NEWSReport No. 95-60 COMMON CARRIER ACTION October 12, 1995 COMMISSION DECLARES AT&T NONDOMINANT Recognizing a decade of enormous change in the long distance market, the Commission today voted to reclassify AT&T Corporation (AT&T) as a non-dominant interexchange carrier. This step will free AT&T from price cap regulation of its long distance services, as well as other regulations and reporting requirements that apply only to dominant carriers, and it will expedite the availability of new services for consumers. The Commission found that AT&T lacks market power in the interstate, domestic, interexchange telecommunications services market, and therefore concluded that continued regulation of AT&T as a dominant carrier is no longer necessary or appropriate. The Commission noted that, in 1981 when AT&T was classified as dominant, the company controlled the Bell Operating Companies, which served over 80 percent of the nation's phones and was virtually the only supplier of interexchange service. Today, in contrast, AT&T faces competition in the interexchange market from hundreds of facilities-based and resale carriers, and no longer controls those local access facilities. As a dominant carrier, AT&T is subject to price cap regulation for nonstreamlined services and to specific tariffing requirements. Under current tariffing requirements, AT&T must file tariffs for nonstreamlined services on at least 14, 45, or 120 days notice, depending on the type of tariff at issue. Tariffs for streamlined services, including virtually all AT&T business services, must be filed on at least 14 days notice. In addition, as a dominant carrier AT&T is not able to use the blanket Section 214 authorization for construction of facilities or the expedited procedures for discontinuance of service that are afforded to non-dominant carriers. As a non-dominant carrier, AT&T will be subject to the same regulations as its long- distance competitors and will have greater incentives to cut its prices and offer innovative new services. More specifically, as a result of being reclassified, AT&T will no longer be subject to price cap regulation and will be able to file tariffs that are presumed lawful on one day's notice, like other non-dominant carriers. AT&T will no longer have to file cost support data and other additional information now required for certain price cap filings, and it will be relieved of certain annual reporting requirements. (over) -2- AT&T, like all other non-dominant carriers, remains subject to the statutory requirements of Title II of the Communications Act. For instance, non-dominant carriers are required to offer service under rates, terms, and conditions that are just, reasonable and not unreasonably discriminatory. Non-dominant carriers are also subject to the Commission's complaint process, and are required to file tariffs under the Commission's streamlined tariffing procedures. They are also required, under Section 214, to give notice to the Commission and to affected customers prior to discontinuance, reduction, or impairment of service. In granting AT&T's motion for non-dominant status, the Commission accepted all of the voluntary commitments offered by AT&T in its September 21, 1995 and October 5 ex parte letters, and ordered AT&T's compliance with those commitments. These commitments address concerns that had been raised with regard to the potential impact of declaring AT&T to be non-dominant. In this proceeding, the Commission found that, while the domestic, interstate, long- distance market is not perfectly competitive, AT&T neither possesses nor can exercise individual market power within that market as a whole. In evaluating whether AT&T possessed market power within the relevant product and geographic market, the Commission considered AT&T's market share, the supply elasticity of the market, the demand elasticity of business and residential customers, and AT&T's size and resources. The Commission also examined particular AT&T service offerings that had been the subject of comments in the proceeding. These services include residential services, operator and calling card services, analog private line and 800 directory assistance services, and service to and from Alaska and Hawaii. Based on its review of the record, the Commission concluded that AT&T's competitors in this market possess or could quickly acquire the capacity needed to take away enough business from AT&T to make unilateral price increases by AT&T unprofitable. The Commission further found that business and residential customers will switch to or from AT&T in order to obtain price reductions and desired features and that this willingness to switch providers is evidence of AT&T's lack of market power. The Commission noted, moreover, that the behavior of this market during the last ten years suggests intense rivalry among AT&T, MCI and Sprint. The Commission further noted that the long-distance marketplace has changed significantly since the Commission's initial determination, almost fifteen years ago, that AT&T possessed market power. More specifically, the Commission observed that AT&T has not controlled local bottleneck facilities for ten years, since it divested the Bell Operating Companies, and it faces at least two national facilities-based competitors plus hundreds of other carriers that employ facilities or resale or both to provide service to customers. The Commission noted that AT&T's size alone does not constitute persuasive evidence of market power. -3- Residential Services In examining residential service prices, the Commission found that, from 1991 to 1995, AT&T's best available discounted residential rates for customers with monthly bills over $10.00 fell between 15 and 28 percent, depending on the volume of calling, and that AT&T's average revenue per minute fell nine percent in nominal terms from 1991 to 1994. The record also showed that MCI and Sprint frequently initiate new discount plans that elicit competitive responses from AT&T. In addition, the record indicates that an increasing percentage of AT&T's residential customers are selecting discount plans rather than paying basic schedule rates. The Commission noted that this evidence strongly suggests that the market is becoming more competitive and therefore that AT&T cannot control rates or charge excessive rates. Moreover, the Commission observed that, because its dominant carrier rules require AT&T to file new residential discount offerings on 45 days notice, the current regulations hinder AT&T's ability to introduce new services and respond quickly to new discount plans offered by its rivals. The Commission acknowledged that basic schedule rates have risen since 1991, and that each time AT&T has raised its basic rates, MCI and Sprint have followed suit. The Commission noted, however, that concerns regarding basic schedule rate increases by the three largest long distance carriers are not based on claims that AT&T has the power to raise prices unilaterally for this service. Rather, some parties have alleged the appearance of parallel pricing among AT&T, MCI and Sprint. The Commission noted that eliminating the lengthy notice period before AT&T's tariffs become effective should foster greater competition among long distance companies to serve basic schedule and other customers, and reduce opportunities to coordinate pricing. Finally, the Commission notes that AT&T has committed unilaterally to offer, for three years, special calling plans targeted to serve low-income and low-volume customers. More specifically, AT&T will offer low-income customers, who qualify under state standards for the FCC Lifeline and Link-up programs, a calling plan under which such customers will be able to place one hour of interstate direct dial calls at rates that are 15 percent below AT&T's existing basic schedule rates. In addition, customers under this plan will also remain eligible for other AT&T optional calling plans. AT&T also will offer a second optional calling plan that is targeted to low-volume customers, but is available to all residential customers. In the first year, customers choosing this plan will pay $3.00 per month for the initial 20 minutes of interstate direct dial calling at any time during the day or night. Calling in excess of twenty minutes will be priced at $0.25 per minute during peak calling hours and $0.15 per minute during off-peak calling times. During the second year, customers on this plan will again pay $3.00 for 20 minutes of calling during any part of the day or night, while calling above the initial 20 minutes will be priced at no higher than $0.27/$0.16 per minute for peak/off-peak calls. During the third year, customers will pay $3.25 for the initial 20 minutes of calling and no higher than $0.27/$0.16 per minute for (over) -4- additional peak/off-peak calls. In addition, AT&T has committed to filing rate changes to its residential interstate direct dial services on not less than five business days if those changes increase rates more than 20 percent in a single year for customers making more than $2.50 in calls per month or increase the average monthly charges more than $0.50 per month in a single year for customers making less than $2.50 in calls per month. Service to and from Alaska and Hawaii The Commission stated that it does not believe that its geographic rate averaging policies and its orders concerning rate integration between the contiguous forty-eight states and various noncontiguous U.S. Regions, including Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands, are threatened by the reclassification of AT&T, nor does it believe that service to Alaska or any other part of the United States is threatened. The Commission noted that AT&T has voluntarily committed to continue to comply with the Commission's orders regarding rate integration, to comply with all of the obligations and conditions set forth in recent Orders concerning service to and from Alaska, and to file any tariff containing a geographically deaveraged rate on five business days notice. As a non-dominant carrier, AT&T also remains subject to the provisions of Section 214 in the unlikely event it seeks to discontinue service in these areas. The Commission noted that a number of the concerns raised by resellers and other parties in this proceeding are based not on claims that AT&T continues to be dominant, but on the structure and performance of the industry as a whole. In response to these concerns, AT&T offered a series of voluntary commitments as a transitional mechanism. The Commission accepted these commitments and also announced that it would commence a proceeding to consider whether, in light of today's decision, it should modify the existing regulatory scheme for interexchange carriers in order to advance its public interest goals more effectively. The Commission's decision to reclassify AT&T as a non-dominant carrier will take effect 30 days from the release of this Order. Action by the Commission October 12, 1995, by Order (FCC 95-427). Chairman Hundt, Commissioners Quello, Barrett, Ness and Chong, with Commissioners Barrett, Ness and Chong issuing separate statements. - FCC - News Media contact: Susan Lewis Sallet at (202) 418-1500. Common Carrier Bureau contacts: Don Stockdale at (202) 418-1580 and Melissa Waksman at (202) 418-0913.