Deregulation has changed the telecommunications industry by transforming local and long distance monopolies into highly competitive suppliers of communications offerings. The telecommunications industry, however, was originally regulated to assure that a standard level of telephone service was available at a reasonable cost. It was regulated, as all monopolies are, to serve everyone equally.
The telecommunications pie was divided into different sectors: AT&T provided long distance; Bell, GTE and other private and cooperative phone companies handled local calls; and interconnecting trunks linked the network to everyone in the United States. Local telephone companies were subsidized with a percentage of the revenue AT&T earned from long distance service so they could lower local telephone charges to their residential and commercial customers.
Commercial customers who made many long distance calls had three different options to lower their long distance bill. A commercial customer in Porter, Indiana, for example, could lease an AT&T WATS line for a flat rate per month and call customers on that line or have customers call them at no charge. If the Porter customer frequently called clients located in a specific city, such as St. Louis, it could lease from AT&T a designated long distance line, called a Full Period Line. A Full Period Line would bring St. Louis dial tone straight to Porter, allowing unlimited local calls to be made in the St. Louis area. The final option was to lease an AT&T Pick-Up & Ring line that would allow Porter to call directly to one St. Louis telephone number by just picking up the phone. Pick-Up & Ring lines were also known as hot lines, because Porter would always reach its St. Louis client.
All three of these long distance options, however, did not require AT&T to construct a new line for the commercial customer. They were merely regulated tariff billing arrangements offered by AT&T for the commercial customer with unique long distance needs.
In 1968, the Supreme Court ruled on the Carter Telephone Decision, the first step toward deregulation in the telecommunications industry. This decision permitted any private company to access non-regulated long distance lines as long as it did not compromise telephone service on any level, from local telephone companies to long distance interconnections. As a result, entrepreneurs with the capital and vision to create their own long distance network would serve as long distance brokers to individual customers by leasing and billing long distance service.
Deregulation led directly to the creation of several long distance carriers, the most notable being MCI. MCI determined that the most profitable approach to marketing their services was to sell to commercial customers with national long distance needs such as banks, airlines, transportation firms and brokerage house.
Setting up a long distance network is a capital intensive endeavor. MCI therefore determined that it could best launch its new long distance network by leasing existing lines from AT&T, the national regulated long distance monopoly. MCI leased WATS lines, Full Period Lines and Pick-Up & Ring Lines from AT&T and constructed their own network by interfacing these leased lines with their own computerized switching central offices. By calculating aggregate phone traffic volumes of many commercial customers, they could determine the best combination of line leases to obtain from AT&T and broker as MCI lines to the commercial customer. Although commercial customers were actually using AT&T lines, they were billed by MCI for each minute of use, often at a substantially lower rate than the commercial customer would have paid directly to AT&T.
To understand how MCI could charge less than AT&T, it is important to note that AT&T rates were set by regulatory agencies and averaged over both profitable and unprofitable territories. …