[Congressional Record Volume 141, Number 71 (Tuesday, May 2, 1995)]
[Senate]
[Pages S5961-S5975]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
AUTOMOTIVE TRADE WITH JAPAN
Mr. BYRD. Madam President, America's trading relationship with Japan
is now reaching a historic, serious phase in what has been a long
history of innumerable initiatives and negotiations to gain access for
American products into her market. Strong action will very likely need
to be taken by the administration, and the support of the Senate and
American industry will be important.
The United States and Japan are nearing the end of over a year and a
half of negotiations on automotive trade, aimed at reducing our $66
billion trade imbalance with Japan by opening major elements of her
closed domestic market to our products. The issue, access to Japan's
automobile market, including to her dealerships for American cars, and
to the lucrative auto parts market, is reaching a critical juncture.
The issue this time involves, once again, more than the securing of
commitments by the Japanese in a written agreement to try to do
something to open her market. It goes to the heart of America's
strategy on how to gain the actual results of opening the Japanese
market.
The question is whether we, including both the executive branch and
the Congress, along with American industry are all prepared to stick to
our guns and take action against Japanese imports if the auto market in
Japan remains essentially closed to our cars and our spare parts.
Specifically, are we willing to take retaliatory action and impose
trade sanctions on her products, under section 301 of the 1974 Trade
Act? I say to my colleagues that now is the time to change the paradigm
in our trading relations with Japan. If we are not prepared to take
retaliatory actions under the law, in a situation which is about as
perfectly suited as is possible to the intent of the law as it was
written, then we may be looking at a continuation of these deficits in
perpetuity.
Madam President, if anyone doubts the persistence of unfair barriers
in Japan to her marketplace, then they ought to take a look at the 1995
National Trade Estimate Report on Foreign Trade Barriers, which
provides an annual inventory of the most important foreign barriers
affecting U.S. export of goods and services, foreign direct investment,
and protection of intellectual property rights. The latest report
dedicates some 44 pages of material to the subject on Japan alone, far
more than to any other country, far more than to the second place, the
European Union, most of the important countries of Western Europe
combined, which takes up 28 pages, and double that of China, with which
country we run our second largest annual trade deficit--44 pages, much
of it dedicated to the automobile trade.
How important is the auto trade for America's current account balance
and for the American economy? The answer is: as important as any single
sector can be. America's trade deficit with Japan in 1994 reached
another record high, at $65.7 billion, up 10 percent from 1993, when it
totaled $59.3 billion. Of that amount, the bilateral automotive trade
deficit accounted for
about $37 billion, or 56 percent of the total, so most of our deficit
with Japan can be attributed to cars and to auto parts. More than that,
the auto trade deficit with Japan constituted some 22 percent of our
entire trade deficit with the world. The policy announced by our Trade
Representative, Ambassador Kantor--according to his testimony before
the Finance Committee on April 4, 1995--is that this deficit is the
result of unfair Japanese practices, that it is unacceptable, that he
will use every tool at his disposal to correct it, and that, in
general, he will use a practical, market-based, results oriented
approach to dealing with these non-market barriers. I strongly support
this approach, and I believe that the Senate as a whole does as well.
As far as the impact on the American economy is concerned, a strong
auto sector is crucial. Two million, two hundred thousand people in the
United States are employed in the parts industry alone--such vital
industries as aluminum, steel, glass, rubber, electronics,
semiconductors, machine tools, and many others. This is on top of the
some 700,000 people employed by the Big Three auto manufacturers
themselves, the Nation's largest manufacturing industry. Sales of cars
and trucks constitute some 4.4 percent of our gross domestic product.
Negotiations with Japan have reached a crucial stage regarding the
auto industry's attempts to deregulate the Japanese auto parts market.
Negotiations on access to the Japan auto business began as a result of
the agreement reached by this administration with the Government of
Japan in July of 1993, the so-called Framework for a New Economic
Partnership. This framework established a general set of results to be
used in specific negotiations, and refocused the criteria for progress
away from the process of removing trade barriers to actual results in
the way of real economic progress in market penetration. After 18
months of negotiations on automobile negotiations--including access to
the motor vehicle market by breaking into Japan's dealerships, the
purchase of original parts by Japan's automakers from United States
suppliers, and the regulation of the auto parts aftermarket, which is
repair parts--Ambassador Kantor has concluded that ``there has been
virtually no progress.'' One result has been the initiation by the
Trade Representative, on October 1, 1994, of a section 301
investigation of Japan's replacement auto parts market, which is
virtually closed.
The difference between the United States and Japanese markets in this
area could not be more dramatic and more symbolic of our troubled trade
relationship: A Department of Commerce study in 1991 estimated that
Japanese vehicle manufacturers controlled about 80 percent of the parts
market, while in the United States the situation is the reverse, and
independent replacement parts producers account for 80 percent of the
market. So, while the United States market is wide open, the Japanese
market is closed. To make the situation more unfair to us, the Japanese
closed market allows their manufacturers to run the prices up on their
own consumers for
repair parts. Another U.S. Government survey has concluded that their
aftermarket repair parts cost, on average, some 340 percent higher than
comparable parts in the United Sates.
This tremendous windfall of billions of dollars in extra profits
helps subsidize the Japanese car industry, so that it can compete more
effectively in the international market, subsidizing lower costs for
Japanese cars here in the United States, Europe, and elsewhere.
Therefore, it's a triple whammy: Our parts manufacturers cannot sell
effectively in the Japanese market; Japanese consumers get gouged; and
the whole thing results in cheaper, more competitive Japanese cars
worldwide.
The ``Karetsu'' system of interlocking and cozy exclusive
relationships among suppliers, manufacturers, and dealers serves as an
effective blocking action against market penetration, and I am advised
that the powerful Japanese Government bureaucracy serves to abet this
exclusivity in supporting a regulatory framework not conductive to easy
access. Japan's competition law, known as the Antimonopoly Act,
[[Page S5962]] which prohibits unfair trade practices has, according
to the 1995 Foreign Trade Barriers report, a ``weak and ineffective''
enforcement history. The Japan Fair Trade Commission, which is supposed
to implement that law, has ``not shown any serious inclination to use
its enforcement powers to eliminate the anticompetitive practices in
sectoral markets that are excluding foreign goods and services from the
Japanese market.'' This is a system totally incompatible with the
principles of free international trade.
As to new American cars, it is nearly impossible for Japanese
businessmen who operate dealerships and showrooms to agree to sell
American cars. I understand that many of these dealers would like to do
so, but they fear retribution from Japanese car manufacturers and are
warned against taking American business. Hence, the marketplace for new
American cars in Japan remains extremely narrow and difficult to
penetrate. What are the results? While Japanese automakers hold some
22.5 percent of the American market, the share of the Japanese market
held by the Big Three United States automakers is less than 1 percent.
The Japanese economy is, in many ways, a sanctuary market, closed to
the world, but depending to a large extent on robust exports. Trade
agreements are, more often than not, written agreements which are
frustrated by a maze of business practices, Government regulations, and
other hurdles for importers to jump. The problem is that other nations,
particularly in Asia, are engaging in the same practices, and if the
Japanese market is not pried open, these trade imbalances will be
mirrored elsewhere, as they are today with China. We see the same kind
of practices in Korea.
Therefore, the stakes in fair trade with Japan have worldwide
ramifications and affect the very future of American participation in a
trading system which enjoys access to a wide open American market. We
need to demand reciprocity, which would
allow our products to compete freely. If our products fail to attract
buyers because they fall short on the merits, fine, then that is our
fault. But this is not what is driving the large deficits with Japan,
and our industries and economy will suffer as they are suffering, and
as they have suffered.
I was very pleased to see the dramatic accord that was achieved by
our Trade Representative with China on the matter of intellectual
property rights, and I would note that it was achieved only at the 11th
hour and with the certainty of definite retaliation by the United
States, absent achieving an accord. Given the history of trade
practices with the Japanese, I fear that only a believable threat, or
actual retaliation, may be sufficient to get equitable results in the
Japanese auto market.
In the new world that is emerging after the collapse of the Soviet
Empire, it is important to see the overall United States-Japanese
relationship as one of give-and-take across the board. The United
States still maintains armed forces in Japan and that relationship has
been excellent, with Japan providing needed host-nation financial
support. It is an excellent burden-sharing arrangement. While our
security relationship has been in balance, and a close relationship
remains intact, the trading situation has generated unneeded frictions.
Today, American national security and economic security go together,
hand-in-hand. Japan has a deep-vested interest in the health of the
American economy, and economy increasingly dependent on trade. Eleven
million Americans are now employed in export-industry jobs, a doubling
of the number from just 10 years ago. It will be more and more
difficult to maintain robust deployed forces in the Pacific, as we
should, without a strong American economy.
Persistent massive trade deficits with Japan and other Asian nations
runs counter to this, and they erode our ability to sustain the kind of
a Pacific rim presence that both we and our allies in the Pacific,
particularly Japan, believe is in our overall interest of stability and
peace. And so it is important for the Japanese Government to make every
effort to ensure that our trade relationship enjoys the same healthy
substance of a two-way street.
The deficit in the United States-Japanese automotive parts trade
reached a record $12.8 billion in 1994, deteriorating 15 percent from
1993, at the very time that negotiations were ongoing on this matter.
The Japanese sold a record $14.3 billion in auto parts in the United
States, compared to a meager $1.5 billion in United States auto parts
which managed to squeeze into the Japanese market. It is a major
element in our deficit picture, and something has to give.
It is precisely in this situation that the 301 law is available to
the Trade Representative, and I certainly expect that he will probably
have to use it and he should have no compunction against using it. This
means that when the section 301 investigation of unfair practices in
the auto parts market is concluded--at the latest by October 1, 1995--
if the current stalemate continues, the United States should not
hesitate to retaliate. According to a New York Times article of April
13, 1995, an administration ``task force has already been established
to draw up a list of Japanese
products that would be subject to 100-percent tariffs unless Japan
takes what one senior official today called `enormous leaps' during
meetings scheduled over the next several weeks.'' These officials
indicated such a list would be announced this month. I note that the
next round of negotiations with the Japanese is scheduled to take place
this week, on tomorrow, Wednesday, May 3, 1995, and I hope that our
negotiator there, Ambassador-designate Ira Shapiro, will tell the
Japanese that stonewalling will result in retaliatory action, with
strong Senate action, if needed, to follow up on the retaliatory
measures that might be announced by the administration.
I point out, Madam President, that there is extensive support across
the board in American industry for the strong action that might be
required against Japanese products in the event that the results sought
by the administration are not obtained. I include in the Record a list
of 27 major United States companies and associations that deal with
Japan which support our negotiations on this matter. It includes the
Business Roundtable, the major auto companies, and associations
representing those manufacturers who have a stake in the health of the
auto and auto parts industries, such as glass, iron and steel, and
electronics. It includes the major labor organizations, including the
United Auto Workers and the AFL-CIO. There is obviously very broad
consensus across American business and labor organizations that the
time for action is past; so we have only now left to us.
It is clear that, while there may be every good intention on the part
of Japanese policymakers and other sectors of Japanese society and
business to open the Japanese market to American automobiles and
products, what really counts in the long run are results, and actions
to do so. Performance, not promises, is only what we are seeking, and
one must be prepared to take strong action to encourage such
performance.
Madam President, automobiles and parts have been the central problem
in Japan's trading relations with the rest of the world for many years.
If we can solve the problem, and break the ``keiretsu'' psychology and
practices which close Japan's markets, a new era between our two
nations will emerge. If we fail, our relationship will continue to
deteriorate.
Mr. President, I ask unanimous consent that a group of supporting
documents be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Organizations Supporting United States-Japan Auto and Auto Parts Trade
Negotiations
Aluminum Association.
American Automobile Manufacturers Association.
American Electronics Association.
American Federation of Labor Congress of Industrial
Organizations.
American Forest and Paper Association.
American Iron and Steel Institute.
American Textile Manufacturers Association.
Association of Manufacturing Technology.
Automotive Parts and Accessories Association.
Business Roundtable.
Chrysler Corporation.
Copper and Brass Fabricators Association.
Ford Motor Company.
General Motors.
Guardian Industries.
[[Page S5963]] International Insurance Council.
Joint Automotive Supplier Government Action Council.
Motion Picture Association.
Motor Equipment Manufacturers Association.
National Association of Manufacturers.
National Glass Association.
Pharmaceutical Research and Manufacturers Association.
Semiconductor Industry Association.
Specialty Equipment Market Association.
United Auto Workers.
United States Business and Industrial Council.
US-Japan Business Council.
____
National Consumers League,
Washington, DC, April 25, 1995.
The President,
The White House, Washington, DC.
Dear Mr. President: On behalf of the National Consumers
League, I want to express our support for the
Administration's position in the Framework negotiations with
Japan and our interest in opening the Japanese market to
competitive American automotive products. The vehicles and
parts made in this country meet a wide variety of safety and
environmental standards. The production facilities in which
they are made meet standards for their operation as well. The
workers in these plants benefit from protective health and
safety laws and many have won further protection through
union representation. All of these conditions contribute to
beneficial results for Americans who are consumers of the
products made by the industry and consumers of its
environmental impacts.
The companies that meet these conditions should be able to
supply markets abroad on the same terms as foreign companies
find in this market. All foreign producers of vehicles and
auto parts have unrestricted access to the U.S. market. We
understand that the Clinton Administration is seeking just
such access to the Japanese market for U.S. automotive
products and we fully support that objective.
American industries that contribute to the social and
economic well-being of the nation, as does the automotive
industry by meeting a variety of legal and regulatory
standards and affording workers a voice in their work lives,
deserve the support of the U.S. government in gaining the
ability to sell their products internationally. American
consumers and Japanese consumers would benefit from the
elimination of Japanese barriers to access to that market for
the quality products made by American workers.
Sincerely,
Linda Golodner,
President.
____
Caterpillar, Inc.,
April 7, 1995.
The President,
The White House, Washington, DC.
Dear President Clinton: I'm writing as Chairman of the
U.S.-Japan Business Council which represents the interests of
leading U.S. manufacturing and service firms. The purpose of
my letter is to commend your Administration for the
aggressive leadership it's providing on behalf of U.S.
automobile and auto parts producers as they attempt to
compete in the Japanese marketplace.
As your trade negotiators have recognized, the fundamental
problem in the U.S.-Japan economic relationship is that
Japan's markets in a host of industrial and service sectors
remain more restrictive than those in the United States and
other major economies. It's equally clear that the U.S. trade
deficit with Japan will persist--despite sharp appreciations
of the yen and a sizable reduction in the U.S. budget
deficit--until Japan reforms its regulatory and market entry
practices.
Your Administration has managed to negotiate several
results-oriented trade agreements with Japan in such areas as
government procurement of medical and telecommunications
equipment, insurance, flat glass, and financial services
under the U.S.-Japan Framework Agreement. The members of the
U.S.-Japan Business Council, many of whom will benefit once
these agreements are implemented, commend your trade team for
this achievement.
But the fact that no agreement has been reached in one of
the most important sectors of our trading relationship with
Japan--autos and auto parts--is troublesome . . . especially
given the broad range of industries and jobs involved in the
automotive sector . . . electronics, semiconductors, steel,
chemicals, and machine tools.
Although U.S. auto and auto parts companies are now
competitive and committed to the Japanese market, they and
other foreign producers continue to be denied full and
comparable access to the Japanese automobile distribution
system, as well as markets for original equipment and
replacement parts.
Meanwhile, the bilateral trade imbalance in motor vehicles
and parts, which typically accounts for some 60 percent of
the U.S. trade deficit with Japan, hit a record high of $36.7
billion in 1994. Forecasts suggest even greater deficits in
this sector in 1995.
On behalf of the U.S.-Japan Business Council, I urge your
Administration to continue working toward a comprehensive
agreement that will result in increased access and sales
opportunities for U.S. automobile manufacturers and parts
producers in the original equipment and replacement parts
markets in Japan and the United States.
Sincerely,
Donald V. Fites.
____
Statement of The National Association of Manufacturers on The United
States-Japan Auto Negotiations
The NAM's membership has a clear and substantial interest
in a U.S.-Japan relationship characterized by a two-way free
flow of goods, services and investment. The NAM thus supports
the ``framework for a new economic partnership'' between
Japan and the United States. As part of this framework, it is
appropriate that Japan has committed to implement policies
``intended to achieve a highly significant reduction'' in its
persistent and large trade surplus with the United States.
The framework addresses both structural imbalances between
the U.S. and Japanese economies as well as those sectors of
the Japanese economy where market forces have, in the past,
clearly not been allowed to operate freely.
The NAM recognizes the importance of successfully resolving
the current bilateral automotive negotiations by ensuring
significant and sustained market access and sales
opportunities for foreign vehicles and parts in the Japanese
market. The NAM thus supports the efforts of the U.S. and the
Japanese Governments to reach speedy agreement to achieve
such access.
The NAM also urges the U.S. Government to reassert that the
full implementation of all previously negotiated agreements
with Japan in other sectors remains a priority objective.
____
The Business Roundtable,
Washington, DC, April 13, 1995.
Hon. Michael Kantor,
Office of the U.S. Trade Representative, Washington, DC.
Dear Ambassador Kantor. As you know, The Business
Roundtable has long been a major supporter of the efforts of
the U.S. government to open foreign markets to international
trade and investment. In this connection, U.S./Japan trade
policy developments have been of particular concern to us.
The difficulties that U.S. business has had in expanding
its sales and investments in Japan have been a continuing
frustration. While progress has been achieved in some
sectors, such as semiconductors, other areas have seen
insufficient improvements.
In particular, the automotive sector has experienced
significant difficulty penetrating the Japan market, and the
trade imbalance in this sector alone represents nearly 60% of
the total trade deficit between the U.S. and Japan. The
Roundtable believes that a successful auto negotiation with
the Japanese will have ramifications beyond Japan and could
help to facilitate further market opening initiatives in
other Asian countries.
The purpose of this letter is not to provide you with the
specifics of the auto sector trade problem faced by U.S.
exporters; the U.S. auto and auto parts industries can do
this far more effectively than we can. Rather, it is to
underscore the importance of negotiations in this sector. We
are also not the ones to advise you on the precise shape of a
successful agreement on auto sector trade with Japan. That
said, we believe that fundamental to any successful
negotiation is the need for agreements to include a basis on
which the results can be evaluated. Without an acceptable
basis to gauge the impact of an auto sector trade agreement,
there will be a significant risk that subsequent activities/
discussions to any agreement will devolve into continuous
argument regarding implementation process rather than
achieving actual results.
We know that the auto sector negotiations with Japan have
been, and will continue to be, difficult. For this reason, we
think that it is important for you to know that The Business
Roundtable fully supports the pursuit of U.S. rights under
the rules of the World Trade Organization, aggressive use of
U.S. trade laws and whatever other action may be necessary to
achieve meaningful access to the Japanese market in this
critical sector.
In closing, thank you for your tireless efforts to open
foreign markets to U.S. exports, and we encourage your
continued resolve in these negotiations.
Sincerely,
Jerry R. Junkins,
Chairman, President & CEO, Texas Instruments, Chairman,
The Business Roundtable International Trade and
Investment Task Force.
____
American Federation of Labor and Congress of Industrial
Organizations
Washington, DC, April 18, 1995.
Hon. Mickey Kantor,
U.S. Trade Representatives, Washington, DC.
Dear Ambassador Kantor: I am writing to urge the
Administration to continue its efforts to reach a results-
oriented agreement with Japan on autos and auto parts. The
discrimination and inequity present in the existing trading
relationship can no longer be papered over.
American workers in a wide range of industries and
occupations would benefit from the reduction of the U.S.
deficit in automotive
[[Page S5964]] trade with Japan and the elimination of
discriminatory practices by Japanese companies directed at
U.S. firms. Union members in the rubber, glass, steel,
aluminum, textile, machine tool, chemical, electrical,
electronics and other industries would directly benefit from
increased access to the Japanese auto market for competitive
American products. Unionized workers in other industries,
including entertainment, telecommunications, construction,
aerospace, paper and even-more, would gain additional jobs if
the Japanese market were truly open and discrimination
against U.S. producers was ended.
The AFL-CIO believes that international trade can benefit
American workers, but that trade must be fair and equitable.
That is not the case with U.S. auto trade with Japan today.
During the past nine years, the U.S. deficit in auto trades
with Japan nearly hit $300 billion. If that deficit could be
reduced substantially, the Clinton Administration's effort to
establish equity in that trading relationship through the
Framework negotiations could lead to the creation of many
thousands of American jobs. We will judge the success of the
Framework's auto talks by their impact on the jobs of
American workers, not by the quantity of words in any
agreement. Under a good agreement, we expect the U.S.
automotive trade deficit with Japan to decline rapidly.
The commitment of the Clinton Administration to ``result-
oriented'' negotiations must be fulfilled either through
effective, verifiable agreements or reciprocal treatment of
U.S. imports from Japan. If an acceptable agreement cannot be
reached in the next few months, the U.S. must impose
sanctions on imports from Japan that are commensurate with
the damage to American workers caused by Japan's barriers to
U.S. products. It is time to demonstrate the Administration's
commitment to settling this long-running trade disaster.
Sincerely,
Lane Kirkland,
President.
____
Aluminum Industry Supports U.S.-Japan Negotiations
the aluminum association strongly supports market access with japan
Washington, D.C., April 13, 1995.--The Aluminum Association
announced today its strong support for a swift and positive
conclusion to the U.S.-Japan automotive trade negotiations.
The aluminum industry, long-time advocates of free trade,
urged the removal of barriers and the opening of Japan's
parts and vehicle market to foreign cars and parts.
U.S. aluminum companies are historic free-traders. They
produce 19 billion pounds of metal each year, making them the
world's largest aluminum industry. The U.S. aluminum market
is the world's largest, most sophisticated and most open, yet
major barriers to market access in Japan remain. The aluminum
industry strongly supports the U.S. Government's efforts to
remedy this persistent problem.
The auto and auto parts industry and its unhindered access
to Japanese markets and manufacturers is extremely important
to our industry. In 1993, the aluminum industry shipped about
4.2 billion pounds of aluminum to the transportation market.
This makes it the industry's second largest market.
Aluminum Association President David N. Parker, called for
an effective, results-oriented agreement on the negotiations
and remarked that the ``talks mirror our industry's long time
efforts to achieve open markets for aluminum.''
Aluminum represents over 200 pounds of an average vehicle,
a growth of over 55 percent in the last decade. Aluminum
plays a significant role in lightweighting both domestic and
foreign vehicles. Industry experts expect its percentage of
the average car to increase rapidly as demand for fuel
efficient vehicles which retain size, safety, and
environmental friendliness grows. Select cars have already
shown that as much as 500-1,000 pounds of aluminum can be
used successfully to achieve high performance or fuel
efficiency.
The Aluminum Association represents primary and secondary
producers of aluminum, as well as semi-fabricated products.
Member companies operate approximately 300 plants in 40
states.
____
AISI Issues Policy Statement on United States-Japan Auto Talks: Steel
Gives Strong Support to Goal of Timely and Meaningful Market Access in
Japan
Washington, D.C.--The American Iron and Steel Institute
(AISI) today issued the following policy statement in strong
support of U.S. government efforts to achieve a prompt,
``results-oriented'' resolution of the U.S.-Japan bilateral
automotive negotiations.
``Steel producers in North America have an important,
direct stake in--and indeed, have contributed substantially
to--the renewed competitiveness of North America's auto
industry in recent years. That was a main reason steel
producers throughout North America strongly supported NAFTA--
because we saw it benefiting our major customers in the North
American auto industry.
Given the auto industry's continued importance to the North
American economy (4.6 percent of total U.S. GDP). AISI's
U.S., Canadian and Mexican member companies remain deeply
concerned by North America's large and persistent trade
deficit with Japan in the automotive sector.
The fact is, as competitive as the North American auto
industry has become, it still requires free and open markets
and fair and reciprocal market access worldwide to reap the
full benefits of its restored status as a world class
industry. Unfortunately, North America's producers of motor
vehicles and auto parts do not have such equality of market
access currently with respect to Japan.
It is therefore essential that the ongoing U.S.-Japan
bilateral automotive negotiations produce a successful and
timely resolution of this critical problem by achieving
significant and sustained market access and sales
opportunities in Japan for North American and other non-
Japanese producers of vehicles and parts. Thus, AISI strongly
supports the U.S. government's ``results-oriented'' efforts
to reach agreement as quickly as possible on meaningful
market access in Japan for this vital North American
industry.
As part of the U.S.-Japan ``framework agreement''--under
which the automotive talks are occurring--Japan has committed
to implement policies ``intended to achieve a highly
significant reduction'' in its trade surplus with the United
States, which exceeded $65 billion last year.
This enormous and unsustainable trade imbalance, two-thirds
of which is in the automotive sector, requires prompt
corrective action--by achieving measurable results in the
auto sector as soon as possible, and ensuring full
implementation of all previously negotiated agreements with
Japan in other sectors.''
____
Statement of the American Textile Manufacturers Institute on United
States-Japan Automobile Trade
The American Textile Manufacturers Institute (ATMI)
strongly supports the Clinton administration's efforts to
open the Japanese market to U.S. automobile and automobile
parts. ATMI is the national trade association for the
domestic textile industry. ATMI member companies operate in
more than 30 states and account for over 80 percent of all
textile fibers consumed by U.S. mills.
The American textile industry is a major supplier to the
U.S. automobile industry. Textile goods produced for use in
automobiles include not only upholstery and floor coverings,
but sidewalls (the interior sides of cars), head linings (the
interior roof material), hood linings (material on the
underside of the hood), trunk linings, convertible tops and
vinyl hardtops, tire reinforcement, hose fabric and
transmission belts. In fact, the average truck contains 18
square yards of textile fabric, while the average car
contains 29 square yards.
In 1993, automobiles and trucks accounted for more than 1.2
billion square yards of fabric consumption in the United
States, or 1.2 billion pounds of fiber. By weight, this
represents nearly 10 percent of the total fiber consumption
in the U.S. Clearly, the auto industry is an important
customer of the American textile industry.
The opening of foreign markets to U.S. textile products and
to items containing U.S. textile products is a vital part of
our industry's global competitiveness strategy. In this
light, ATMI endorses the efforts of Ambassador Kantor to open
Japan's market to U.S. autos and auto parts and urges the
administration to continue to seek adequate market access in
the current negotiations with the government of Japan.
____
Nearly Twenty Industries Join in Call for Japan Government to Open
Closed Markets to U.S. Products
Washington, D.C.--A diverse group of the nation's largest
industries joined together today to call on the Japanese
government to open its market to reduce its record $66
billion merchandise trade surplus with the U.S.
``Japan's chronic trade surplus is choking its economy and
playing havoc with the world's currency markets,'' said
Andrew H. Card, Jr., President and CEO of the American
Automobile Manufacturers Association (AAMA). ``After more
than 25 years of foot-dragging, it's time for the Japanese
government to join with other industrialized nations to
practice free trade in its own market.''
Autos and auto parts accounted for $36.8 billion of the
U.S. trade deficit with Japan last year and is predicted to
reach $39 billion in 1995.
The latest round of U.S.-Japan trade negotiations is
scheduled to conclude in Washington on Tuesday.
Nearly twenty industry representatives--from aluminum and
steel producers to pharmaceutical manufacturers--joined Card
in calling for greater access to Japan's ``sanctuary''
markets.
``The whole world is watching the outcome of these
negotiations. If Japan fails to undertake decisive reform to
open its automotive sector, there are numerous developing
economies waiting in the wings--China, Korea, Indonesia,
Vietnam--which will be tempted to follow Japan's sanctuary
market as a model, rather than to adopt a free and open model
which provides benefits to all participants in the world
open-trading system,'' Card said.
Other groups joining AAMA at the press conference include
the: Aluminum Association, American Electronics Association,
American Forest and Paper Association, American Iron and
Steel Institute, Automobile Parts and Accessories
Association, Copper and Brass Fabricators Association,
Pharmaceutical Research and Manufacturers of America,
Association of Manufacturing
[[Page S5965]] Technology, International Insurance Council,
Motor and Equipment Manufacturers Association, Specialty
Equipment Manufacturers Association and the United Auto
Workers Union.
Other groups calling on Japan to open its markets include
the: American Textile Manufacturers Institute, Joint
automotive Supplier Government Action council, Motion Picture
Association of America, National Association of
Manufacturers, National Glass Association and U.S.-Japan
Business Council.
During the press conference, Card pointed to a new report
by the American Chamber of Commerce in Japan which outlines
trade barriers across 35 industrial sectors.
With regard to autos, the ACCJ report concluded that the
Japanese manufacturers intend to continue discouraging
dealers from franchise agreements with U.S. automakers.
The ACCJ report recommends that the Japanese Government:
Open Japan's auto market; provide free access to Japanese
dealers; simplify regulations and procedures; and open
Japan's parts market to foreign suppliers.
AAMA is the trade association headquartered in Washington,
D.C. whose members are Chrysler, Ford and General Motors.
____
Semiconductor Industry Association,
San Jose, CA, April 19, 1995.
Hon. Michael Kantor,
U.S. Trade Representative,
Washington, DC.
Hon. Ronald H. Brown,
Secretary of Commerce, Department of Commerce, Washington,
DC.
Dear Ambassador Kantor and Secretary Brown: The
Semiconductor Industry Association strongly supports your
efforts to achieve a substantial measurable increase in
imports into Japan's automotive and automotive parts markets.
These efforts are both necessary and appropriate. There can
be no acceptable alternative to having outcomes in the
Japanese market reflect the competitiveness of American auto
and auto parts producers. This has not yet been allowed to
occur.
Your efforts serve not only the broad national interest but
are of real economic interest to our industry as well.
Semiconductors are a key component in modern automobiles,
with applications including engine controllers, air bags, and
antilock brakes. There is a direct impact on U.S. chip
companies from both the very low levels of U.S. automobile
exports to Japan and the reluctance of Japan automobile
companies to use American components.
In 1994 over $1.7 billion of semiconductors were used in
American automobiles. This figure could have been
substantially higher if it were not for the fact that of the
10 million vehicles produced by the three American firms in
the U.S., only 33,000 were exported to Japan.
U.S. firms have been working for years to increase their
share of the $1.3 billion Japanese automotive chip market
through the U.S.-Japan Semiconductor Agreement. The foreign
automotive semiconductor share in Japan of about 10 percent,
while much higher than five years ago, remains well below the
dominant shares that U.S. firms have achieved in other world
markets. The limited foreign penetration to Japan's auto
semiconductor market is also in contrast to the significant
progress which is being made in a number of other electronics
sectors in Japan.
The implementation of market access agreements with Japan
requires extraordinary efforts on the part of both American
suppliers and Japanese purchasers, and by both governments,
but the benefits can also be extraordinary. The U.S.-Japan
Semiconductor Agreement has led to an additional $2.5 billion
in annual U.S. sales in Japan and to unprecedented
cooperation between American and Japanese companies and
industries.
While SIA intends to continue to work through the U.S.-
Japan Semiconductor Agreement to further programs in
semiconductor market access, an agreement on auto parts is
fully complementary and very much in the interest of not only
the U.S. economy, but of harmonious relations between the
United States and Japan.
We wish you well in this vital endeavor. A successful autos
and auto parts agreements would promote the change in
attitudes towards imported components that is required for
success in increasing access to the Japanese market. SIA
fully supports your efforts to quickly achieve an effective
results-oriented agreement with the Government of Japan on
auto and auto parts.
Sincerely,
A. A. Procensini,
President.
____
American Forest &
Paper Association,
Washington, DC, April 11, 1995.
Hon. Ira Shapiro,
General Counsel, Office of the U.S. Trade Representative,
Washington, DC.
Dear Ira: The American Forest & Paper Association, on
behalf of the U.S. forest products industry, is highly
supportive of your efforts to open the Japanese market to
U.S. suppliers of autos and auto parts.
The long-standing problems of market access in this
sector--including kieretsu relationships between auto
producers and suppliers, denial of access to the producer-
owner distribution network, and the use of government
standards to exclude imports--are all-too-familiar features
of our own problems in penetrating the Japanese market. We
believe that a comprehensive, negotiated solution to the
auto/auto parts problems will have important implications for
the resolution of similar problems in other sectors, such as
ours, where the same pattern of exclusion is evident.
At the same time, we believe that the firm stand which USTR
has taken in these negotiations sends a very clear signal to
the Government of Japan that the Administration will take the
steps necessary to ensure compliance with existing
agreements. With both the wood and paper agreements
designated to a Super 301 watchlist, we anticipate that the
result of your efforts in the auto sector will be to heighten
Japanese awareness of the need to refocus its
``encouragement'' of imports in a direction which leads to
concrete results.
Sincerely,
Maureen R. Smith,
Vice President, International.
Mr. HOLLINGS. Madam President, let me commend our distinguished
senior Senator, former leader and President pro tempore of the body.
Senator Byrd's words are music to this Senator's ears, because in all
of the almost 5 months now of the so-called ``contract,'' not one word
has been stated until Senator Byrd has spoken about competitive trade
policy.
That is exactly what we need. Right to the point, as the
distinguished Senator has pointed out, the Japanese are subsidizing
their sales--what we call ``loss leaders,'' in the retail business.
They subsidize and sell automobiles there for less than it costs them
back in Japan.
I could not get the updated figures right now to be accurate, but I
remember over a year ago a Toyota Cressida that sells for $21,800 in
Washington, DC, sells for $31,800 back in Tokyo.
We had other comparable prices, and I would be glad to bring us up to
date. The point is, in the year 1994 just passed, Business Week
reported that, once again, Japan had taken over a larger share of the
American domestic automobile market. Specifically, they had inched up
another 1.2 percent in spite of the competitiveness and quality
production of the American automobile industry. We have all been
bragging. Detroit is finally putting out real cars, quality production,
and we are now demanding, instead of foreign cars, American cars for a
change. But with it all, Japan has still taken over more of the market.
Five years ago, I had the vice presidents of Chrysler, Ford, and
General Motors orchestrated almost to bring an antidumping case against
Japan. While I had the agreement of Chrysler tentatively and Ford
tentatively, General Motors bugged out. They said it was not good for
business. They better wake up and understand what is good for business.
Yes, our leader here is making a very cogent observation, but we will
have to go back to another colleague of ours who adopted the
expression, ``Where's the beef?'' Our Vice President.
We have been talking for years--years on end. I testified 35 years
ago with similar language about the textile industry. In 1980, 15 years
ago, the deficit in the balance of textile trade of the entire European
market with Japan was some $4 billion--not with just Japan but with the
Pacific rim. We had a deficit, also, in the balance of textile trade of
$4 billion.
In the ensuing 15 years now the Europeans have shown they know how to
deal with Japan. They do not have this weeping and wailing about fair
trade and level the playing field and whining and crying and moaning
and groaning--business is business. Through the enforcement of their
antidumping laws, they have reduced it to less than $1 billion. And our
deficit in the balance of textile trade has gone from $4 billion to $32
billion. Add in that $28 billion in textile manufacture, and we have
millions of jobs.
Politicians are running all over the Hill talking about jobs, jobs,
create jobs, jobs, jobs. We are exporting them as fast as we possibly
can.
A fundamental is involved, Madam President. They use the Friedrich
List or German model, which Alexander Hamilton initiated in the
founding days of this Republic whereby the wealth of a nation is
measured not by what it can buy but by what it can produce. The
decisions are made on the basis of whether or not it strengthens the
Japanese economy or weakens the Japanese economy. The Japanese use
[[Page S5966]] government, along with trade policies and private
sector to take over--in this instance, market share. That is why year
upon year, end upon end, we send over our trade representatives. They
moan, they groan, they whine, they cry. We continue to keep our markets
open.
The only time anybody made any progress at all was under the
voluntary restraints agreement, and we slowed it down somewhat.
However, we still have not really denied them access to our market.
Adam Smith, free trade is strictly passe in the global competition.
Forget it. Forget it. We have little Boy Scouts, and the Golden Rule,
do unto others as they do unto you. That does not apply in global
competition.
I can say here and now we have to protect the economic backbone, the
manufacturing capacity and capability of our Nation or, as Akio Morita
said years ago, that power that loses its manufacturing power ceases to
be a world power.
That is the road that we are on in this country of ours. I am glad
the distinguished Senator from West Virginia is emphasizing this. It is
well stated, and I hope we can get an administration that will answer
the question of our former Vice President Mondale, ``Where's the beef?"
If they begin to put in some beef like they did with China, then we
can get an agreement like we did with China. If we put some beef behind
the words of the distinguished leader from West Virginia, we will get a
result. Business is business and it is not politics, and we have got to
begin to understand that.
One other item, and then I will yield, Madam President. It is a very,
some might say, splendored thing, but the question of
telecommunications, the information superhighway, is one of the most
complex subjects or issues that we can possibly deal with.
The problem is that everyone wants to deregulate and let market
forces control. Certainly this Senator does, and all the Senators that
I know of with respect to our Commerce Committee holding the particular
hearings.
The problem is we have a monopoly on the one hand and a
responsibility for universal service on the other hand. With respect to
universal service, Madam President, we do not want to make the same
mistake we did with airlines whereas today, now, 85 percent of the
medium- and small-sized towns and communities of America are
subsidizing the 50 percent long hauls, and all the airlines have gone
broke.
Universal service is splendid, outstanding, wonderful communications
from our seven Bell companies. The local service operators, we want to
continue that universal service and require, thereby, on the one hand,
everybody coming in to contribute to a universal service fund, and on
the other, not allow our Bell companies to be cherrypicked and take off
the good business, high-concentrated service, so to speak, and leave
the rural and less populated areas for others to serve.
That is one of the tasks in regulating service. Otherwise, we have to
regulate the unbundling of the monopoly. The monopoly is there, and we
know twofold: No. 1, that monopoly gets a 46 percent return on their
guaranteed cash flow. Now, man, oh man, oh man. It did not come to my
attention until just now. Later in the Record I will insert whereby the
return of all investment to the leading industrial sectors of the
United States of America--and now we will take long distance--the
return they receive is 19 percent. The average is less than the 19
percent return on their investment. The highest of any in the United
States of America are seven Southern Bell. They get a 46 percent
return.
Now, if I am president of a Bell company, why should I be pursuing
the Congress to get over the business where I am getting a 46-percent
return into a business that gets, say, 19 percent or lesser return?
Business is business.
I do not want my stockholders to lynch me and throw me out. So
necessarily, I am not, although I talk pretty-like on the one hand
about the superhighway and everything else like that, let the
competition begin, I really do not care if we never pass a bill because
I have a guaranteed cash flow of 5.6 billion bucks.
I keep Wall Street happy with that. I spend about $2.7 billion in
upgrading the system. And I have $1.7 billion in my back pocket here--
cash. I can go to any bank, not only in the United States, but into
Tokyo or wherever, and with $1.7 billion cash in my back pocket, I can
finance anything.
So what I am saying in essence is that what we have to do is break up
that monopoly. These monopolistic Bell companies, we intended for them
to be monopolies. The law required it. But having given it to them, we
know now, under the modified final judgment, they know how to get past
every rule and every regulation. I found it out all during the 1960's
and 1970's when, on the Communications Subcommittee, I worked with
them. We tried our dead-level best to, by gosh, deregulate and open up
AT&T and the Bell companies, and we could not do it.
We had to finally do it with the Department of Justice, the Antitrust
Division, and a consent decree. That modified final judgment is what
finally did the trick, because we had 12 rulings and findings by the
Federal Communications Commission and they kept appealing them. And
even though we would find against them, nothing was enforced. This
crowd knows how to use every word we write in the law and how to get
around it and how to appeal it. And therein is another complexity.
Now we have an astounding development. The astounding development is
that with all the hearings and everything we have had, and how they
have stonewalled us, we finally had, just about 3 weeks ago, Ameritech,
a Bell company, along with the Justice Department, along with AT&T, the
long distance carrier, along with the Consumer Federation of America,
agreed to a consent order to open up competition up in the mid-Northern
section of the United States of America.
I could hardly believe my ears, but they agreed to it. In fact, the
Bell companies have jumped all over their friend, Ameritech, and said,
``Oh, no, no; this is not a precedent. This cannot be done. It is
terrible. What did you do? You are a traitor,'' and everything else.
They have really been giving poor Ameritech a fit.
Be that as it may, I have in my hand a memorandum of the U.S.
Department of Justice ``In Support of its Motion for a Modification of
the Decree to Permit a Limited Trial of Interexchange Service by
Ameritech.'' This explains the complexities of all the requirements
necessary in doing those two things, bringing about competition in the
main; but the two things: Maintaining the universal service on the one
hand, and unbundling a monopoly on the other.
That is why some of these Senators can run around and say I want to
build more deregulatory policy. That is political cover for saying I
want you to give me a day certain. If they get a day certain and the
monopoly is not broken up, then no one will enter the particular local
exchange. The local exchange monopoly will be used to take over all the
other competitive services and satellites, long distance, PCS, and all
the rest of the communications, and you are going to end up with
monopolistic conduct and not open competition. It is very, very
complex. The best document I could possibly find is the one by our
Assistant Attorney General, the Honorable Anne Bingaman, and her
colleagues here, on behalf of the United States of America.
I ask unanimous consent that this explanation of these complexities
of this issue of deregulating communications and bringing about
competition be printed in the Record at this particular point.
There being no objection, the document was ordered to be printed in
the Record, as follows:
[In the United States District Court for the District of Columbia,
Civil Action No. 82-0192 (HHG)]
United States of America, plaintiff, v. Western Electric Company, Inc.,
et al., and American Telephone & Telegraph Company, defendants
memorandum of the united states in support of its motion for a
modification of the decree to permit a limited trial of interexchange
service by ameritech
Anne K. Bingaman, Assistant Attorney General.
Willard K. Tom, Counselor to the Assistant Attorney
General.
David S. Turetsky, Senior Counsel to the Assistant Attorney
General.
Jerry S. Fowler, Jr., Special Counsel to the Assistant
Attorney General.
[[Page S5967]] Donald J. Russell, Chief, Telecommunications
Task Force.
The United States has moved for a modification of the
Decree in this case to permit a limited trial of
interexchange service by Ameritech. As explained in the
Preliminary Memorandum filed with that motion, the trial
would begin only when Ameritech faces actual local exchange
competition and there are substantial opportunities for more
such competition; would be limited to certain geographic
areas within the states of Illinois and Michigan; and could
be terminated if Ameritech violates the order governing the
trial or if it can no longer establish the absence of any
substantial possibility that continuation of the trial would
impede competition. The United States, Ameritech, and AT&T
have stipulated that the proposed order filed with the motion
is in the public interest and have consented to its entry
under Section VII of the Decree.
The Preliminary Memorandum outlined briefly the terms and
conditions of the proposal. This Memorandum provides a more
detailed explanation of the purpose, history, and structure
of the proposed modification and the reasons why it should be
approved.
i. purpose and general structure of the proposed modification
The proposed modification is both more limited and more
profound than most requests for removal or modification of
the Decree's line of business restrictions that have
previously come before the Department of Justice and the
Court: more limited because it proposes only a circumscribed
trial of an otherwise prohibited service, not a permanent
lifting of the restriction for some category of service; more
profound because it would take affirmative steps toward
understanding and achieving the conditions that might render
unnecessary one of the most fundamental and important
restrictions of the Decree.
The proposal contemplates a three-stage process. First, the
motion and proposed order present to the Court the rules
under which the proposed trial would be conducted, and seek a
determination that they are in the public interest. Second,
before any interexchange service could actually begin,
Ameritech would have to take certain steps to open local
exchange service to competition, and the Department of
Justice would have to determine that competitive conditions
in the marketplace, in conjunction with the other safeguards
in the order, ensure that there is no substantial possibility
that commencement of the experiment could impede competition
in interexchange service. (Proposed Order, para.para.9-11.)
Third, after interexchange service begins, Ameritech would be
subject to certain post-entry safeguards, including all
existing equal access requirements, and the Department would
supervise the trial and could terminate it if conditions
required. (Proposed Order, para.para.15-17.) The Court would
retain discretion to take any necessary actions at any point,
including review of any determinations made by the
Department. (Proposed Order, para.51.)
This three-stage process recognizes that the transition to
competition in local exchange services will be complex. No
set of conditions for promoting such competition could hope
to address in advance the dozens of complicated
implementation issues that will have to be resolved before
meaningful competition is a practical reality, rather than
merely a theoretical possibility. As local competition
develops, and as industry and regulators gain experience with
ensuring the competitiveness of markets that depend on access
to local exchange services when the principal local exchange
carrier is a participant in those markets, it may be possible
to relax some of the post-entry restrictions, and the
proposed order makes provision for such modification.
(Proposed Order, para.17.)
The process that the proposed modification would establish
will help the Department, the Court, the telecommunications
industry, and the public to gain practical experience and
develop real marketplace facts about (1) the extent to which
telecommunications markets can become fully competitive so
that Decree restrictions might become unnecessary and (2)
short of such fully competitive conditions, what combination
of competition and safeguards might be sufficient to enable
the Regional Bell Operating Companies (``RBOCs'') to enter
the market for interexchange services without harming
competition in that market--all in a setting that does not
threaten substantial harm to competition in the interexchange
market. Equally important, the Department believes that the
same process will itself hasten the development of
competition for local exchange services. It will encourage
the states that are working to open up local exchange
services to competition. And it will establish a mechanism to
identify, understand, and address the many implementation
issues that will arise in the transition to competition in
local exchange markets.
ii. development of the proposal
A. Technological and competitive developments
Technological changes in recent years have raised the
possibility that the scope of the natural monopoly in local
telephone service may be subject to erosion.\1\ For example,
in many densely populated urban areas, Competitive Access
Providers (``CAPs'') have laid their own fiber optic networks
to serve large business customers. At present, those fiber
networks are principally used to provide exchange access,
either by supplying a direct link from the customer's
premises to the point of presence (``POP'') of the
interexchange carrier (``IXC''), or by supplying only the
transport from the central office or tandem switch of the
local exchange carrier (``LEC'') to the IXC's POP. Those same
fiber networks, under the right circumstances, might be able
to be used to provide ``dialtone''--i.e., local exchange
service. Indeed, two CAPs--MFS and Teleport--have already
obtained certificates from the Illinois Commerce Commission
to operate as local exchange carriers in Chicago, and another
CAP, U.S. Signal (formerly known as City Signal), has
obtained such authority to serve Grand Rapids.\2\ Similarly,
as cable television systems make greater use of fiber optics,
those systems may also be able to provide both dialtone and
access.\3\ Although competition from CAPs has just begun to
develop (and competition from cable companies remains largely
a theoretical possibility), these technological developments
raise important questions about the possible future extent of
such competition.
Footnotes at end of article.
B. Ameritech's original proposal
Based in part on these technological changes, Ameritech
filed with the Department and circulated for public comment a
waiver request under Section VIII(C) of the Decree, seeking
complete removal of the interexchange prohibition, or in the
alternative, a waiver of the prohibition to conduct statewide
trials of interexchange service in one or more states. It
premised that request partly on the notion that the
technological changes described above, plus developments in
Federal Communications Commission (``FCC'') regulatory tools
and policies, were enough to constrain any possible
anticompetitive conduct.\4\ At the heart of its request,
however, was what it called its ``Customers First Plan''--its
proposal that it would take certain steps and seek certain
state regulatory changes that would open up the local
exchange to competition.
To understand the significance of the steps outlined in the
Customers First Plan, it helps to consider some of the
principal barriers facing potential entrants into local
exchange service. First, there are substantial legal barriers
to entry in most markets. Until quite recently, the
underlying assumption of telecommunications regulation was
that local exchange service is a ``natural monopoly'' that
should be provided by one entity, subject to government
regulation. Thus, states strictly prohibited entry into local
telephone service by competitors, often granting monopoly
franchises to a single company in each market.\5\ Even where
states have taken steps to end prohibitions on entry by
competitors, potential entrants have sometimes had difficulty
obtaining required certification from state regulators.
Second, even as legal and regulatory barriers come down, a
substantial barrier remains if entrants must replicate the
entire network of the LEC in order to provide local exchange
service. See United States v. Western Elec. Co., 673 F. Supp.
525, 544-45 (D.D.C. 1987) (``The conditions that caused these
monopolies to emerge in the first place . . . preclude any
thought of a duplication of the local networks.''), aff'd in
relevant part, F.2d 283 (D.C. Cir.), cert. denied, 498 U.S.
911 (1990).
Third, a fundamental characteristic of telephone markets--
the existence of network externalities\6\--requires that any
entrant be able to offer its customers the ability to make
calls to and receive calls from the incumbent's customers.
Because a large portion of the value of telephone service for
a particular user depends on that user's ability to contact
other users, the incumbent's ubiquity is an insurmountable
barrier to competition, absent mechanisms for effective
interconnection of networks.
Ameritech's original Customers First Plan had three basic
components. First, Ameritech promised not to oppose
certification of local exchange competitors and to waive any
exclusive franchise rights it had ``if the interexchange
restriction is removed, and if state and federal regulators
adopt the other reforms proposed [by Ameritech].'' Ameritech
Memorandum in Support of Motions to Remove the Decree's
Interexchange Restriction (``Ameritech's Customers First
Memo'') at 36 (filed with the Justice Department on Dec. 7,
1993) [Appendix, Tab 6]. Second, Ameritech offered what it
characterized as ``unprecedented interconnection at the local
level,'' id. at 4, which would ``enabl[e] [competitors]
customers to originate and terminate calls on the same basis
as Ameritech customers, without dialing access codes or
waiting for a second dial tone,'' id. at 37. Third, the Plan,
Ameritech claimed, ``thoroughly unbundle[d] Ameritech's
network for resale.'' Id. at 38. This unbundling was designed
to ``enable competitors either to provide for themselves, or
to procure from Ameritech, any facilities or functions they
require, either one at a time or in any combination,'' thus
obviating the need for competitors to replicate Ameritech's
entire network. Id.
In sum, Ameritech argued, the Customers First Plan ``does
away with legal barriers to entry by rejecting `first in the
field' regulation, and . . . tears down economic barriers to
competition by allowing full interconnection and resale.''
Id. at 40.
C. Inadequacies of Ameritech's original proposal
The Customers First Plan as originally proposed represented
an innovative and significant step in the right direction,
because it acknowledged and sought to remove many of the
barriers to local competition. But the
[[Page S5968]] Department recognized, and stressed in
subsequent negotiations with Ameritech, that the plan neither
resolved all the issues involved in breaking down those
barriers, nor contained adequate safeguards against
Ameritech's impeding competition in the interexchange market
before those barriers were fully identified and eliminated.
It thus fell short of Ameritech's claims in numerous
respects, of which the following are illustrative.
To begin with, the original proposal assumed that local
competition would automatically flow from eliminating the
legal bar to such competition and from the theoretical
availability of interconnection and unbundling. ``No more
needs to be done to enable and encourage competition for
local exchange service.'' Ameritech's Customers First Memo at
40 [Appendix, Tab 6]. The Department concluded otherwise,
however. The terms and conditions of interconnection and
unbundling are critical. For example, Ameritech argued that
its unbundling proposal obviated the need for competitors to
replicate the ``loop'' that connects the subscriber's
premises to Ameritech's central offices. With unbundling,
such competitors could connect Ameritech loops to their own
``ports'' (i.e., switches and other non-loop elements of
local exchange service) by running trunks from their central
offices to Ameritech's central offices. But if loops are
priced too high in relation to the retail price of the
bundled local exchange service, it will be uneconomic for
even the most efficient competitor to connect Ameritech loops
to the competitor's ports in order to offer service in
competition with Ameritech. One therefore cannot simply
assume that competition will occur; the Department must
instead apply its traditional expertise, evaluating the
competitive state of markets in light of actual market
conditions and experience.
Similarly, Ameritech argued that the network externality
problem would be solved if Ameritech agreed to interconnect
with other carriers, to terminate traffic originating from a
competing carrier and destined for a customer on Ameritech's
network, and to send traffic to other carriers when Ameritech
subscribers wished to call competitors' subscribers. But the
Department recognized that if Ameritech's prices to terminate
calls from subscribers of competing recognized that if
Ameritech's prices to terminate calls from subscribers of
competing networks to called parties on Ameritech's network
are unreasonably high, competition could be seriously
hindered. Indeed, in a decision rendered just last month, the
Illinois Commerce Commission found that:
``. . . Illinois Bell's proposal to charge new LECs
tariffed switched access rates to complete local traffic on
its network would result in a situation in which wholesale
compensation rates would be above retail market rates for a
wide variety of calls. In other words, carriers would pay
more in terminating compensation to Illinois Bell than it
currently receives in revenues from its local usage
customers. . . . [S]everal witnessed independently
demonstrated that in most cases Illinois Bell would charge a
new LEC more in access charges than it would charge its own
local residential or business customer for the entire usage
service, making it impossible for a new LEC to establish a
competitive price. . . .''\7\
Implementation issues of this kind are inevitable, and no
one knows for certain whether, or how soon, entry into the
local market will occur on a significant scale. Every
scenario for the emergency of competition assumes continuing
dependence upon Ameritech, at least for interconnection and
in many cases for loops and perhaps other network elements as
well. This continuing dependence means that competition will
involve complex business relationships and numerous pricing
and technical issues, any one of which can make competition
infeasible. The Department therefore concluded that
Ameritech's original proposal that it be granted
interexchange authority simultaneous with the formal lifting
of legal entry barriers and adoption of regulatory reforms
permitting unbundling and interconnection was unrealistic.
That proposal offered no assurance that consumers would
actually have alternatives available to them upon the
adoption of such reforms, or that competitors would be able
to enter sufficiently quickly or pervasively to prevent
anticompetitive conduct by Ameritech. The potential harm to
competition was particularly great in light of Ameritech's
own argument that the ability to offer a full range of ``one-
stop shopping'' services confers a great competitive
advantage. If true, giving Ameritech such ability at a time
when competitors cannot realistically offer local exchange
services would tend to extend Ameritech's monopoly from local
exchange services to the interexchange market. It is thus
critical that actual marketplace conditions be examined to
test the true economic feasibility of local competition
before Ameritech is allowed to offer interexchange services.
A second major flaw of the original proposal was its
failure to address the issue of number portability. Customers
are reluctant to switch to competing providers if it entails
the inconvenience of losing their existing telephone numbers.
For example, a Gallup poll of residential and business
customers in 1994 found that 40-50% of residential customers
and 70-80% of business customers who otherwise would consider
switching local telephone
service providers if alternatives existed were unlikely to
consider such a switch if they had to change telephone
numbers in order to do so.\8\ The Department therefore
concluded that number portability was an important issue
that needed to be addressed if local competition were to
play the role envisioned by Ameritech's plan.
Third, the original Customers First Plan did not address
competitors' access to poles, conduits, and rights of way.
Entrants who wish to lay wire networks face formidable
obstacles in obtaining rights of way, problems that the
incumbents historically have avoided through use of public
condemnation powers and that new entrants might be able to
avoid by obtaining access to existing poles and conduits.
Discussions between the Department and Ameritech led
Ameritech to agree to make access available to the extent
such access was in Ameritech's control, so as to provide the
best possible opportunity for the Ameritech trial to succeed.
Fourth, the original Customers First Plan gave Ameritech
excessive latitude to market its interexchange service
through its local exchange operations--through which the
overwhelming majority of existing customers get their local
phone service and which is usually the first place that new
customers call when they need to get phone service. The
Department concluded that this latitude would have provided
Ameritech's interexchange business a tremendous advantage
over other interexchange carriers, attributable only to its
position as the monopoly provider of local exchange service.
Fifth, although the original proposal would have prohibited
Ameritech from using the Customer Proprietary Network
Information (``CPNT'') gained in the course of providing
access to competing interexchange carriers, it would have
allowed Ameritech to use CPNI gained in providing local
exchange and intraLATA toll service in marketing its own
interexchange service. The Department concluded that this
would give Ameritech a significant advantage based on its
current position as the monopoly provider of local exchange
service.
Sixth, the original proposal did not require that Ameritech
provide interexchange services through a subsidiary separate
from its local operations. Although separate subsidiary
requirements are imperfect instruments, the Department
believes they will nonetheless be useful, both to regulators
trying to ensure that Ameritech does not cross-subsidize or
discriminate, and to the Department in supervising the trial
and evaluating its results.
Seventh, Ameritech's original plan included departures from
equal access. For example, it would have allowed Ameritech to
put interexchange routing functions in its local switch for
its own interexchange traffic but not for that of competing
IXCs. The Department concluded that, in the absence of a
truly competitive marketplace, this would make it virtually
impossible to prevent cross-subsidization and discrimination.
D. Revision of Ameritech's proposal
The proposed modification presented to this Court differs
substantially from Ameritech's original proposal, suffers
from none of the deficiencies identified in that proposal,
and offers far more procompetitive potential and far fewer
anticompetitive risks than that proposal. It is the product
of thousands of hours of work over the past year by the
Department as well as by Ameritech, state regulators,
potential competitive local exchange carriers, long distance
carriers, consumer groups, and others who filed several
rounds of public comment on several versions of the proposal
and engaged in intensive discussions with the Department. The
Assistant Attorney General for Antitrust participated
directly in many of these discussions and in the crafting of
language for the proposed order, reflecting her strong
personal commitment to the purpose of the 1982 Decree and to
competition in telecommunications markets. thus, although
Ameritech's original proposal shares with the current
proposal the important concept of taking steps to open the
local exchange to competition as a predicate for removing the
interexchange line of business restriction, the two proposals
are otherwise far different. The current proposal is in every
sense a joint product of the Department of Justice,
Ameritech, and all of the parties that filed comments or
participated in these discussions. The principles embodied in
the current proposal have the support of AT&T, a decree party
and major competitor in the interexchange market; Sprint,
also a major interexchange competitor; CompTel, a trade
association representing more than 150 competitive
interexchange carriers and their suppliers; America's
Carriers Telecommunication Association (``ACTA''), a trade
association of smaller interexchange carriers; MFS
Communications, Time-Warner Communications, and Electric
Lighwave, Inc., three providers of competing local exchange
service in various parts of the country; the Association for
Local Telecommunications Services, a trade association of
competing providers of local exchange services; and the
Consumer Federation of America and Consumers Union, two major
consumer groups.
iii. detailed explanation of the competition-based criteria and
safeguards in the proposed modification
At the heart of the proposed order is the premise that
various steps are being taken by Ameritech and the state
regulatory commissions in Illinois and Michigan, and that
these steps will likely lead to competitive
[[Page S5969]] conditions that make it both safe and
desirable to allow Ameritech, on a trial basis, to offer
interexchange services in certain portions of those states
(the ``Trial Territory'').\9\ Because those competitive
conditions have not yet been achieved, the proposed order
contemplates a multi-stage procedure, under which the actual
trial of such services will not begin until Ameritech
presents facts from which the Department can determine that
such competitive conditions do, in fact, exist. The process
by which that determination is to be made is set forth in
paragraphs 9-11 of the proposed order. That process has two
parts. First, Ameritech begins the process by certifying that
certain required steps have, in fact, been taken to open
local exchange service to competition, and by filing a
compliance plan dealing with equal access, separate
subsidiary provisions, and other post-entry safeguards. The
Department will then investigate, take any necessary
discovery, and make a determination, reviewable by the Court,
as to whether there is sufficient competition and other
sufficient assurances against harm to the interexchange
market that the trial may safely begin.
The proposed order also contains a number of post-entry
safeguards and gives the Department the responsibility of
supervising the course of the trial. If Ameritech violates
the order or otherwise engages in anticompetitive conduct,
the Department can require it to cease such conduct, ask the
Court to impose civil fines, or terminate the trial.
The required steps to foster local competition, the
standard for the Department to determine that the
interexchange trial should begin, the post-entry safeguards,
and the Department's supervisory responsibilities are
described below.
A. Steps to foster the emergence of local competition
Paragraph 9 of the proposed order lists a number of
developments with respect to local exchange competition that
must occur before Ameritech can apply for authority to begin
interexchange services. By design, the order does not specify
in every detail the precise terms and conditions on which
these developments must take place--matters that are in the
purview of the state regulators, and with which the
regulators in the two trial states are already grappling in
their efforts to foster competition. There are many issues
that remain to be resolved, and it is for the states and the
market participants, not the Department, to resolve them. On
the other hand, the way in which those issues are resolved
may have an extremely significant effect on competitive
conditions, as may a variety of other technical and economic
factors, some of which may be beyond the control of the
regulators. The Department's traditional area of expertise,
of course, is in evaluating the competitive structure and
behavior of markets. Under the proposed order, therefore, the
state regulators and the Department each discharge their
traditional types of responsibilities: the states are already
in the process of determining the terms and conditions under
which the steps set forth in paragraph 9 will take place, and
the Department, under paragraph 11 of the proposed order,
will concern itself with the resulting competitive
circumstances, and with whether those circumstances and other
safeguards are sufficient to ensure that a trial of Ameritech
interchange entry will not harm interexchange competition.
The specific steps required by paragraph 9 of the proposed
order are as follows.
I. Unbundling of loops and ports
As discussed in Section II.B, unbundling of loops and ports
is important to local competition because it obviates the
need to replicate the LEC's entire network of distribution
facilities. Outside of dense downtown areas, a portion of
that network--the loop connecting the customer premises to
the main distribution frame in the central office--may well
exhibit natural monopoly (or at best, duopoly)
characteristics for some time to come. Unbundling is intended
to address the natural monopoly problem, but whether it does
so successfully or not depends heavily on the pricing of the
unbundled loops and on other terms and conditions such as the
speed and reliability of provisioning and repair. (See
Section II.C.) The proposed order recognizes this dependence
and deals with it through a collaboration between the
Department and the appropriate state regulatory authorities,
whereby each entity acts within its sphere of expertise.
Thus, the state regulatory authorities will regulate the
pricing of loops and ports.\10\ For Ameritech to be
authorized to begin interexchange service, however, the
Department will have to investigate and determine, among
other things, that
``regulatory developments (including * * * the terms and
conditions thereof) and market conditions offer substantial
opportunities for additional local exchange competition. * *
*''
(Proposed Order, para. 11(b)(ii).) Because the proposed order
bases entry into interexchange service on an assessment of
marketplace facts about competitive conditions at the time of
decision, it is unnecessary to resolve the pricing issue--or
most of the other myriad and perhaps unforeseeable
implementation issues--in advance.\11\
2. IntraLATA toll dialing parity
The Court recognized, at the time of the Decree, the
importance of dialing parity to a competitive
telecommunications marketplace. See United States v. Western
Electric Co., 552 F. Supp. 131, 197 (D.D.C. 1982), aff'd sub
nom, Maryland v. United States, 460 U.S. 1001 (1983). The
proposed order requires that, before it applies to begin the
interexchange trial, Ameritech must
``I have made the necessary technical, operational,
administrative and other changes to implement dialing parity
for intraLATA toll telecommunications no later than 21 days
prior to the effective date of Ameritech's authority . . . on
terms approved by the appropriate state regulatory
authority.''
(Proposed Order, para.9(b).) Thus, to begin the application
process, Ameritech must make the necessary changes to ensure
that dialing parity can be implemented prior to Ameritech's
interexchange authority. Before the Department can approve
commencement on the trial, it must ensure that Ameritech has
taken the further step of having installed and tested the
capability for providing such parity. (Proposed Order,
para.11(d).) The Department can thus ensure that Ameritech
annually implements dialing parity no later than the time it
begins interexchange service.\12\
3. Resale of local exchange service
Another prerequisite before Ameritech can file its
application with the Department is that steps have been taken
to allow non-facilities-based (i.e., resale) competition for
all classes of service, including residential service.
(Proposed Order, para.9(c).)
Resale competition is not a replacement for facilities-
based competition. Competition from exchange carriers that
supply their own loops (e.g., cable systems) can help thwart
discrimination in the pricing, provisioning, and maintenance
of loop facilities, so long as adequate provisions are made
to deal with the advantages that flow to the dominant carrier
because of network externalities (i.e., the need to terminate
calls on the dominant carrier's system, number portability,
access to signalling resources and database information,
etc.). Competition from exchange carriers that supply their
own switching facilities but use Ameritech loops (e.g., CAPs
connecting their switches to Ameritech loops to extend the
geographic area they can serve) are dependent upon the
appropriate pricing, provisioning, and maintenance of loop
facilities. If those conditions are right, however, they can
prevent discrimination in the provision of network features
and functionality, excessive charges for exchange access, and
so on. Pure resale competition, by itself, does none of these
things. It brings competition only to the marketing of local
exchange services, and it requires extensive regulations to
ensure that the prices, terms, and conditions under which
Ameritech offers the underlying service make resale
meaningful available.
Nonetheless, resale competition is important for two
reasons. First Ameritech will be able to offer interexchange
services very quickly and easily once it has the authority to
do so, by reselling such services just as hundreds of other
companies resell interexchange services. The availability of
commercially feasible resale opportunities is one way to
ensure that interexchange carriers that are not in a position
to enter local exchange service quickly and easily on a
facilities basis will have opportunities similar to
Ameritech's to offer a full range of services.
Second, the availability of resale will tend to reduce the
barriers to facilities-based entry, because a company that
already has a subscriber base as a reseller will be able to
make investments in switches and other facilities with less
risk. Just as unbundling of loops and ports makes it possible
for competing exchange carriers to offer services outside the
dense downtown areas where they can justify installing their
own loops, so full resale of the entire local service (loops
and ports) makes it possible to offer services before there
is enough traffic to justify investment in a switch (or in
trunks to connect more distant Ameritech central offices to
an existing switch). Once a subscriber base is built, more
investment may be justified. Such reductions in barriers to
entry will enhance the prospects of the ultimate success of
the trial.
The requirement that there be adequate resale opportunities
is thus directly tied to the requirement of paragraph 11 that
competitive circumstances and the safeguards and supervisory
provisions of the order ensure the absence of any substantial
possibility that Ameritech could use its position in the
local exchange market to harm competition in the
interexchange market. The important point is that the ability
of the interexchange market to function competitively not be
harmed.
As with the other provisions already discussed, it is left
to the states whether non-facilities-based competition should
be achieved by directly reselling Ameritech bundled services,
or by renting Ameritech loops and Ameritech ports on their
separate pricing schedules and selling the combined package
as a service, or both.
4. Pole attachments and conduit space
A fourth prerequisite is that Ameritech have implemented
reasonable and nondiscriminatory arrangements for sharing of
pole attachments and conduit space, and for competitors to
secure access to entrance facilities, risers, and telephone
closets, to the extent such arrangements are under the
control of Ameritech. Inability to secure access
[[Page S5970]] to poles, conduits, entrance facilities, and
so forth could be a significant barrier to a facilities-based
competitor seeking to install its own loops. To the extent
that this potential barrier is under Ameritech's control,
Ameritech promises, by its consent to the proposed order, to
eliminate it, thereby encouraging the competition that could
serve as a predicate for Ameritech's entry into interexchange
service. In many cases, of course, such barriers may not be
in Ameritech's control. But whether they are or not, the
ultimate question remains that set forth in paragraph 11: to
what extent do competition, the potential for more
competition, and the other provisions of the order constrain
Ameritech's exercise of market power to harm competition in
the interexchange market? (See Section III.B.)
5. Interconnection
Effective interconnection arrangements are among the most
critical issues for facilities-based competitors. As
explained above (Section II.B), competitors must be able to
offer their customers the ability to make calls to and
receive calls from anybody else who owns a phone--most
notably Ameritech's customers. Without such interconnection,
the competitor's service essentially would be worthless. This
basic need for interconnection gives rise to a host of
complex issues, the resolution of which has important
ramifications for competition. For example, arrangements must
be made for networks to compensate each other for terminating
calls that originate in another network. Unless properly
structured, the reciprocal compensation arrangements can
raise significant barriers to entry by potential local
competitors.
Likeswise, the interconnection arrangements must be on
terms that permit local dialing parity, so that customers of
Ameritech's competitors can place local calls without
suffering any inconvenience--such as dialing extra digits--
that is not imposed on Ameritech customers. Local competitors
must also have adequate access to various services necessary
to the provision of local exchange service, such as unbundled
signalling and 611, 911, E911, call completion, and TRS relay
services, as well as data necessary to provide 411 (directory
assistance) service.
The proposed order does not attempt to dictate the precise
resolution of each of these issues. Some of these issues
might be resolved among the carriers without intervention by
state regulators. If the terms are acceptable to the
competitive exchange carriers, the arrangements will satisfy
paragraph 9(e).\13\ If the carriers cannot agree, regulatory
approval will satisfy paragraph 9(e), because it would not
further the public interest in competition to give each
competitor a veto power over Ameritech's ability to move
forward with a trial.\14\ In either case, the ultimate
question will be the competitive effects of the arrangements,
which will necessarily be considered in connection with the
assessment of competitive conditions required by paragraph 11
of the proposed order.
6. Number portability
As discussed above in Section II.C, an important element in
local exchange competition is service provider number
portability--the ability of a subscriber to retain his
telephone number when changing carriers. The proposed order
distinguishes between two ways of achieving service provider
number portability: true number portability and interim
number portability. True number portability allows calls to
be delivered directly to the subscriber's new exchange
carrier without having to route traffic through the old
exchange carrier and retains the full range of functionality
(e.g., delivery of information necessary to provide caller ID
functions) that would have been available to the subscriber
in the absence of a change in service provider. Such true
number portability is likely to involve some form of database
look-up: for example, an IXC delivering a call into the
Chicago area would use the signalling network to consult a
database, which would supply to the service provider the
information necessary to deliver the call to the correct
exchange carrier.
In the absence of true number portability, a variety of
means exist to provide number portability on an interim
basis. An example is remote call-forwarding. A subscriber
changing from Ameritech to a new exchange carrier would
receive a new telephone number, the first three digits (``NXX
code'') of which would be an NXX code assigned to the
subscriber's new carrier. If a caller dialed the subscriber's
old telephone number, the call would be routed to Ameritech's
switch, since the old number would contain an NXX code
assigned to Ameritech. Ameritech's switch would be programmed
to complete the call by use of an additional circuit from its
switch to the next exchange carrier's switch. Such interim
forms of number portability may suffer certain drawbacks,
e.g., the loss of data necessary to provide certain
functions, such as caller ID; transmission delays as a
result of the additional switching that may impair
suitability for data transmission; and inability of the
new exchange carrier to collect the access charge for
terminating an interexchange or intraLATA toll call.\15\
The proposed order requires Ameritech to implement true
number portability in the Trial Territory, except that if it
is unable to do so as of the date 120 days before the
anticipated implementation of intraLATA dialing parity, it
may rely on interim number portability if it explains
satisfactorily why it cannot implement true number
portability as of that date and sets forth a plan acceptable
to the Department for achieving true number portability.
Achievement of true number potability is not totally in the
control of Ameritech. It will require cooperation from
vendors of hardware and software, such as AT&T, as well as
from other industry participants, such as IXCs, who will be
delivering traffic destined for ported numbers. Ameritech has
already issued a Request for Proposal for the technology and
administrative services necessary to implement true number
portability. The Illinois Commerce Commission has ordered an
industry task force to be created, under the supervision of
the Commission staff, to deal with the issue of number
portability. ICC Order, supra note 7, at 110 [Appendix, Tab
7]. This task force will hold workshops, at which industry
participants can react to that RFP, propose alternative
specifications, and attempt to arrive at a workable solution.
The first of those workshops was held on April 21, 1995.
As with many of the other steps in paragraph 9, the actual
terms and conditions under which either true or interim
number portability is offered are likely to have a major
impact on whether there are substantial opportunities for
other exchange carriers to compete. The proposed order
requires that arrangements be made for allocating the costs
of number portability that do not place an unreasonable
burden upon competing exchange carriers, leaving to
Ameritech, industry participants, and state regulators the
task of working out the precise terms of such arrangements in
the first instance.
Separate from service provider number portability is the
issue of location portability--the ability to retain the same
telephone number at a different location within a geographic
area. It is not particularly significant for competition that
location portability be available. If it is available,
however, competition could be adversely affected if
Ameritech's control over monopoly facilities allows it to
offer such a feature while preventing its competitors from
doing the same. The proposed order thus requires that, to the
extent Ameritech is offering location portability to its own
customers, and to the extent it is technically and
practicably feasible, Ameritech make available to other
exchange carriers, on nondiscriminatory terms and conditions,
the capability to offer such portability.
Nondiscrimination in this context would not mean that
exchange carriers offering switching services in competition
with Ameritech would necessarily be afforded access to
features in Ameritech's switch. To the extent that switching
facilities are competitive, and location portability is a
service offered through such facilities, competition should
encourage all competitors to differentiate their services by
offering new and better features. Nondiscrimination would
mean, however, that Ameritech could not hinder competitors
offering such services through discrimination in the terms in
which they connected to Ameritech's network or through other
means. For example, if location portability is achieved
through wiring changes at the central office rather than
through software features in the switch, an exchange carrier
competing with Ameritech by connecting its own switches to
Ameritech loops would be placed at a significant disadvantage
if Ameritech denied equal access to such wiring changes.
Similarly, it would likely be discriminatory for Ameritech to
refuse to offer to switchless resellers, (i.e., those using
both Ameritech loops and Ameritech ports, including switching
services) the same location portability features it offers to
its own subscribers; since Ameritech facilities are handling
the entire call, there is no apparent reason why the same
features could not be made available.
7. Number assignment
Telephone numbers are the most fundamental means of
interface between end users and the telephone network, as
well as between one network and another. A competitive local
telephone network must have fair and equal access to number
resources as an essential element of developing
telecommunications services and competing for customers. To
ensure the competitively neutral administration of number
resources, the proposed order requires Ameritech to have made
reasonable efforts to transfer any duties it has in
administering those resources to a neutral third party.
(Proposed Order, para.9(h).) If its efforts to transfer its
duties are not successful by the time Ameritech applies for
authorization to provide interexchange service, it must
explain in writing why they have not been successful and what
further steps it plans to take, and must implement a
nondiscriminatory procedure for assigning numbers. The
efficacy of such arrangements will be considered by the
Department in making its determination under paragraph 11.
B. Actual marketplace facts concerning the emergence of local
competition
1. Procedures for department approval
Completion of the above steps would not result in immediate
commencement of the trial of interexchange service. Instead,
at that point Ameritech will apply to begin the trial if it
believes competitive circumstances in the local market
warrant. Ameritech will report to the Department that it has
taken the required steps with respect to unbundling,
intraLATA toll dialing parity,
[[Page S5971]] resale of local services, pole attachments
and conduit space, interconnection, number portability, and
nondiscriminatory number assignment. In addition, Ameritech
must file a compliance plan.\16\ After Ameritech has filed
both the report and compliance plan, the Department will have
thirty days to determine whether it needs any additional
information from Ameritech. Within sixty days after Ameritech
has substantially complied with the Department's request for
additional information or 120 days after the filing of both
the report and the compliance plan, whichever is later, the
Department will determine whether Ameritech may begin the
trial. In making that decision, the Department will seek
comments from the appropriate state regulatory authorities
and interested persons. (Proposed Order, para.11(a).) It may
also take any other action reasonably necessary to make its
decision, including conducting third-party discovery. (Id.,
para.para.11(a), 49.)
2. Procedures for court review
The Court may, in its discretion, review any decision of
the Department, both with respect to commencement of the
trial and otherwise. (Id., para.51.) If the Department
approves commencement of the trial, such approval could not
go into effect for at least 30 days (Proposed Order,
para.13), thus allowing a period of time during which
interested persons could seek a temporary restraining order
from the Court. The Court could then establish such schedule
and procedures for such review as it deemed appropriate under
the circumstances. If the Department does not approve
commencement of the trial upon a particular application by
Ameritech, Ameritech does not have a right of review within
the structure of the proposed order. (Proposed Order,
para.51.) It does, however, retain the right to seek Court
action independent of the proposed order, under sections VII
or VIII(C) of the Decree. (Id.). Ameritech is thus no worse
off under the unreviewability provision than it would be in
the absence of the proposed order. to avail itself of the
benefits of the proposed order, however, it would have to
work further toward creating conditions that meet the
standard of paragraph 11 rather than involve the Court in
reviewing the Department's decision. This provision gives
Ameritech a strong incentive to apply to begin the
interexchange trial only when the test for doing so is
actually met. The judicial system is thus spared the burden
of premature applications that could otherwise lead to
extensive judicial review, and Ameritech is given a reason to
provide information to the Department as quickly as possible,
even in advance of its application where appropriate.
3. Substantive standard for department approval
The substantive standard for commencing the trail of
interexchange service is set out in paragraph 11(b) of the
proposed order:
``To render an affirmative decision on Ameritech's
application, the Department must find that
``(i) actual competition (including facilities-based
competition) in local exchange telecommunications exists in
the Trial Territory,
``(ii) the conditions specified in paragraph 9 have been
substantially satisfied, and that regulatory developments
(including but not limited to those developments set forth in
Paragraph 9 and the terms and conditions thereof) and market
conditions offer substantial opportunities for additional
local exchange competition, as evidenced by, among other
things, the increasing availability of local exchange
telecommunications alternatives for such customers,
``(iii) the conditions described in (i) and (ii) above,
together with regulatory protections, the Department's right
to terminate Ameritech's interexchange telecommunications
authority under Paragraph 16, the transport facilities
restrictions of Paragraph 19, the compliance plan, the
limited geographic scope described in Exhibit A, and the
other provisions of this Order, are sufficient to ensure that
there is no substantial possibility that Ameritech could use
its position in local exchange telecommunications to impede
competition for the provision of interexchange
telecommunications to business or residential customers in
the Trial Territory.''
(Proposed Order, para.11(b) (emphasis added).)
Thus, the standard has three parts--actual competition,
substantial opportunities for additional competition, and a
determination that such competition and competitive
opportunities, together with regulation, post-entry
safeguards, and the fact that Ameritech's interexchange
service would only be on a trial basis, make it safe and
desirable to begin the trial. These three parts of the
standard are related both to each other and to the ultimate
objectives of the trial.
For the trial to be an ultimate success, it will have to
help prove or disprove one or both of two propositions: (1)
the competitive steps outlined above produce enough actual
competition and opportunities for additional competition to
ensure by themselves that there is no substantial possibility
Ameritech could engage in anticompetitive conduct affecting
the interexchange market, or (2) some combination of actual
competition and opportunities for additional competition,
together with regulation and post-entry safeguards, is
sufficient to ensure the absence of such possibility.\17\
Paragraph 11 does not require that either of these
propositions be proved before the trial begins; indeed, the
purpose of the trial is to test these propositions. At the
same time, it is important to ensure that the trial itself
does not result in harm to competition in the interexchange
market. Many of the same factors--actual competition,
opportunities for additional competition, and post-entry
safeguards--that would protect competition in the event
permanent relief were appropriate will also serve to protect
competition during the trial. Since the premise of the trial
is that these factors will not be known to be sufficient at
the beginning of the trial, however, the proposed order also
provides for very close supervision by the Department,
including a provision for the Department to terminate the
trial if necessary. Before beginning the trial, the
Department is to make a determination that all of these
factors, including the provision for termination, together
will be sufficient to negate any substantial possibility that
Ameritech could use market power in the local market to harm
competition in the interexchange market.
The three parts that make up that judgment are discussed in
greater detail below. Because they are so closely related,
actual competition and substantial opportunities for
potential competition are discussed together.
a. Actual Competition and substantial opportunities for additional
competition
Competitive outcomes can generally be assured if there is a
sufficient level of actual competition--multiple competitors
actually producing and selling the good or service.
Theoretically, some markets can produce competitive outcomes
even if they do not contain multiple competitors actually
producing and selling the good or service. One situation in
which such outcomes may occur is where firms not currently
producing or selling the relevant product in the relevant
area would start doing so quickly, and without the
expenditure of significant sunk costs, in response to a small
but significant price increase. If these firms are
sufficiently numerous that the incumbent firm cannot maintain
prices above the competitive level, then the market will
behave competitively. Cf. Department of Justice and Federal
Trade Commission Horizontal Merger Guidelines, Sec. 1.32
(April 2, 1992) [hereinafter ``1992 Merger Guidelines''].
Such a market is said to be ``contestable.''
It is hard to think of a market less likely to be
``contestable'' than local exchange service. Sunk costs in
this industry are, in a word, gigantic. Perhaps recognizing
this, Ameritech's original waiver request was supported by an
affidavit and a reply affidavit that spoke not of
``contestability'' but of something Ameritech's expert called
``effective'' or ``as-if'' contestability. Affidavit of David
J. Teece, para. 41 (Nov. 29, 1993) (filed with the Department
of Justice in support of Ameritech's Original Proposal on
Dec. 7, 1993) [Appendix, Tab. 13]; Reply Affidavit of David
J. Teece at 3-8 (Apr. 6, 1994) (filed with the Department of
Justice on Apr. 12, 1994) [Appendix, Tab. 14]. By this he
meant that Ameritech's unbundling of loops and ports would
allow competitors to treat those assets as if they were not
sunk costs, freely entering and exiting the industry in
response to competitive conditions by renting only what they
needed at a given moment in time from Ameritech.
Such an argument, however, is highly speculative. It
assumes that state regulators will get the prices of those
loops and ports exactly right, precisely duplicating the
prices that would obtain in a competitive market. (See
Section II.C.) It further assumes that Ameritech could not
discriminate in the provisioning or maintenance of loops or
ports or in the terms and conditions of interconnection, and
that competitors will not incur substantial sunk costs in
other elements of their operation. In short, on the current
state of the record, the Department regards the suggestion
that unbundling would make local telephone markets behave
``as-if'' they were contestable as both unproven and
implausible.
A market with only one firm could also behave competitively
if longer-term entry (i.e., with sunk costs) into the market
is so easy that the incumbent firm could not profitably
behave anticompetitively (e.g., maintain a price above
competitive levels or--more relevant here--use a monopoly
position in that market to adversely affect competition in an
adjacent market). For entry to be that easy, it would have to
be ``timely, likely, and sufficient in its magnitude,
character and scope to deter or counteract the competitive
effects of concern.'' 1993 Merger Guidelines, Sec. 3.0.
Ameritech argues that unbundling, interconnection, and the
other steps it is taking pursuant to state regulatory action
and paragraph 9 of the proposed order will make entry that
easy.
As a practical matter, however, it is impossible to
evaluate that argument in the abstract, without the existence
of some actual competition to guide the way. Once there are
significant actual competitors, one can begin to ask
questions such as:
How were those competitors able to enter? What
certification and other regulatory requirements did they have
to meet, and how long did it take? Is there any reason other
competitors would not be able to do the same?
Is the availability of such competing service expanding?
Are competitors encountering significant barriers to such
expansion?
To what extent are competitors entering by renting loops
from Ameritech as opposed
[[Page S5972]] to building their own loop plant, either for
the whole of their local exchange business or as a way of
extending the reach of their network? To the extent that
competitors have to build some of their own facilities, how
long does that take, and how many other competitors could do
the same?
Are competitors able to serve a wide range of customers
throughout the Trial Territory, or are they limited to niche
markets?
To the extent that not all customers have competitive
alternatives available to them, could Ameritech discriminate
against just those customers that have no alternatives, or
would anticompetitive behavior against those customers
necessarily cause it to lose so many other customers that
Ameritech could not profitably persist in the anticompetitive
behavior?
The proposed order does not specifically state how much
actual competition is necessary to satisfy paragraph 11(b).
Nonetheless, the foregoing discussion suggests the implicit
level: there must be enough actual competition to provide an
empirical basis for answering these kinds of questions, and
the answers must indicate that there are substantial
additional opportunities for competition and that these
opportunities will be sufficient, in combination with the
safeguards and supervisory provisions of the order, to deter
Ameritech from behaving anticompetitively. To provide such
answers requires more than a single competitor serving niche
markets but less than the level of actual competition that
would suffice in and of itself to justify permanent removal
of the interexchange restriction, without the safeguards and
supervisory provisions that will accompany the trial
(including the right of the Department to terminate the trial
and the ability of the Court to review the Department's
determinations).
The proposed order also emphasizes that there must be
facilities-based competition in the Trial Territory. As
discussed in Section III.A.3, resale competition is not a
perfect substitute for facilities-based competition.
Facilities-based competition can discipline a wide range of
anticompetitive conduct that would be left untouched by
resale. Thus, the Department will look closely at the extent
of facilities-based competition in determining whether the
standards of paragraph 11 are met.
b. Determination that the state of the market safeguards, and
supervisory provisions make it safe to begin the trial
In addition to actual competition and ease of entry, the
proposed order relies on supervisory provisions and post-
entry safeguards, as more fully described in Section III.C.
For example, the Department may terminate Ameritech's
interexchange authority if it no longer believes that there
is no substantial possibility that continuation of the trial
would impede competition. (Proposed Order, para.16.) To
authorize commencement of the trial, then, the Department
must determine that actual competition, substantial
opportunities for additional competition, and these other
supervisory provisions and safeguards are sufficient to
ensure that going forward with the trial will not create any
``substantial possibility that ameritech could use its
position in local exchange telecommunications to impede
competition for the provision of interexchange
telecommunications.'' (Proposed order, para.11(b)(iii).) The
assurance against harm to competition must protect both
business and residential customers in the Trial Territory.
(Id.)
4. Other factors the department may consider
The proposed order specifically highlights a number of
additional factors that the Department may consider in making
the determination under paragraph 11 to proceed with the
trial.
a. Certification, licensing, franchising, and similar requirements
Implicit in the concept that there are substantial
opportunities for additional local exchange competition is
the premise that certification, licensing, franchising, and
similar regulatory and legal requirements are not
significantly impeding the development of such competition.
State and local regulation serves important public policy
objectives, such as protecting consumers from deception and
ensuring that carriers have adequate financial backing. In
states such as Illinois and Michigan, which have state
policies favoring competition and in which there is already a
recent history of granting certificates to competitors, it is
the Department's expectation that such requirements would be
narrowly tailored to achieve such public policy objectives
without impeding competition significantly. Nonetheless, this
factor is specifically mentioned in the proposed order as an
issue for the Department to consider, because state and local
government policies can have a major and even decisive impact
on whether and how fast competition will develop.
b. Ordering, provisioning, and repair systems
There are two different provisions in the proposed order
dealing with electronic access to ordering, provisioning, and
repair systems. First, if Ameritech wishes to make such
systems available to the Ameritech interexchange subsidiary,
it must offer such access, on nondiscriminatory terms and
rates, to unaffiliated carriers. (Proposed Order, para. 26.)
Second, in making its decision under paragraph 11, the
Department may take into account the extent to which
Ameritech offers unaffiliated carriers access equivalent to
that used in Ameritech's local exchange operations (whether
or not Ameritech's interexchange subsidiary is given access).
(Proposed Order, para. 11(c)(ii).)
The requirement in paragraph 26 is a matter of equal
access--putting other carriers in a position equal to
Ameritech's interexchange subsidiary--and is absolute. The
requirement in paragraph 11 is more judgmental. It recognizes
that there could be technical reasons why it would not be
practicable for Ameritech to provide access to certain
systems to anyone outside Ameritech's local exchange
operations, including Ameritech's interexchange subsidiary.
At the same time, it recognizes that lack of such access
could have a considerable impact on the prospects for local
competition, and thus specifically provides for the
Department to consider the issue and take it into account.
C. Supervision and safeguards
When the interexchange trial begins, there will be actual
local exchange competition and substantial opportunities for
additional such competition, but no firm assurance that the
competitive state of the market will suffice by itself to
thwart any anticompetitive conduct that Ameritech might
attempt in the interexchange market. Therefore, the proposed
order contains supervisory provisions and post-entry
safeguards, designed for use during the trial, to supplement
such competition and ensure that there is no substantial
possibility that Ameritech could use market power in the
local market to harm competition in the interexchange market
during the trial.
As competition develops, many of the post-entry safeguards
may become unnecessary to ensure the absence of any such
substantial possibility, and the proposed order provides for
their removal as appropriate. (Proposed Order, para.17.) The
proposed order does not specifically provide for
Ameritech's interexchange authority to be made permanent
and the Department's supervisory role to be terminated,
because Sections VII and VIII(C) of the Decree already
establish the appropriate mechanism and standard for
permanent relief.
The Department is required to conduct a comprehensive
review of all aspects of the trial within three years of
Ameritech's interexchange authority under the proposed order.
(Proposed Order, para.18.)
The specific supervisory provisions and safeguards are as
follows:
1. Terminability of the trial
If Ameritech violates the order, or if the Department no
longer believes that there is no substantial possibility that
continuation of the trial would impede competition,
Ameritech's interexchange authority can be terminated
(Proposed Order, para.16.), subject to review by the Court
(Proposed Order, para.51.). This termination provision
ensures that, even if the opportunities for local exchange
competition at the start of the trial and other safeguards
turn out not to be sufficient to prevent Ameritech from
taking actions that harm competition in the interexchange
market, any such harm will be short-lived and insubstantial.
During the comment process, a number of commenters
suggested that it would be difficult for the Department to
exercise this authority. In response to these concerns, a
provision was included in the proposed order to require
Ameritech's compliance plan to supply, prior to approval of
its interexchange service, a credible plan for orderly
withdrawal from the provision of interexchange
telecommunications in the event Ameritech's authority to
offer interexchange telecommunications is discontinued.
(Proposed Order, para.10(j).) Such a plan might include, for
example, a procedure for balloting customers or for reverting
them to their previous interexchange carrier. Moreover, the
proposed order makes clear that financial hardship to
Ameritech resulting from such discontinuance shall not be a
ground for opposing such discontinuance. (Proposed Order,
para.16.)
2. Self-reporting
The proposed order requires Ameritech to develop a plan for
detecting and reporting violations of the order or of the
compliance plan, and to report any such violations and any
corrective action taken. (Proposed Order, para.para.10)i),
15.)
3. Orders to discontinue conduct
If the Department determines (a) that Ameritech is
violating any of the terms of the order, its compliance plan,
or additional conditions imposed on Ameritech in connection
with approval of its interexchange service, or (b) any other
conduct by Ameritech may impede competition for interexchange
telecommunications in the Trial Territory, the Department may
require Ameritech to discontinue such violations or other
conduct. Ameritech bears the burden of proof in resisting
such a requirement. (Proposed Order, para.15.)
4. Civil fines
In the event of a violation by Ameritech, the proposed
order gives the Department the authority to ask the Court to
impose civil fines. (Id.)
5. Limited geographic scope
The proposed trial is limited initially to the portion of
the Chicago LATA that is in the state of Illinois and to the
Grand Rapids, Michigan, LATA. Focusing on the state of
competitive conditions on a LATA-by-LATA basis ensures that
the competitive analysis takes into account differences not
just in
[[Page S5973]] state regulatory schemes, but also in
demographic and other conditions. Chicago was chosen because
there is widespread agreement that, of all the
areas in the Ameritech service territory, the potential for
competition--though still embryonic--is most advanced
there. Grand Rapids was chosen because the first competing
exchange carrier in Michigan, U.S. Signal (formerly known
as City Signal), has been certified to serve a portion of
that territory and was the subject of a detailed
interconnection order issued by the Michigan Public
Service Commission. Thus, it seems appropriate for the
Department to focus first on those two areas and to be
prepared to act with respect to those areas within the
period set forth in paragraph 11(a).
The inclusion of these two areas in the Trial Territory
does not mean that the trials in those two areas necessarily
must proceed simultaneously. Competitive conditions in one of
the areas may justify proceeding with an interexchange trial
before such conditions have evolved in the other area.
Further, explicit provision is made for expansion of the
Trial Territory in those two states, and each area in the two
states will stand on its own merits, governed by the standard
in paragraph 11b).\18\ (See Proposed Order, para.17.) As with
other determinations under the proposed order, the Court may,
in its discretion, review any decision to expand the Trial
Territory, (Id., para.51.) If the Department approves
expansion, such expansion could not go into effect for at
least 30 days (Proposed Order, para.17), thus allowing a
period of time during which interested persons could seek a
temporary restraining order from the Court. A decision by the
Department not to expand the Trial Territory would also be
reviewable. (See Proposed Order, para.51.)
Most important, the designation of those two areas as
comprising the initial Trial Territory, and of those two
states as being eligible for expansion of the Trial Territory
within the framework of the order, is not meant in any way to
discourage the ongoing efforts of the other Ameritech states
(Indiana, Ohio, and Wisconsin)--or similar efforts underway
or that may arise in the states in which other RBOCs
operate--to bring the benefits of local competition to the
consumers in their states, completely independent of any
interexchange entry by Ameritech in those states. Local
competition promises benefits to consumers separate from any
benefits they may get as a result of interexchange
competition from Ameritech. Moreover, the development of such
competition can only hasten the day when interexchange entry
by Ameritech--or other RBOCs--will be appropriately granted
under Section VII or VIII(C), wholly apart from the proposed
order now before the Court.
6. Types of services
Paragraph 7 of the proposed order limits Ameritech to
providing certain enumerated types of interexchange services
that have a clear nexus to the Trial Territory, i.e.,
services as to which the fact that competition exists in the
Trial Territory is relevant even if competition does not
exist elsewhere in the country. Thus, for most switched
services, as to which the interexchange carrier is selected
by the party placing the call, Ameritech could provide
interexchange service originating from the Trial Territory.
(Proposed Order, para.7(a).) For services such as inbound 800
service, which is ordinarily carried by the interexchange
carrier selected by the billed party at the terminating
location, Ameritech could provide service terminating at
subscribers' locations in the Trial Territory. (Proposed
Order, para.7(b).) Ameritech may also provide certain other
types of services normally provided by interexchange carriers
to their subscribers, such as calling card and private line
services, with limitations to ensure an adequate nexus to the
Trial Territory. (Proposed Order, para.para.7(c)-(d).) There
may also be other types of services that Ameritech may wish
to offer in the future in order to stay competitive with the
offerings of other IXCs. Because these services may not yet
exist, it is difficult to enumerate them, much less to
determine in advance whether any potential harm to
competition is adequate addressed by the proposed order.
Hence, a mechanism is provided to allow Ameritech to provide
such services, subject to disapproval by the Department.
(Proposed Order, para.7(e).) Under the provision, Ameritech
would have to give at least 30 days notice of such services,
and the Department, after soliciting comments from interested
persons, could disapprove the offering of such services. A
relatively short notification and objection period is
provided because it is anticipated that this provision will
principally be used to respond to competitive offerings in
the marketplace; however, a decision not to disapprove the
services would be without prejudice to later withdrawal of
authority under paragraphs 15 or 16 of the order if
necessary.
7. Ownership of transport facilities
Paragraph 19 of the proposed order provides that Ameritech
shall not own any of the transport facilities used to provide
interexchange telecommunications. Instead it must contract
for such facilities for a term not to exceed five years. This
safeguard serves two purposes: to the extent Ameritech has
not made substantial investments in facilities in the ground,
it makes it easier to terminate the trial; and it reduces
Ameritech's incentive to discriminate in favor of those
facilities because it makes it harder for Ameritech to
capture all of the benefits of such discrimination.
8. Separate subsidiary requirements
Paragraph 20 of the proposed order provides for the
separation of the Ameritech subsidiary providing
interexchange services from the Ameritech local exchange
operations. The provisions generally track the more stringent
approach taken by the Federal Communications Commission in
its Computer Inquiry II proceedings and rules and in the
requirement of separate subsidiaries for RBOC provision of
commercial mobile radio services, rather than more lenient
approaches relying on cost accounting instead of structural
separation (such as the approach taken by the FCC in its
Computer Inquiry III proceeding\19\). The more stringent
structural separation approach is more appropriate for a
trial of interexchange services, at least in the early stages
before competition is fully developed and before additional
information about the need for separate subsidiary
requirements is gained from the trial itself.\20\
9. Equal access provisions
Under the proposed order, the equal access provisions of
the Decree would remain in full force; the order would grant
Ameritech only a temporary and limited modification of the
line of business restriction of Section II(D)(1) of the
Decree and would not relieve Ameritech of any other
restrictions. (Proposed Order, para.4.) In addition, a number
of provisions are added to adapt the equal access concept to
a situation in which an Ameritech subsidiary is one of the
interexchange carriers interconnecting with the Ameritech
local exchange operations. These provisions deal with
equality in the type, quality, and pricing of
interconnection, exchange access, and local exchange
telecommunications (para.para.21, 25); technical information,
standards, collocation, and other terms of interconnection
(para.para.22-24); availability of service order,
maintenance, and other telecommunications support systems
(para.26);\21\ billing services (para.27); location number
portability (para.28); White Pages directory listings
(para.29); and customer information (para.para.30-32).\22\
10. Marketing restrictions
The marketing provisions of the order (para.para.33-47)
deal with two principal issues: (1) ``equal access''-type
obligations preventing Ameritech's local exchange operations
from assisting the Ameritech interexchange subsidiary in its
marketing efforts, and (2) the circumstances under which
Ameritech can make one-stop shopping arrangements (i.e., the
ability of customers to get their local and long distance
calling from one, full-service carrier) available to business
and residential customers, respectively. The ``equal access''
obligations (para.para.34, 36, 38-39, 44) embody the basic
principles of existing obligations, with modifications to
ensure that those principles will be effectuated when
Ameritech competes in the provision of interexchange
services. The provisions regarding one-stop shopping
(para.para.35, 41-43, 45-47) are intended to avoid giving an
inappropriate competitive advantage to, or imposing an unfair
handicap on, any carrier. The order would allow Ameritech to
offer one-stop shopping to business or residential customers
only when at least one other carrier is marketing services on
a comparable basis.\23\
The proposed order does not set out specific conditions
under which Ameritech can engage in ``bundle-pricing'' of its
interexchange services with local exchange or intraLATA toll
services (i.e., pricing whose availability is contingent upon
the subscriber's election of Ameritech for both such
services). Whether such bundle-pricing is appropriate, and
the types of conditions needed to prevent harm to competition
in interexchange services, depends on the state of
competition. The issue of ``bundle-pricing'' has therefore
been made an element of Ameritech's compliance plan (Proposed
Order, para.para.10(e)-(f)). Ameritech will tailor its
proposal to the competitive circumstances then existing, and
the Department will review it in light of those
circumstances.
11. Compliance plan
The proposed order requires Ameritech to file a compliance
plan prior to obtaining approval to begin its trial of
interexchange services. (Proposed Order, para.10.) The
compliance plan reinforces the separate subsidiary, equal
access, and marketing provisions of the order by requiring
Ameritech to spell out detailed plans for implementation of
those requirements. (Proposed Order, para.para.10(a)-(d),
(g).) It also provides the mechanism for determining the
appropriate market and other conditions for Ameritech's
offering of bundled pricing (para.para.10(e)-(f)) and for the
Ameritech interexchange subsidiary's ownership, leasing, or
control of any of the facilities it uses to provide local
exchange telecommunications and exchange access services
(para.10(h)). The compliance plan also will include
procedures for Ameritech to detect and self-report violations
of the order or the compliance plan (para.10(i)) and for
Ameritech's withdrawal from interexchange service should it
be required to do so (para.10(j)).
12. Other conditions
Ameritech's entry into interexchange services may also be
conditioned on any other terms that may be appropriate to
further the purposes of the order. (Proposed Order,
para.11(e).)
[[Page S5974]] IV. The Proposed Modification Should Be Approved Because
It is in the Public Interest.
A. The public interest standard applies to entry of the proposed
modification
In reviewing the proposed modification, the Court should
apply the ``public interest'' standard. The motion was filed
by the United States under section VII of the decree, and
Ameritech and AT&T have joined the United States in
stipulating to the proposed order.
The Court of Appeals has held that a proposed modification
satisfies the public interest test ``so long as the resulting
array of rights and obligations is within the zone of
settlements consonant with the public interest today.''
United States v. Western Electric Co., 993 F.2d 1572, 1576
(D.C. Cir.) (quoting United States v. Western Electric Co.,
900 F.2d 283, 307 (D.C. Cir.), cert. denied, 498 U.S. 911
(1990)) (emphasis in original), cert. denied, 114 S. Ct. 487
(1993). The public interest test is ``flexible,'' allowing
the government to choose among various decree provisions that
could further the public interest in competition. When the
government and the party whose decree obligations are at
issue agree on a decree modification proposal, as is the case
here,
``the court's function is not to determine whether the
resulting array of rights and liabilities ``is one that will
best serve society,'' but only to confirm that the resulting
``settlement is `within the reaches of the public
interest.'''
993 F.2d at 1576 (citing and quoting 900 F.2d at 309; United
States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.), cert.
denied, 454 U.S. 1083 (1981); and United States v. Gillette
Co., 406 F.Supp. 713, 716 (D. Mass. 1975)) (emphasis in
original). Therefore, a court is to approve a consensual
decree modification under the public interest standard unless
``it has exceptional confidence that adverse antitrust
consequences will result--perhaps akin to the confidence that
would justify a court in overturning the predictive judgments
of an administrative agency.'' 993 F.2d at 1577.
The Department welcomes this Court's careful review of the
proposed modification under this standard. We are confident
that the text of the proposed order, the explanation that we
are providing in this Memorandum, and the comments of other
interested persons will give the Court ample reason for
entering the proposed order.
B. The proposed modification is in the public interest
The proposed modification both avoids harm to competition
in the interexchange market and yields affirmative benefits
to competition. Accordingly, it is in the public interest and
should be approved and entered by this Court.
1. The proposed modification is structured to avoid harm to
competition in the interexchange market
Far from giving the Court ``exceptional confidence that
adverse antitrust consequences will result,'' the proposed
modification gives the Court ample assurance that no adverse
consequences will occur. As this Memorandum has explained,
the order we ask the Court to enter would permit only a
limited trial of Ameritech provision of interexchange
services, and even that trial could not begin until the
Department (and the Court if it reviews the Department's
determination) is satisfied that local competition exists and
will continue to develop in the Trial Territory. In addition,
the interexchange services that the modification permits
would remain subject to a variety of safeguards, including
the power of the Court or the Department to terminate the
trial at any time.
The proposed order thus ensures that competition in the
interexchange market will not be harmed by the modification--
a fact underscored by AT&T's stipulation that the proposed
modification is in the public interest and by the support of
Sprint, CompTel, and ACTA.
2. The trial will provide affirmative benefits to competition
Not only is the proposed order structured to prevent any
harm to competition, but it also presents a valuable
opportunity affirmatively to advance the public interest in
competition.
First, as a prerequisite to its offering of interexchange
service pursuant to this modification, Ameritech must take
specific actions to remove barriers to local competition,
including those relating to terms of interconnection,
unbundling of loops, dialing parity, and number portability.
The proposed modification thus complements the efforts of the
state regulatory commissions in the Ameritech region to lower
such barriers, as reflected in the comments of the staff of
the Michigan PSC on an earlier version of the proposal:
``[T]he Department of Justice (DOJ) and the court should
move forward in a measured fashion to permit more competition
in the telecommunications marketplace. That action,
however[,] should be such that it recognizes the need to
balance the interests of the Regional Bell Operating
Companies (RBOC), their local and toll competitors, and
residential and business customers in the telecommunications
marketplace. That balance can be achieve through an approach
which minimizes the potential for anticompetitive actions on
the part of the RBOCs. This coupled with the coordination and
recognition of appropriate State law and regulatory agency
actions to remove barriers to entry to the State or local
telecommunications markets should set the stage for a trial
waiver of the interLATA restrictions currently in effect.''--
Michigan PSC Staff Comments on Draft Dated February 21, 1995
[Appendix, Tab 16].
Second, the trail will yield important information about
RBOC provision of interexchange services. The Department, the
Court, all segments of the telecommunications industry, and
the public will be able to observe and analyze the effects of
the stipulated conditions, and related regulatory and
technological developments, on competition in local and
interchange telecommunications markets. We will learn much
about whether local competition will develop to such an
extent that harm to interchange competition can be avoided,
with or without other safeguards. We will also enhance our
understanding of the importance of factors such as call set-
up and transmission delays resulting from interim forms of
number portability, consumer demand for one-stop shopping,
the terms and conditions of
interconnection, and the pricing of network elements in the
development of such competition. If competition is not
sufficient to be self-policing, we may learn how difficult
and costly it is to monitor and prevent discrimination and
cross-subsidization. We will also learn about what kinds
of safeguards are effective and/or necessary.
No trial, or course, could provide all the answers.
Nonetheless, this trial should substantially assist in
determining whether and on what terms the Decree's
interexchange restriction should be retained, modified or
removed.
Third, the trial may yield important information about the
possible benefits to interexchange competition from RBOC
provision of interexchange services. The RBOCs have argued
that the interexchange market, particularly for residential
customers, is oligopolistic rather than competitive, and that
RBOC entry will tend to disrupt that oligopolistic
coordination, resulting in substantial benefits to consumers.
While Ameritech has not yet presented sufficient evidence to
substantiate this claim, actual experience may cast
additional light on this argument.
conclusion
The carefully crafted details of the proposed order grew
out of intensive work by the Department and extensive
consultation and negotiation with interested persons. We do
not expect all commenters to be satisfied; in an arena filled
with competing private interests, we can be assured that some
will claim that the balance has not been struck precisely
right. The issue, however, is whether the Department
``reasonably regard[s]'' the modification ``as advancing the
public interest,'' 993 F.2d at 1576. On that issue, the terms
of the proposed order demonstrate, and we believe the
comments of interested persons as a whole will confirm, that
the proposed modification advances the public interest. The
Court should therefore enter the proposed order and allow
this important trial to proceed, subject to the
preconditions, safeguards, and continuing review for which
the order itself provides.
Respectfully submitted,
Anne K. Bingaman,
Assistant Attorney General.
Willard K. Tom,
Counselor to the Assistant Attorney General.
David S. Turetsky,
Senior Counsel to the Assistant Attorney General.
Jerry S. Fowler, Jr.,
Special Counsel to the Assistant Attorney General.
Donald J. Russell,
Chief, Telecommunications Task Force.
\1\See, e.g., MCI Corp., A Blueprint for Action: The
Transition to Local Exchange Competition, Tab 1 at 1 (March
1995) [Appendix, Tab 1]; William J. Baumol & J. Gregory
Sidak, Toward Competition in Local Telephony 9 (1994);
Affidavit of William J. Baumol at 5, submitted on behalf of
AT&T as an attachment to AT&T's Opposition to Ameritech's
Motions for ``Permanent'' and ``Temporary'' Waivers From the
Interexchange Restrictions of the Decree (filed with the
Department in opposition to Ameritech's original proposal on
February 15, 1994) [that opposition cited hereinafter as
``AT&T Opposition to Original Proposal''] [Appendix, Tab 2].
\2\See Order, Dkt. No. 93-0409 (Ill. Commerce Comm'n, July
20, 1994) (MFS) [Appendix, Tab 3]; Order, Dkt. No. 94-0162
(Ill. Commerce Comm'n Sept. 7, 1994) (Teleport) [Appendix,
Tab 4]; In re City Signal, Inc., Application for a License to
Provide Basic Local Exchange Service in the Grand Rapids
Exchange, No. U-10555, 1994 Mich. PSC LEXIS 267 (Mich. Pub.
Serv. Comm'n Oct. 12, 1994) [Appendix, Tab 5].
\3\Teleport is planning to test the use of cable facilities
owned by Tele-Communications, Inc., (``TCI'') to provide
local exchange service to residential customers in the
Chicago area. See Leslie Cauley, Tele-Communications,
Motorola to Join Teleport for Venture in Chicago Area, Wall
Street J., Oct. 12, 1994, at B5. Others are exploring similar
possibilities.
\4\Specifically, Ameritech asserted that ``industry-wide
developments . . . are themselves more than sufficient to
warrant removal of the interexchange restriction.'' Ameritech
Memorandum in Support of Motions to Remove the Decree's
Interexchange Restriction at 3 (filed with the Department of
Justice on Dec. 7, 1993) [Appendix, Tab 6]. The Department
does not believe that the record is sufficient at this time
to support this contention (either as to technological or
regulatory developments), and does not base the present
motion on any such contention.
\5\These prohibitions were also justified as a way to promote
universal service, by requiring high-margin services to
subsidize below-cost services and prohibiting new entrants
from ``cream skimming'' those
[[Page S5975]] services. In recent years, progressive states
have begun to explore alternative ways of ensuring universal
service that would permit competition and allow consumers the
benefit of the efficiencies and lower prices that competition
brings.
\6\Positive network externalities characterize those
``products for which the utility that a user derives from
consumption of the good increases with the number of our
agents consuming the good. . . . [T]he utility that a given
user derives from the good depends upon the number of other
users who are in the same `network' as he or she.'' Michael
L. Katz & Carl Shapiro, Network Externalities, Competition
and Compatibility, 75 AM. Econ. Rev. 424 (1985). ``The
utility that a consumer derives from purchasing a telephone .
. . clearly depends on the number of other households or
businesses that have joined the telephone Network.'' Id.
\7\In re Illinois Bell Telephone Company Proposed
Introduction of a Trial of Ameritech's Customers First Plan
is Illinois, Dkt. No. 94-0096, slip op. at 97 (Ill. Commerce
Comm'n, Apr. 7, 1995) [hereinafter ``ICC order''] [Appendix,
Tab 7].
\8\A Blueprint for Action, supra note 1, Tab 3 at 2
[Appendix, Tab 1]. A similar telephone survey was conducted
in January 1994, by First Market Research Corporation, for a
study sponsored by AT&T, MCI, and CompTel. That survey found
that in the absence of number portability, the number of
respondents interested in changing to a cable TV company for
local telephone service in response to a 20% discount fell
from 32.8% to 22.6%. Corresponding figures for a 10% discount
and for no discount were a drop from 18% to 12.6% and from
8.7% to zero, respectively. Economics & Technology, Inc, &
Hatfield Associates, Inc., The Enduring Local Bottleneck 108-
10 (February 1994) [Appendix, Tab 8].
\9\Initially, the Trial Territory would consists of the
portion of the Chicago LATA that is located in the state of
Illinois and the Grand Rapids LATA in the state of Michigan.
The two LATAs could begin their interexchange trials at
different times, and the Trial Territory could have
eventually be expanded to include other portions of those two
states (but only those two states) if those portions met the
competitive standards set out in the proposed order.
\10\Regulatory consideration of such issues is already well
underway in the trial states. In Michigan, the Michigan PSC
adopted on an interim basis a pricing scheme for unbundled
loops that was proposed by City Signal, a CAP which in 1994
was granted a license to provide local service in the Grand
Rapids LATA. Under the interim scheme, Ameritech will charge
City Signal $8 for a residential loop and $11 for a business
loop. The Commission will further address these issues in an
upcoming generic proceeding, to commence June 1, 1995, and to
be completed no later than nine months thereafter. In the
matter of the Application of City Signal, Inc., for an Order
Establishing and Approving Interconnection Arrangements with
Ameritech Michigan, Case No. U-10647, at 85-95 (Mich. Pub.
Serv. Comm'n, Feb. 23, 1995) [hereinafter ``City Signal
Order''] [Appendix, Tab 9].
In Illinois, the Illinois Commerce Commission heard extensive
testimony on Ameritech's proposed pricing of unbundled loops
and ports, disapproved certain aspects of that pricing, and
required that Ameritech file new tariffs to ensure that the
sum of prices for unbundled network functions not exceed the
price of bundled functions and to reduce and equalize the
contribution that those prices would make to common costs.
ICC Order, supra note 7, at 60-61 [Appendix, Tab 7].
\11\The issue of ``sub-loop unbundling'' is dealt with in
similar fashion. AT&T and others have contended that merely
unbundling loops from ports does not go far enough. Instead,
AT&T contends that local service should be unbundled into at
least twelve basic network elements: distribution,
concentration, feeding, end office switching, dedicated line
transport, common transport, tandem switching, databases used
in signaling, packet switching of signaling from the
originating central office, packet switching of signaling at
the destination, links from the packet switches to data
processors and storage points, and operator services.
Affidavit of Lawrence A. Sullivan, submitted by AT&T in its
Opposition to Original Proposal, at 29-30 (filed with the
Department of Justice on Feb. 15, 1994) [Appendix, Tab 10].
Advocates for this position argue, for example, that a
provider of personal communications services (``PCS'') might
be able to provide a witness connection from the home to a
neighborhood node, and then use Ameritech facilities to get
from the neighborhood node to the central office. Testimony
of Dr. Mark T. Bryant on behalf of MCI before the Illinois
Commerce Commission, at 10-11 (Dkt. No. 94-0048, Aug. 8,
1994) [Appendix, Tab 11]. Ameritech responds that such an
approach could lead to the uneconomic stranding of
significant amounts of its investment, to no real purpose
since the facilities can be made available to competitors on
a nondiscriminatory basis and since continued use of
Ameritech facilities whose costs are already sunk would be in
the interests of consumers. The proposed order does not
require sub-loop unbundling, but makes clear that this
resolution is without prejudice to the power of a state to
require such further unbundling. (Proposed Order, para.1(m).)
Moreover, it makes clear that the Department may consider the
competitive effects of such unbundling (or lack thereof).
(Id.).
\12\State law or regulatory requirements intended to benefit
competition in the intraLATA toll market may require
Ameritech to implement intraLATA toll dialing parity before
Ameritech has met the conditions in para.11 of the proposed
order. In that case, intraLATA toll dialing parity would come
into effect before Ameritech commences interexchange service.
\13\The proposed order does not displace state regulation,
however. (See Proposed Order, para. 3.) State regulators may
choose to regulate arrangements even when consented to by the
carriers involved.
In allowing paragraph 9(e) to be satisfied by consent of the
other exchange carriers, we recognize that unequal bargaining
power may lead a competitive exchange carrier to agree to
unsatisfactory terms. That is precisely why the provisions of
paragraph 9 are not a checklist that will lead automatically
to Ameritech's entry into interexchange service. The ultimate
issue will always be the competitive results of the
negotiated arrangements, as tested against actual marketplace
facts. (See Section III.B.) Thus, because the proposed order
requires that the Department analyze market facts and assess
competitive circumstances, the proposed order gives Ameritech
the incentive to negotiate in good faith and arrive at a
procompetitive agreement with competitive exchange carriers.
\14\Of course, the reasons advanced by a competing carrier as
to why the proffered interconnection arrangements are
inadequate may have a bearing on any assessment of
competitive circumstances.
\15\See, e.g., A Blueprint for Action, supra note 1, Tab 3 at
5-19 (discussing shortcomings of interim number portability)
[Appendix, Tab 1].
\16\The compliance plan, which deals principally with post-
entry safeguards, is discussed in more detail in Section
III.C, below.
\17\The Department is currently investigating claims that
regulation and post-entry safeguards are sufficient to ensure
that there is no substantial possibility that an RBOC could
engage in anticompetitive conduct, without the market-opening
measures contemplated in the proposed order, in connection
with the Motion of Bell Atlantic Corporation, BellSouth
Corporation, NYNEX Corporation, and Southwestern Bell
Corporation to Vacate the Decree. (Bell Atlantic has since
withdrawn from that motion.) Ameritech is not advancing that
proposition at this time, however, and the proposed trial is
not designed to test such claims.
\18\The staff of the Michigan PSC, in its comments on an
earlier version of the proposal, urged the Department to
include the Detroit and Lansing LATAs in the Trial Territory.
Revised Comments of the Staff of the Michigan Public Service
Commission (Mar. 22, 1995) [Appendix, Tab 15]. The Department
does not believe this change to be appropriate, because it is
too early to tell how widely different areas of the state
will vary in the availability of competitive alternatives and
the ability of such alternatives to guard against harm to
competition in the interexchange market. We stress, however,
that the modification provisions of the proposed order
establish sufficient flexibility to deal appropriately with
whatever competitive conditions should arise.
\19\The FCC's order removing structural separation
requirements was vacated and remanded by the Ninth Circuit.
California v. FCC, 39 F.3d 919 (9th Cir. 1994), cert. denied,
63 U.S.L.W. 3721 (U.S. April 3, 1995). Further proceedings on
remand are pending at the FCC.
\20\Even under the FCC's Computer Inquiry II approach,
certain kinds of services can be shared between the
interexchange subsidiary and other affiliates. These are
enumerated in para. 20(g). To the extent that any such
sharing is carried out in a way that harms competition, the
Department and the Court retain the power to take corrective
action under para.para. 15-16, as well as to take that fact
into account in evaluating the progress of the trail under
para. 18.
\21\The proposed order calls for ``equivalent'' rather than
identical order, maintenance, and support systems, to account
for the possibility that access to such systems may involve
the use of different interfaces because of the different
requirements of different carriers' computer systems and
because of Ameritech's need to protect the security of its
systems. The access must, however, be equivalently
convenient; the provision would not be satisfied by providing
electronic connections to Ameritech's interexchange
subsidiary but only fax machines to its competitors.
\22\Among the restrictions on access to customer information
is a provision that the Ameritech interexchange subsidiary
may not have access to customer proprietary network
information (``CPNI'') as defined by the FCC, except in the
same manner that CPNI is available to unaffiliated carriers.
This would mean, for example, that unlike the Ameritech local
exchange operations, the Ameritech interexchange subsidiary
would have to obtain the affirmative consent of the local
exchange operations' customers in order to get local and
intraLATA toll usage patterns of those customers. At one
point, Ameritech expressed concern that this restriction
would put it at a marketing disadvantage compared to AT&T,
which could target the marketing of one-stop shopping
services to its more lucrative interexchange customers, based
on their long-distance usage patterns, which would be
available to AT&T without such affirmative consent because
they would relate to services as to which AT&T was the
subscribers' provider. Ameritech concluded, however, that it
could overcome this disadvantage if it could start seeking
such affirmative consent from Ameritech local exchange
customers as soon as possible. Since nothing in the existing
Decree would appear to prohibit the seeking of such consent
before the trial begins or even before the proposed order is
entered, so long as customers are not misled as to the actual
extent of Ameritech's authority to offer interexchange
service, Ameritech withdrew this concern.
\23\In some cases, such as the provision of interexchange and
intraLATA toll services by the interexchange subsidiary
(para.para. 41, 45) and the provision of Centrex service to
business customers (para. 43), the proposed order provides
for the offering of such services immediately upon the
commencement of Ameritech's authority to offer interexchange
telecommunications, because other carriers are already
offering such services on a ``one-stop-shopping'' basis.
The PRESIDING OFFICER. The Senator from North Dakota.
Mr. DORGAN. Madam President, I ask unanimous consent that my remarks
appear as in morning business.
The PRESIDING OFFICER. Without objection, it is so ordered.
____________________