Chapter Five
Data Communications: Market Order 1973-1979
LSI Modems, Statistical Multiplexers and Networks

5.7   CPE Certification and Computer Inquiry II

The evolution of data communications never strayed far from the co-evolving redefinition of AT&T and the limits of market competition. With its 1974 antitrust lawsuit, the Justice Department had launched a frontal assault intent on dismantling AT&T. The FCC functioned by exerting pressure to change the rules governing the attachment of customer equipment to the AT&T network, and the rules governing the boundary between communications and computing and which businesses would be regulated and which would be shaped by market competition.

Bernard Strassburg, Chief of the Common Carrier Bureau of the FCC, knew the fight over foreign attachments was far from over with AT&T’s filing of the PCA tariffs on January 1, 1969. Given that the FCC only had regulatory authority over interstate telecommunications, and intrastate telecommunications in those states that did not have their own Public Utilities Commission (PUC), it was virtually certain some states that had PUCs would contest the right of customers to attach devices of their own choosing. The reason was no big mystery. If customers purchased their own attachments, modems or PBXs for example, or connected to an alternative carrier, such as MCI, then telephone companies lost revenue and local telephone rates would surely have to go up since local telephone rates were subsidized by the profits AT&T made on customer premises equipment and interstate telephone calls. Known as the “separations problem,” it was a necessary consequence of a monopoly and an artificial accounting that inflated costs and invited market competition. [38]

In an effort to preempt state actions, Strassburg announced a Joint Proceeding with NARUC (National Association of Regulatory Utility Commissioners) on June 14, 1972. Strassburg made clear that the objective was not to review Carterfone. That had already been decided: tariffs now allowed connection of customer-provided CPE with the use of PCAs. [39] The issue was whether, and under what conditions, customers would be permitted to provide their own PCAs. Strassburg recalls:

“The Joint Proceeding 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."

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 damage that could result from the interconnection of customer-owned and maintained terminal equipment. To get data required requesting it from AT&T, who 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.” [40]

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. [41]

Next North Carolina directly challenged the authority of the FCC to proscribe intrastate telecommunications policies and tariffs (Telerent Leasing). Then the PUC of Nebraska declared any PBX connected to intrastate lines a common carrier, needing to get a certificate of convenience and necessity, which, was obvious to all, would take a long time. Where North Carolina took the battle to the courts, Nebraska waged war administratively.

Throughout this period, AT&T continued 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. [42] As of January 1972, over 10,000  DAAs, the PCAs used with modems, were in use - half manual and half automated, the later introduced in mid-1970. (By July 1978, 160,000 PCAs would be in use. [43] ) Competitors soon began selling PCAs and claimed their PCAs cheaper and better, proving again AT&T’s conspiracy to monopolize. (Two examples were the STC voice connecting arrangement, originally developed by AT&T -- ironically enough -- and the Rochester program. [44] ) There were also claims that AT&T should implement 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), the group independent manufacturers of CPE organized by “Tom Carter” of Carterfone. Strassburg advised them that they “must look elsewhere than to regulation for a solution.” [45] Given the knowledge and insight of someone so respected, it is small wonder private antitrust suits began being filed in record numbers. (See Exhibit 6.1 Number of Active Antitrust Cases Pending Against AT&T.)

In early 1974, the FCC acted to protect its 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.” [46]

State PUCs were put on notice not to take actions reversing or inconsistent with prior Federal rulings related to the interconnection of customer-owned CPE and systems to the “indivisible” telephone network. [47] The North Carolina PUC immediately appealed the decision to the United States Court of Appeals for the 4th Circuit-- North Carolina Utilities Comm’n v. FCC, 537 F.2d 787 (4th Cir.) NARUC and other states soon joined in the appeal.

While the court took time to render a decision in the jurisdictional dispute, the Joint Proceeding took testimony. [48]

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 CPE met rigorous technical criteria -- the Commissions registration program comprised 112 pages of procedures and technical specifications -- no PCA had to be used. PCAs were still required for CPE that had not been registered. The same parties that had appealed the Telerent Leasing decision now appealed the FCC’s registration program. In November 1975, the FCC ruled that manufacturers could provide DAA-equivalent circuitry effective June 1976. AT&T appealed and, in response, the FCC postponed the effective date to June 1, 1977.

In early 1976, the Fourth Circuit Court ruled in the Telerent Leasing case in favor of the FCC. The FCC could preempt state jurisdiction to impose nationwide telephone standards. Before the end of the year, the Supreme Court refused an appeal for review without further comment. 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, a request for review. The power of the FCC had been asserted and registration could replace the use of PCAs. Furthermore, AT&T now had to certify its products as well.

Another open issue between the FCC and AT&T was that of Hybrid Services from Computer Inquiry I. Hybrid Services were defined as those that had both data processing and message-switching components. This definition had become critical for AT&T clearly wanted to enter data processing markets and chafed under the proposed separate affiliates solution. On August 9, 1976, the FCC issued a Notice of Inquiry and Proposed Rulemaking. It became known as Computer Inquiry II.

Three years later, in May 1979, the FCC released its Tentative Decision for Computer Inquiry II. To better define Hybrid Services, a distinction was made between voice and basic non-voice. Voice services remained regulated, and basic non-voice services (read data processing), unregulated. “Dominant” carriers could offer basic non-voice services, but only through separate subsidiaries, subsidiaries that would not be regulated. AT&T objected to separate subsidiaries, arguing the advantages of economic synergies would be lost. The Justice Department objected to the very concept of the FCC trying to expand its authority under the Communication Act to include structural issues, arguing the Act gave them no such authority. The FCC took these and other comments under advisement. [49]