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Chapter 2 - Background

2.12 The FCC, Jurisdictional Disputes and Direct Connection of CPE -- 1973-1978

All this while the jurisdictional struggles between the Federal Government – as the FCC, Justice Department, and Congress – and the states brew. (The issues once again being interstate versus intrastate commerce.) The FCC had regulatory authority over interstate telecommunications. And each state had a PUC regulating intrastate telecommunications. The Carterfone and SCC decisions precipitated conflict among these jurisdictional authorities for if customers provided their own CPE, or connected to common carriers other than the telephone companies, revenues would be lost to the telephone companies, with the logical conclusion local telephone rates would either have to go up or, minimally, would not be as low as they could be. Known as the separations problem,496 and a necessary consequence of enforcing a natural monopoly, that is each user had one telephone which could be connected to all other telephones: How were the revenues and costs of an interstate telephone call to be allocated among the intrastate and interstate carriers. The practice had been to allocate some of the revenue of an interstate call to both intrastate telephone companies, and to allocate some of the telephone and intrastate network costs to the interstate carrier. Hence, the states benefited from both more revenue and lower costs from interstate calls – a major reason local rates were declining. Hence, state PUC opposition could be expected to the recent FCC rulings.

Strassburg knew this jurisdictional struggle with the states had to be preempted. So he organized a Joint Proceeding with NARUC (National Association of Regulatory Utility Commissioners – an outgrowth of NARUC with R as Railroad.). Announced on June 14, 1972, Docket 19419 carried the long title of the Interstate and Foreign MTS and WATS, 35 F.C.C.2d 539 (1972). It did not specifically rule for intrastate, but as a Joint Proceeding, with representation from both FCC and PUCs (Three from the FCC, four from the PUC’s.), it was meant to define rules that would be adopted by all, so jurisdictional disputes would not increase telecommunication costs, or prevent use of the telephone in ways wanted by consumers – privately beneficial, and not publicly detrimental. Strassburg made clear that the object of the Proceeding was not to review Carterfone, that had been decided – tariffs now allowed connection of customer-provided CPE with the use of PCAs.. The issue was whether, and under what conditions, customers would be permitted to provide their own PCAs to perform network control signaling and connecting arrangements. Strassburg recalls:

We directed that the Joint Board would consider the recommendations of the National Academy of Sciences, the Advisory Committees, the Chief Engineers Office, and any other comments. That was to be the forum for formally resolving the PCA issues and registration – or any other alternatives to PCAs.”497

NARUC and the individual states were not content to leave all to the Joint Proceeding however. NARUC and seventeen state PUCs conducted their own investigations of the harms that could result from the interconnection of customer-owned and maintained terminal equipment – CPE. To get data required requesting it from AT&T, which wanted to support NARUC’s concerns and, ideally, reverse the Carterfone decision. In April 1973, they publicized their results. After studying 1,523 cases of CPE problems, they concluded: it is clear that the interconnection of subscriber-provided equipment has had adverse effects to date on the quality of telephone service.498 NARUC deferred in drawing conclusions however. Five weeks later, the FCC reported that in reviewing the data: statistically meaningful differences between customer-provided and telephone-company provided equipment could not be demonstrated.499

North Carolina then acted to challenge the authority of the FCC to proscribe intrastate telecommunications policies and tariffs. The North Carolina PUC would not permit interstate connections to their intrastate telephone system. The interconnection they denied was to Telerent Leasing, which took the case to the FCC, demanding that they be permitted to connect to intrastate North Carolina. North Carolina was directly challenging the authority of the FCC to regulate intrastate commerce. They were not alone. The state PUC of Nebraska declared any PBX connected to intrastate lines a common carrier, needing to get a certificate of convenience and necessity; which, if not obvious, will take a long time. Where North Carolina took battle to the courts, Nebraska waged war administratively.

Through out this period, AT&T had to implement their PCA program, and, increasingly, defend their policy from charges of monopoly and conspiracy to monopolize. By 1974, there would be nearly one hundred different kinds of PCAs.500 As for DAA’s, the PCAs used with modems, as of January 1972, over 10,000 were in use - half manual and half automated, the later introduced in mid-1970.501 (By July 1978, 1, 160,000 PCAs would be in use.502 ) Alternatives were emerging to the PCA; although by now years had passed since the PCA first had to be proscribed, used, and made widely-available. Those contesting AT&T claimed that alternatives were cheaper and better, and thus proved again AT&T’s conspiracy to monopolize. (Two examples were the STC voice connecting arrangement, developed by AT&T – ironically enough – and the Rochester program.503 ) There were also the claims that AT&T should have implemented a registration program, like the one being discussed by the FCC.

On January 1, 1974, Walter R. Hinchman became the new Chief of CCB on Stassburg’s retirement. In March 1974, only months after retiring, Strassburg gave a speech to a meeting of the North American Telephone Association (NATA); independent manufacturers of CPE organized by Tom Carter of Carterfone. Strassburg advised them that they must look elsewhere than to regulation for a solution.504 Given the knowledge and insight of someone so respected, it is small wonder private antitrust suits began being filed in record numbers. (See Exhibit 2.21 Number of Active Antitrust Cases Pending Against AT&T.)

In early 1974, the FCC acted to protect Federal jurisdiction by issuing a declaratory ruling in the Telerent Leasing Proceeding asserting:

…primacy in authority over the terms and conditions governing the interconnection of customer-provided equipment to the nationwide telephone network.505

State PUCs could take no actions reversing or inconsistent with prior Federal rulings related to the interconnection of customer-owned CPE and systems to the indivisible telephone network.506 The North Carolina PUC immediately appealed the decision to the United States Court of Appeals for the 4th Circuit– North Carolina Utilities Commn v. FCC, 537 F.2d 787 (4th Cir.). NARUC and other states joined in the appeal.

While the court took its time to render a decision in the jurisdictional dispute, the Joint Proceeding took testimony.

During 1974, two additional tariff disputes were brought to the FCC : Phonemate and Mebane Telephone Company. The Phonemate Corporation wanted to sell a telephone answering machine powered by four batteries. AT&T said it had to use a PCA. The FCC litigated assuming that four batteries could not cause harm. Only the product had been designed wrong, and, in fact, could under the right circumstances cause harm. Only by the time this became known, AT&T had come to recognize their position to be absurd, and Phonemate did not want their incompetence made known, so they agreed that AT&T would supply some protective circuitry that Phonemate would put in every machine. While seemingly innocuous, it would be seen as an example manufacturers were capable of providing their own protective circuitry, i.e. PCAs, so their products could connect directly to the telephone network. The Mebane case was slightly different. The small, independent Mebane Telephone Company of North Carolina took the position that the FCC did not have the authority to mandate they tariff customer-provided equipment. No tariff, no interconnection. In May 1975, the FCC made a conscious extension507 of the Carterfone policy to reject Mebane’s tariff position – Mebane had to tariff customer-provided CPE.

In October 1975, the FCC issued its first decision from the Joint Proceedings. Direct connection of customer-provided CPE would be allowed, subject to either FCC registration or self-certification. If such CPE met rigorous technical criteria – the Commissions registration program comprised 112 pages of procedures and technical specifications508 – no PCA had to be used. PCA’s remained required for CPE not registered. The parties that had appealed the Telerent Leasing decision now appealed the FCC’s registration program.

In early 1976, the Fourth Circuit Court ruled in the Telerent Leasing case, two to one, in support of the FCC.509 The FCC could preempt state jurisdiction to impose nationwide telephone standards. Before the end of the year, an appeal to the Supreme Court was refused for review without further comment. The FCC’s authority had been established.

In March 1977, the Fourth Circuit Court ruled that the FCC’s equipment registration/certification was legal. Six months later the Supreme Court again denied a writ of certiorari – request for review. The power of the FCC had been asserted again.

In late March, in testimony before the Senate Subcommittee on Communications, Paul Henson, Chairman of the Board of United Telecommunications proposed the Primary Instrument Concept – all basic single line telephone service included one telephone owned and maintained by the telephone company. It was justified on many grounds, e.g. it maintained telephone company end-to-end responsibility, it helped keep local rates down, safety issues, and transitional advantages. On October 3, 1977, the Chairman and Ranking Majority member requested the FCC consider implementing the Primary Instrument Concept. The FCC started an inquiry on February 6, 1978, and on August 2, issued a report declining to adopt the recommended Concept.

Customers had the right to connect equipment of their choice to Bell’s network.

  • [496]

    This issue, separations, is critically important and will not be but touched on in this discussion. It is core to understanding the interconnections, and how they were accounted for, that made organizational and institutional structure so difficult to change. See Temin for the best discussion – one involving over one hundred interviews of AT&T executives during this period.

  • [497]


  • [498]

    United States v. AT&T, Defendants’ Third Statement of Contentions and Proof, Vol. II, pp. 1149-1150

  • [499]

    Henck., p. 134

  • [500]

    Ibid., p. 1174

  • [501]

    Stuart L. Mathison and Philip M. Walker, “Regulatory and Economic Issues in Computer Communications,” Proceedings of the IEEE 60 : 14.

  • [502]

    Third Statement, p. 1174

  • [503]

    Third Statement, pp. 1152–1168

  • [504]

    Henck, p. 134 This subject is discussed in the next section. See for example Exhibit 2.15 Number of Active Antitrust Cases Pending Against AT&T

  • [505]

    Third Statement, p. 1150

  • [506]

    Henck, p. 135 Invoking the decision in Cooley v. Board of Wardens regarding Federal authority to regulate uniform systems.

  • [507]

    Third Statement, p.

  • [508]

    Ibid., p.

  • [509]

    From the Slomin Interview: In the wake of the Carswell-Hanesworth disasters of the Nixon administration, the 4th Circuit, which was Hanesworth’s Circuit, had adopted the most stringent recusal rules in the United States for judges.If they had any interest in a preceding whatsoever, however peripheral, they had to recuse, say they won’t hear a case.The irony was, every single judge of the 4th Circuit had recused himself from hearing these cases because of ownership of AT&T stock, except for one.So that when the first North Carolina Utilities case decision was issued, motions were filed for rehearing en banc.