Modified Final Judgment
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The agreement between AT&T and Judge Greene that took effect in 1984, the Modified Final Judgment (MFJ), transformed the telecommunications industry. The MFJ also set the stage for the Telecommunications Act of 1996 (TA96) 12 years later. TA96 essentially completed the task begun by the MFJ of 1984.
The MFJ got its name because it modified the “Final Judgment” document of the 1956 Consent Decree, which was itself a settlement of a huge, drawn out, antitrust proceeding. With the MFJ, the court (specifically Judge Greene’s court) became an “extra” regulator for both the new AT&T system and the local Bell Operating Companies spun off from the Bell System. These now became local exchange carriers (LEC).
The 22 BOCs were reorganized into seven Regional Bell Operating Companies (RBOCs) of roughly equal asset and subscriber size, but of vastly different geographical scope. The seven RBOCs (NYNEX, Bell Atlantic, BellSouth, Ameritech, Southwestern Bell, U S WEST, and Pacific Telesis) offered local service and used only AT&T Long Lines for long distance service, unless customers specified otherwise through a series of increasingly easier procedures (equal access).
AT&T retained Western Electric Company (WECO), which all agreed was AT&T’s plan from the start, and most of Bell Labs, again a goal for AT&T. The core long distance business, AT&T Long Lines, was the service arm of this operation.
Under the MFJ, the RBOCs were required to provide equal access to AT&T competitors such as MCI, Sprint, and a whole raft of smaller companies. There were requirements both on the part of the RBOCs (called “feature groups”) and the newly deregulated long distance companies (called “points of presence”) in order to make this happen. In addition, the RBOCs were barred from customer premises equipment (CPE) manufacturing (to avoid a repeat of AT&T/WECO “abuses”) and prohibited from providing any “enhanced services” above and beyond the passive transfer of analog or digital signals through their systems.
However, the RBOCs retained a local monopoly within specially established local access and transport areas (LATA), whose size and shape was a topic of fierce debate. All calls originating in one LATA and terminating in another had to be handled by one of the interexchange carriers (IEC) with a “presence” in the LATA.
There were no longer any separations payments on the part of AT&T. Instead, the MFJ established a system of “access charges” whereby the LECs billed the relevant IEC for the local portion of the “long distance” call.
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Effects of the Modified Final Judgment
Local access and transport areas
For the purposes of the MFJ, the entire United States was divided into 245 local access and transport areas (LATA). They were in a real sense a totally artificial construct, although they did involve the use of U.S. Census data.
The LEC could only provide what were known as intraLATA services. That is, only calls where the origination point and the termination point were both within the same LATA could be totally handled on the LEC facilities. AT&T, or one of AT&T’s competitors, had to provide interLATA service, under equal access rules. This meant that the LEC had to allow any subscriber to access any IEC, on an equal basis, as long as the IEC had a switching office access point (called a “point of presence”) in the LATA. A special case or category became known as intra-LATA toll calls. These were calls that originated and terminated within a single LATA, but were billed at a higher rate, called a toll. The whole concept is similar to the idea that a toll road is still just a road, but people are charged money to use it.
Although rather arbitrary, LATAs did preserve common social and economic boundaries that reflected actual calling patterns. It made no sense to have areas where most calls now became long distance calls! In fact, some LATAs spanned states if this boundary preserved a traditional “community of interest” in that local area.
Each LATA was designed to have about 1,000,000 subscribers and similar usage patterns in terms of local and long distance calling. There was much debate about the size of LATAs. If the LATAs were too large, then the LECs would have little need to hand off calls to an IEC, and the monopoly stranglehold would be worse than ever. If the LATAs were too small, then only AT&T would be able to afford switching offices in all of them. As it was, some complained that LATAs were too small, but they were accepted by both sides in the dispute.
The MFJ structure thus left customers with essentially three basic types of telephone calls. Local calls were almost universally billed at flat rates regardless of connection time. Toll calls were in most cases billed by the local service provider, but carried by the long distance companies, since economies of scale and aggregation of traffic was important for these calls. So, many intra-LATA toll calls were actually handled by the interexchange carriers (IEC), but billed to customers transparently by the local exchange carriers (LEC). Finally, long distance calls (technically inter-LATA toll calls) were billed on a separate section of the bill and reflected a distance and time pricing structure in most cases.
Points of presence
The place where local service ended and long distance began was at the IEC’s point of presence (POP) within the LATA. This was the IEC’s switching office and obviously an IEC had to have a POP within a LATA to handle local traffic into and out of the LATA. Now, even if an IEC did not have a POP in a particular LATA, nothing prevented an IEC from handing the call off to a competing IEC, as long as the call was paid for. In this case, the billing IEC paid out a portion of the billed amount to the other IEC. This happened whenever an IEC with a POP in the originating LATA did not have a POP in the terminating LATA, which was more frequent than people realized. In fact, as late as 1995, only AT&T had a POP in every LATA in the United States. (Alaska was most often not covered.)
Under the MFJ, all local subscribers had to have “equal access” to any and all IECs maintaining POPs in the LATA. Often this meant dialing a prefix to the area code and number, but IEC preferences could be presubscribed. Therefore, by expressing a preference for Sprint (for example), unless special dialing rules were followed, all “normal” calls outside the LATA were carried by and billed by Sprint. There were several categories of special dialing rules to override the presubscription arrangements. These were known as Feature Groups and depended heavily on the LEC’s switching office software. The ultimate Feature Group, Feature Group D, allowed dialing a simple “10288” prefix to reach AT&T (for example). The “288” was AT&T’s Carrier Identification Code (CIC), which was dialed as A-T-T.
Unauthorized transfer of presubscription from one IEC to another was common and annoying to users. This technique became known as slamming and came under the scrutiny of the FCC, but continues nonetheless, even today.
Access charges
Access charges were established by the MFJ to replace the separations payments AT&T made to the LECs before 1984. Access charges reflected the fact that all “long distance” (more properly, inter-LATA toll) calls included two local calls at each end, since the IECs were forbidden by the MFJ from providing local service. Local service remained effectively a state regulated monopoly of the LECs.
Under the access charge arrangement, the originating LEC usually collected the full inter-LATA toll call amount from the customer, unless collect calling or some other special billing feature was used. Even though the bill sent by the LEC contained a “long distance” portion separate from other sections of the bill, the IEC usually paid the LEC for these billing services in order to spare the IECs from their own billing software and mailing costs.
This long distance amount was separated from the full amount of the bill, so the customer only had to write out one check to the originating LEC. The long distance portion was in turn paid by the LEC to the IEC involved. Of course, the originating and terminating LEC (which could be the same LEC if the call was from one LATA to another in the same LEC’s territory) still had to be compensated for carrying the local call at each end.
This was accomplished by having each LEC send the IEC a Carrier Access Billing System (CABS) bill. The terminology is awkward, but universal. The CABS bill was usually sent electronically, not as a printout. Since old-fashioned, nine-track mainframe magnetic tapes were most often used for this purpose, and the information format on the tape had to be read by all IECs, Telcordia Technologies standardized a bill data tape record format for this purpose. The CABS bill amount on the bill data tape was paid to each LEC by the IEC for the local calls on each end.
Most importantly for the 1990s, the MFJ specifically excluded data service providers from having to pay any access charges at all. This was done to encourage the growth on these data services, which otherwise would have resources drained by access billings and would have to factor these costs into customer pricing and their own billing. In 1984, data services were still small and uncommon. The FCC has ruled that VoIP services are under federal jurisdiction and that the states may not require these service providers to meet their traditional telephone carrier regulations. At the same time the Internet Telephony Service Providers (ITSP) are also free of having to pay access charges to the LEC.
Competition comes to local service: Bypass and CAPs
The MFJ preserved the local monopoly on local service for the LECs. However, even before the MFJ and divestiture, this monopoly was not absolute, secure, or universal.
Companies like MCI had been offering competitive long distance service since the 1970s. Organizations that perceived the cost of telephone service to be too high on the long distance side of the house were attracted to these competitive IECs. Of course, in order to access the competitive IEC’s switching office, the organization had to establish local access to the IEC’s switching office. And, since the LEC retained a monopoly on local service, the LEC had to provide the trunks to the IEC in the first place.
In most cases, the LEC providing the trunk link was part of the AT&T Bell System. This meant that even though a company such as MCI was being used for long distance, the LECs at each end were still under the vast AT&T umbrella. This still dissatisfied many organizations, who felt that not only long distance services were overpriced, but local services as well. These organizations sought not only to cut AT&T out of their long distance plans, but cut AT&T out of the local access portion as well. Naturally, the LEC still had to be used for purely local calling, but for accessing IECs, why pay the LEC?
In the mid 1970s, the first viable alternative became practical and affordable for these organizations. This was known as local service bypass, or just bypass. Bypass did not require a trunk to the IEC switching office to be purchased from the LEC at all. Several small, aggressive, and inexpensive alternate access providers began to do business in major metropolitan areas. Since their services and pricing directly competed with the LECs for access to the IECs, they came to be called competitive access providers (CAP).
Ironically, in many cases the CAPs did not own their own facilities at all. Most commonly, they purchased trunks from the LECs at deep, bulk rate discounts and then resold them to their own customers, the organizations who had the most to gain from bypass. These resellers prospered enough in many areas to actually build and operate their own facilities in metropolitan areas, although this did not become common until the late 1980s.
Many different bypass arrangements were possible. Under the most common bypass arrangement, instead of going to a LEC access line in order to access a trunk to an IEC point of presence (POPs were only “invented” with the 1984 MFJ), the organization could get an access line to a CAP switching office, which still ran to the IEC POP. This cut the LEC out of the IEC access arrangement entirely.
By the early 1990s, divestiture was deemed a rousing success. Competition had two lasting effects on long distance calling. First, it became more and more common; an awareness of alternatives to AT&T Long Lines stimulated the public to call further and longer than ever before. Second, the price of long distance fell, and fell again. MCI’s promise of 50% turned out to be closer to 67%, an amazing fact that led some to consider that long distance was not only overpriced, but vastly overpriced.
Prices fell in part because no one had any real idea as to just how much an individual call cost in the first place. Years of regulation had led to a mentality of maximizing revenues, not closely watching (or even knowing) costs. When AT&T invented area codes and encouraged direct distance dialing (DDD) in 1961, the cost of a long distance call coast-to-coast was pegged at $12.00 a minute. Naturally, the cost of all the new signaling and switching equipment had to be recovered, but revenues were flat. Cartoons showed people jumping out of the shower dripping wet to take a long distance call (hey! it cost the caller a lot of money!). AT&T soon dropped the rate to $6.00 a minute. The reason was purely revenue considerations, not the cost of providing the service.
But local rates, still regulated monopolies, rose about 13% nationally. The difference was widely perceived as the difference between a competitive, deregulated, long distance environment and a monopolistic, regulated, local service environment. Faced with this perception, rightly or wrongly, the states tried to bring local rates down by encouraging some local competition. After all, it had worked nationally and brought glory to the FCC. Why not in our state?
Many states decided in the 1990s to encourage, but at the same time control, the CAPs. The fostered competition, encouraged the LECs to lower their prices in turn, and all without a messy confrontation with the LECs themselves. The LECs would have to lower rates voluntarily to compete with the CAPs, so the state regulators would not have to order rate cuts and face court challenges and bad publicity.
Most states instituted a policy of certification for CAPs and other companies (like major corporate telecommunications departments). Certification involved hearings and voluminous paperwork showing financial strength, willingness to deploy facilities, and overall corporate responsibility. The process was often long and drawn out, and sometimes faced strenuous objections from the LECs, but most states certified one or more CAPs as competitive LECs (CLECs, either pronounced “see-lecks” or “clecks” as the spirit moves one).
The former sole LEC in an area then became the incumbent LEC, or ILEC (“eye-leck”). Of course, the ILECs were still totally regulated by the state. This hardly thrilled the ILECs, who suddenly saw new CLEC competitors freely writing contracts at various prices based on undercutting the ILEC’s own tariff information by 10% or even 20%! These lower rates could be offered by the CLEC since they were able to purchase certain “unbundled” elements, like the local loop, from the LEC at heavily discounted rates. This was set by the Telecom Act of 1996.
The U.S. Court of Appeals for the District of Columbia Circuit overturned this unbundling and wholesale pricing requirement in March of 2004. This decision was a setback for the competitive local exchange carriers (CLECs) since they will have to pay higher prices for elements they lease from the LEC.
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