets originating on its own system, while 36 Despite Verizon’s and SBC’s assertions that share, reliability or security to handle sensitive data
relating a lower priority—coach status—to the data new technologies such as VOIP and cable traffic. Thus, they cannot be relied upon to restrain
packets from outside traffic that needs to access telephony, as well as wireless providers pose Verizon or SBC from exercising market power after
Verizon’s Internet backbone. significant competitive threats to the ILECs, it is the merger.
Chief, Antitrust Bureau. Keith H. Gordon 120 Broadway, New York, NY 10271, Tel
Susanna Zwerling, Jeremy R. Kasha. No.: (212) 416–8262, Fax No.: (212) 416–
Chief Telecommunications & Energy Bureau. Assistant Attorneys General of Counsel. 6015.
Peter D. Bernstein, [FR Doc. 06–3090 Filed 4–4–06; 8:45 am]
BILLING CODE 4410–11–M

Notice: Competitive Impact Statements and Proposed Consent Judgments: SBC Communications, Inc., Et Al.

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Wednesday,

Competitive Impact Statements and

differently buildings where at least two carriers

48 For instance, their proposal that the merged

effects of alternative remedies actually considered,

8 Verizon comments, Declaration of Verses,

filed In the Matter of Applications for Consent to

transport circuits for which AT&T and SBC are the

12 The data sets submitted by ACTel members to

for a short period of time after the mergers. But the

Through State Capitals, CNN, April 11, 1997;

Influence, 83 A.B.A.J. 36, June 1997.

owners and municipal officials. sunk costs is generally recognized as a barrier to

Tunney well recognized ‘‘[i]ncreasing concentration market with precision—concluding only

27 Merger Guidelines, Section 3.3.

42 15 U.S.C. 16(e)(1)(B) (emphasis added).

BILLING CODE 4410–11–C

State Commission Proceedings to Regulate U S Remedies Need to Ensure Compliance by ILECs

none of this is to suggest that the

8 There may well be other buildings where MCI

Rivals (CAPs) collectively offer erc+(1¥e)r. unchanged: 13

Law and Technology 17:1 (Fall 2003), 85–135.

1 ............................................................... 9 $0 10.0 $10,000,000 $10,000,000 6.0

5 ............................................................... 14 1,300,000 10.0 2,000,000 3,3000,000 2.0

Rulemaking, 18 FCC Rcd. 16978, 17155, n.856

TABLE 1.—API AND PCI FOR VERIZON (BNTR)

Total Special Access PCI ................................................................................................................ 47.88 45.73 43.40 43.47

that case, a significant and sustained

Proposed Final Judgement, Complaint, Stipulation,

2 See, e.g., http://www.oag.state.ny.us/

name following its merger closing, we refer to the

residential customers have purchased local services 2005).

WorldCom, Inc. and MCI Communications

35 Dionne Searcey and Amy Schatz, ‘‘Phone

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