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For disqualification of Commissioner Nicholas Johnson




26 F.C.C.2d 523




NOVEMBER 13, 1970









On October 19, 1970, I delivered a public address in Chicago, Illinois, for the Digitronics Users Association Conference, entitled "Why I Am a Conservative or For Whom Does Bell Toil?" (FCC Public Notice No. 56558).  The speech addressed fundamental issues surrounding the social-political-economic role of the telephone company in an industrialized society.  It discussed a number of instances in which Bell management had publicly acknowledge (or I suggested) that past or current telephone company policies were producing less revenue for shareholders than they might have received.  It suggested that such policies are often a disservice to the interests of consumers as well.

Although no response to the substantive issues raised was immediately forthcoming, on October 28, 1970, the management of the American Telephone and Telegraph Company served on me personally a petition requesting that, in view of my "manifest bias against the Bell System," I excuse myself from further participation in any and all matters before the Federal Communications Commission "involving any companies in the Bell System."

In response to press inquiries about the filing of the petition of disqualification, I indicated on October 28 that I would consider the views of Bell's management most seriously and issue a legal opinion as promptly as possible.  For reasons I will explain subsequently, I have requested a ruling from the FCC General Counsel on the questions involved.  It was furnished on November 9, and is attached.  What follows is my analysis -- after considerable reflection -- of the legal issues raised in the disqualification petition.

I.  Procedural Issues

The disqualification petition before me is so novel that procedures for dealing with it are not at all clear.  (I do not know of any prior recorded instance during this century in which Bell has urged the disqualification of a regulatory Commissioner, state or federal.)

 [*524]  Bell's management has chosen to file the petition before me as an individual Commissioner rather than before the full Commission.  Traditionally, in most legal forums, the judicial officer in the first instance passes on a motion for disqualification pressed against him.  Disqualification of Judges, 45 American Law Reports (A.L.R.) 2d 937, 940 (1956).  This appears to be the rule also in quasi-judicial settings.  Alabama v. Aldridge, 212 Ala. 660, 103 So. 835 (1925) (administrator of a State Board of Accountancy); Officer Disqualification, 39 A.L.R. 1470 (1925) (annotation collecting cases).  The U.S. Court of Appeals for the District of Columbia Circuit appears to agree.  In Dilling v. U.S., 142 F.2d 473 (D.C. Cir. 1944), the Court held that a trial judge may hear and reject affidavits of bias and prejudice, and an appellate court will not review "except in rare and extraordinary cases." Id., citing Ex Parte American Steel Barrel Co. and Seaman, 230 U.S. 35 (1913) (rejection of a proceeding to retire a trial judge for bias).  (It is also true, however, that the full Commission occasionally has been called upon in the past to pass on bias charges raised against a single FCC Commissioner.  See, Segal and Smith, 5 F.C.C. 3, 9-11 (1937); In re Chronicle Broadcasting Co., 20 F.C.C. 2d 33 (1969); Chronicle Fails to Eject Johnson, Broadcasting, Oct. 20, 1969, at 70.)

In addition to this custom of the judicial officer himself handling a disqualification petition filed against him in the first instance, it is necessary to consider another well settled principle: the traditional independence of presidential appointees.  See Humphrey's Executor v. U.S., 295 U.S. 602, 625 (1935); Cf., Marbury v. Madison, 1 Cranch 137, 161, 5 U.S. 87 (1503), and Cushman.  The Independent Regulatory Commissions 188-201 (1941).

Notwithstanding these traditions and customs, in view of the unprecedented nature of this particular petition I propose some novel procedures, designed to insure fairness to all concerned, for dealing with this unusual petition.

1.  First, I am issuing my own legal opinion and ruling on the petition, as requested.  This is required at least in the sense that I am the only one who knows what my motivations were and are in dealing with AT&T matters.  It is also consistent with the cases I have just discussed.

2.  Second, as an additional precaution, I have asked the Federal Communications Commission's General Counsel for an independent legal analysis of the merits of the bias issues raised by Bell's management.  That independent opinion of the General Counsel is attached immediately following my own analysis.  "Under the circumstances," the General Counsel concluded, "it seems to me that the appropriate course is to reject the AT&T petition, as written, on the ground that it does not particularize specific bases for the relief requested."

3.  Finally, I am forwarding my opinion, together with the General Counsel's independent analysis, to my fellow Commissioners on my own motion as an information item -- giving them the opportunity, should they wish to exercise it, of reviewing the matter.

 [*525]  I want to emphasize at the outset my sincere feeling that I would deeply welcome the independent judgment of my fellow Commissioners on the FCC (and even other Commissions). For Bell's charges are ones that potentially plague all who harbor any views, whatever they may be, of regulatory philosophy.  My concern is that a general increase in the filing of like petitions might stifle the interchange of ideas and comment on innovative approaches to complicated regulatory problems.

Hence, before turning to a point-by-point legal analysis of the petition from Bell's management, I want briefly to sketch a historical backdrop against which the legal issues can be positioned for more illuminating discussion.

The Federal Communications Commission over the years has had, as it has today, individual Commissioners possessed of attitudes regarding one phase or another of our regulatory work.  A review of Professor Walter B. Emery's notable book, Broadcasting and Government: Responsibilities and Regulations (1961), furnishes these useful reminders out of Commission history:

Commissioner T. A. M. Craven was an engineer who was first appointed a Commissioner in 1937 and served, with one interruption, through two terms until 1963.  Despite a slow Commission evolution toward greater concern with respect to programming (both before and after Red Lion Broadcasting Co. v. F.C.C., 395 U.S. 367 (1969), Commissioner Craven stoutly spoke out against program controls of any kind as "patently both illegal and impractical." E.g., F.C.C. Docket No. 12673, Nov. 19, 1958, 1 P & F Radio Reg. 98:26 (1958, reprinted in Emery, Supra, p. 379.  Commissioner Craven never did change his mind about program controls, often speaking out against them publicly and privately.  His firm policy convictions no doubt caused much hand wringing among certain lawyers, who must have felt they had no chance of prevailing against the Commissioner's view, even though, in the end, it may have stirred more imaginative legal argument with salutary effects on the other Commissioners.  See, Emery, supra, at p. 36-37.

Chairman Paul A. Walker was an Oklahoma populist lawyer who served 19 years as an FCC Commissioner until his retirement in 1953.  Commissioner Walker throughout his career held a deep distaste for many of the policies and tactics of the nation's largest telephone corporations.  With the encouragement of President Franklin D. Roosevelt, Commissioner Walker in the late 1930s carried on a successful three-year investigation of the American Telephone and Telegraph Company which resulted in substantial reductions in long distance telephone rates.  Investigation of the Telephone Industry in the U.S., F.C.C. Report, June 14, 1939, p. 602.

Because of his fierce devotion to his definition of the public interest, Commissioner Walker was never popular with some powerful economic and political interests.  Many in the industry regarded him as a "big corporation foe," Emery, supra, at p. 384.  He was never afraid to speak out.  For instance, he strongly rebuked a large utility in 1943  [*526]  for what he considered a gross mistreatment of a smaller, independent telephone company.  The wrongs committed, he said,

... will, unless corrected, remain forever a reminder to the public of the arbitrary and hurtful actions which can be perpetrated by a powerful monopoly.  The ultimate effect of such actions will be to destroy completely public trust and confidence in utility management... Id.

History does not record how many formal petitions of disqualification were ever filed -- if any -- against Commissioners Craven of Walker for these supposed policy "biases" and "prejudgments." My searches of the F.C.C. Reports have not yet uncovered a reported case where any Commissioner of the Federal Communications Commission was disqualified for strong attitudes and dispositions toward various regulatory policy themes.  Cf.  Segal and Smith, supra (disbarment proceeding).

In general, my concern is that this Commission continue to protect its historic attitude of allowing differing points of view and sharp policy debates, both inside and outside the Commission, to flower in hopes of encouraging a wholesome, free-flowing intellectual interchange.

III.  Positions Regarding Bell

My own views on telephone regulation are well known within this Commission and the industry, and often these views have provoked acrimonious exchanges with my colleagues.  See, In the Matter of American Telephone and Telegraph Co., 20 F.C.C. 2d 886, 893 (1970). Nevertheless, I always have endeavored to approach common carrier matters in a fair, frank, balanced manner -- without sacrificing my strongly held policy convictions -- consistent with the best traditions of intellectual independence and with due regard for the public interest, convenience, and necessity.

On its face at least, Bell management's charge of "manifest bias" is so all-encompassing that it becomes somewhat difficult to analyze in detail.  Nevertheless, I will try.

1.  A survey of votes I cast on Commission items involving the Bell System over the last six months shows I voted for Bell almost as often as I voted against it -- specifically, 13 votes consistent with the position urged by Bell's management and 14 votes opposed to the position advanced by the Bell System.  Only five times during these 14 votes was my position different from the Commission majority.

For the record, here are my votes consistent with the position urged by Bell's management: Communications Satellites, 23 F.C.C. 2d (1970); Land Mobile Use of Channels 14-20, 19 P & F Radio Reg. 2d 325 (1970); Uniform System of Accounts, 24 F.C.C. 2d 357 (1970); Telpak, 24 F.C.C. 2d 823 (1970); Microwave Communications, Inc., F.C.C. 70-888 (1970); C & P Telephone Co. of W. Va., 25 F.C.C. 2d 190 (1970); New Audio Transmission Rates, F.C.C. 70-903 (1970); AT&T Blanket Application, F.C.C. 70-955 (1970); Domestic Communication Satellite Facilities, 25 F.C.C. 2d 545 (1970); In re Department of Defense, F.C.C. 70-961 (1970); Pacific Telephone and Telegraph, F.C.C. 70-1012 (1970); AT&T, F.C.C. 70-1059 (1970); and Common Carrier Records, F.C.C. 70-1153 (1970).

 [*527]  For the record here are my votes opposing the position urged by Bell's management: AT&T, 23 F.C.C. 2d 503 (1970); Telpak, 23 F.C.C. 2d 606 (1970); Domestic Public Radio Service Applications, 23 F.C.C. 2d 670 (1970); Fees Schedule, 23 F.C.C. 2d 880 (1970); Special Emergency Radio Service, 24 F.C.C. 2d 310 (1970); Pacific Telephone and Telegraph, 25 F.C.C. 2d 445 (1970) *; C & P Telephone and Telegraph Co., 24 F.C.C. 2d 610 (1970); Western Union Telegraph Co., 24 F.C.C. 2d 664 (1970) *; Common Carrier Employment Practices, 24 F.C.C. 2d 725 (1970); AT&T, 25 F.C.C. 2d 31 (1970) *; Land Mobile Use of Channels 14-20, F.C.C. 2d 764 (1970); Tariff Filing Requirements, F.C.C. 70-1096 (1970); Better T.V. of Dutchess County, F.C.C. 70-1094 (1970) *; and Separations by Joint Board, F.C.C. 70-1153 (1970) *.  (Asterisks indicate my votes that were not supportive of the Commission majority.)

Needless to say, I do not offer this record because I feel it is necessary to prove a lack of bias, or because it is persuasive.  I would think a regulatory Commissioner might very well vote against AT&T in virtually very case and still be able to sustain the position that he was voting out of an honest conviction and evaluation of the record unrelated to bias or prejudice.  But I do think it is a useful backdrop, and perhaps may be considered as some evidence of lack of bias.

2.  In a case pending before the U.S. Court of Appeals for the D.C. Circuit, as we shall see in more detail subsequently, petitioners interested in Telpak common carrier matters have changed me with a pro-Bell prejudgment which, they argue, works against the interests of certain Bell System bulk users.  Associated Press v. F.C.C., Nos. 23,833, 23,836, 23,839, 23,841, 23,842, and 23,843 (D.C. Cir., consolidated Jan. 26, 1970).  Once again, I do not believe a Commissioner need be charged with bias by both sides to rebut the charges of either; but it is at least, again, some evidence that the issue may not be as clear cut as it appears to Bell.

Certainly no one likes to be criticized or have a decision in one aspect of a complicated, hard-fought rate-making proceeding go against him.  Yet one of my fundamental duties, which goes to the core of the statutory command to work for the public interest, convenience, and necessity, is the duty to promote the betterment of the communications industry for its "larger and more effective use" in the public's interest.  See Section 1, 303(g), 47 U.S.C. 151, 303(g), (1964).  This is one reason I chose to prepare and publish a handbook for the betterment of American television, How to Talk Back to Your Television Set (1970) -- an activity which was also viewed as improper by many in the broadcasting industry.

Federal Communications Commissioners long have worn this "promotional hat," as some in the industry call it; and this duty is woven throughout the statutory scheme of the 1934 Communications Act even beyond Sections 1 and 303(g).

At one time, in fact, the Act specifically called for "the presentation or delivery of publications or papers for which a reasonable honorarium or compensation may be accepted." Although this was later amended in a Congressional crack down against honorariums, outside compensation, and financial interests of various kinds, P.L. 86-752,  [*528]  approved Sept. 13, 1960, 74 Stat. 889, amending 47 U.S.C. 4(b), there is no indication Congress intended to discourage publication per se.  With specific regard to common carriers, the 1934 Communications Act in Section 218, 47 U.S.C. 218 (1964), makes it clear that telephone management is not above scrutiny:

Sec. 218.  The Commission may inquire into the management of the business of all carriers subject to this Act, and shall keep itself informed as to the manner and method in which the same is conducted...

From this statutory base, I proceeded in my Chicago address with the sole intention of promoting the larger and more effective use of American telephone technology to better the public interest -- as well as, in that instance, the interests of Bell's shareholders, employees, and management.  What better way to promote the commonweal than to point up past problems and old cases, lifting them out of the stagnant miasma of our regulatory commission, and into community consciousness in the earnest hope we may be able to head off history before it repeats itself?

IV.  Bell's Position

With this preliminary discussion as a backdrop, I turn to a summary of Bell management's petition.  I assume this four-page general statement is offered as a serious legal challenge, and I treat it as such.  It is attached, in its entirety, as an appendix.

After charging me with "manifest bias against the Bell System," and then asking me to excuse myself from further participation in any and all matters before the Commission involving any companies of the Bell System, the petition in Five numbered paragraphs raises these points:

1.  My October 19, 1970, speech for the Digitronics Users Association Conference demonstrates a "deep-seated bias and prejudice" against the Bell System.

2.  My speech ignores facts and disregards any damage it might do to the Bell System, demonstrating that my bias "is so pervasive" and my mind "so closed" that argument before me on the merits would be useless.  That my speech was made of my "own volition" is charged as "incompatible with the dispassionate objectivity" required of a Commissioner.

Specifically, the petition charges me with prejudgment of four categories of what are described as pending proceedings:

(a) Docket No. 16258 (Phase 2), involving among other things the Western Electric relationship and depreciation;

(b) Docket Nos. 18128 and 18684, which involve private line rates, including rates for program transmission services;

(c) the pending applications by new specialized common carriers; and

(d) A.T. & T.'s pending domestic satellite system applications.

3.  bell management goes on to charge that the speech cannot meet "minimum requirements of substantive and procedural due process" as articulated in Segal and Smith, supra, and "amplified" by the Federal courts in American Cyanamid Co. v. F.T.C., 363 F.2d 757 (1966), quoting from Amos Treat & Co. v. S.E.C., 306 F.2d 260, 267 (1962), and its test for "the very appearance of complete fairness."

 [*529]  4.  The petition rests, finally, on the recent Court of Appeals decision in Cinderella Career and Finishing Schools, Inc. v. F.T.C., 425 F. 2d 583 (1970), which disqualified Chairman Dixon for a speech he made on alleged unfair trade practices while an appeal of a Hearing Examiner's decision on the matter was pending imminently before him.

5.  In summing up the charge, Bell management says, "... your participation in such proceedings would undermine public confidence in the entire administrative process."

V.  Applicable Law

The petition deserves a point-by-point analysis to which I will shortly turn in detail.

A.  First, however, in my view the most important -- and controlling -- points of applicable law here have been omitted from Bell management's petition, and should be set forth.  The law I speak of has been developed by the U.S. Supreme Court in two notable cases, F.T.C. v. Cement Institute, 333 U.S. 683 (1948), and United States v. Morgan, 313 U.S. 409 (1941).

I always try to comport myself in accordance with the appropriate judicial restraints on prejudgments of pending matters by Commissioners -- in my private thoughts as well as my public utterances.  To be sure, my Chicago address was frankly critical -- but intelligent, sincere criticism is usually more helpful than unstinting praise and meaningless platitudes.  This basic value of criticism has been widely recognized in many aspects of human endeavor from child rearing to monopoly regulation.

1.  Cement Institute: It has long been my view (as well as that of leading administrative law professors and judges, e.g., Jaffe, James Landis and the Administrative Process, 78 Harv. L. Rev. 313, 327, (1964)) that certain "biases" -- or philosophical points of view -- properly constituted and properly executed, come close to being the quintessence of the administrative process.  That is why a President not only can, but in many respects should, appoint commissioners who share his regulatory philosophy, for only in that way can a Chief Executive or the Congress read the direction it chooses into our regulatory pattern.

However one may feel about the wisdom of the personal predilections and motives of a given President in the selection of his regulatory commission appointees, no one, to my knowledge, has ever challenged a President's legal power to favor whatever biases he pleases in making those appointments.  This legal philosophy has been clear at least since before the New Deal, and more recently from the time of the great Cement Cases in the late 1940s, including F.T.C. v. Cement Institute, supra.

In the Cement Cases, the Federal Trade Commission had been charged with being "prejudiced and biased" and with having made a "prejudgment of the issues." Id. at 700. The full Commission, before bringing proceedings against the companies involved, had expressed the opinion in reports to Congress and to the President that the cement  [*530]  industry's pricing system violated the antitrust laws.  The Supreme Court, in an opinion by Mr. Justice Black held that the FTC's previously publicized opinions on the matter before the Commissioners for judgment "did not disqualify the commission" as long as the minds of the Commissioners were not "irrevocably closed." Id. at 701-703.

Unlike the Trade Commissioners in the Cement Cases, I undertook in my Chicago address to underscore specifically that my mind is irrevocably open, not closed, on telephone regulatory matters.  Indeed, I prefaced my remarks on Docket No. 16258 (accelerated depreciation and Western Electric) with this sentence: "I will express no final position before examining the full record." Address, supra, at p. 8.  In another passage of my speech, address, supra, at p. 10-11, I discussed the possibility of raising AT&T's rates of return.  This could not prejudice Bell, or any other utility, since it indicates that I have a somewhat more open mind on raising rates and related issues than traditional regulators -- and even Bell's own management.  Bell management has been unable to demonstrate (presumably because it can't) just how this "bias" could irreparably damage their position before this Commission.  In yet another passage of my speech, address, supra, at 22-23, I said, "Because of the pendency of Commission proceedings, I do not want to say much about service in the data field." I then quoted a Bell official and a staff report without indicating my own sentiments in any way.

The situation before us is quite similar to charges of prejudgment and personal bias brought three years ago by the Independent Petroleum Association of America against Commissioner Black of the Federal Power Commission.  The charges stemmed for a public address the Commissioner made in 1964 strongly advocating the need for regulation of rates.  The Federal Power Commission dismissed the bias charges.  Area Rate Proceedings, 33 F.P.C. 43, 46-47 (1965). On appeal, the Circuit Court affirmed.  "In our opinion," the Circuit Court said, Skelly Oil Co. v. F.P.C., 375 F. 2d 6, 18 (10th Cir. 1967) aff'd. in part and rev'd. in part on other grounds, 390 U.S.  747, "no basis for disqualification arises from the fact or assumption that a member of an administrative agency enters a proceeding with advance views on important economic matters in issue." (Cited, In Re Chronicle, 20 F.C.C. 2d at 38 (1969).

I do admit that I have a bias in favor of talking things over, provoking discussion, and thinking about these difficult issues as much as possible.  This helps to shape and reshape my own thinking, and that of others, who must work toward the proper ultimate disposition of these complicated matters.  This does not mean, however, in the words of the Supreme Court in the Cement Institute case, that my mind is "irrevocably closed." Indeed, quite the contrary is the case.  If anything, my mind is still restless, seeking new arguments and facts to challenge thoughts that may well be erroneous.

2.  Morgan IV: The second crucial case omitted from Bell's petition is part of the celebrated Morgan litigation.  After the U.S. Supreme Court held in the second Morgan case, Morgan v. U.S., 304 U.S. 1 (1938), that the U.S. Secretary of Agriculture had denied due process to the market agencies of the stockyards in a rate-setting proceeding,  [*531] the Secretary vigorously criticized the Supreme Court decision and the parties in a letter to the New York Times.  In the fourth Morgan case, 313 U.S. 409 (1941), the market agencies charged that this letter disqualified the Secretary from reconsideration of the case on remand to him.  Mr. Justice Frankfurter wrote, for the Court, id. at 420-21:

In denying their motion the Secretary wrote a patently sincere denial of bias.  He stated that he had complained against a return of the impounded funds to the market agencies prior to a determination of the rates on the merits, that the denial of the petition for rehearing, 304 U.S. 23, 26, had shown him the error of his assumption, that in his letter of criticism he made no prejudgment about the rates to be fixed, and that his only concern was to "see that the substantive rights of the parties are fairly determined."

But, intrinsically, the letter did not require the Secretary's dignified denial of bias.  That he not merely held but expressed strong views on matters believed by him to have been in issue, did not unfit him for exercising his duty in subsequent proceedings ordered by this Court.  As well might it be argued that the judges below, who had three times heard this case, had disqualifying convictions.  In publicly criticizing this Court's opinion the Secretary merely indulged in a practice familiar in the long history of Anglo-American litigation, whereby unsuccessful litigants and lawyers give vent to their disappointment in tavern or press.  Cabinet officers charged by Congress with adjudicatory functions are not assumed to be flabby creatures any more than judges are.  Both may have an underlying philosophy in approaching a specific case.  But both are assumed to be men of conscience and intellectual discipline, capable of judging a particular controversy fairly on the basis of its own circumstances.  (Emphasis supplied.)


I perceive no meaningful difference between a critical letter, as set out in Morgan IV, which was read by perhaps half a million subscribers to the New York Times, and my address in Chicago to perhaps 100 digitronics users.  In Mr. Justice Frankfurter's language, I was simply indulging in "a practice familiar in the long history of Anglo-American litigation" whereby Commissioners who see their philosophy ignored or abused are wont to "give vent to their disappointment in tavern or press."

Moreover, it is noteworthy, I believe, that Morgan IV involves perhaps the strongest possible case against a decision-making official -- and it was decided in his favor.  The Secretary had commented on a case in litigation, in which he had been overturned, vigorously criticizing the result, prior to his considering it on remand.  Whatever one may say of my conduct, it does not come remotely close to being as strong a case.

3.  The Chronicle Case: The third key case neglected by Bell's management is a far more recent Federal Communications Commission decision than the 1937 opinion in Segal and Smith.  Moreover, the case happens to involve my own views on the issue of concentration of control of the mass media.  In re Chronicle, 20 F.C.C. 2d 33 (1969).

In this case, the petitioner alleged that my writings generally, including an official opinion, magazine articles, and a television appearance, demonstrated that I was somehow improperly involved in the case and had thus displayed bias and prejudgment.  In rejecting this charge with a 6-0 decision (in which I did not participate), this Commission relied heavily on the Cement Institute and Morgan IV cases in writing:

The pertinent question here is whether Commissioner Johnson has formed an opinion prior to decision as to the facts or outcome of this case, closing his mind  [*532]  to persuasion, or has reasonably given the appearance of doing so.  American Cyanamid Co. v. F.T.C., 363 F. 2d 757 (C.A. 6, 1966); Texaco, Inc. v. F.T.C., 118 U.S. a/pp.  D.C. 366, 336 F. 2d 754 (C.A.D.C., 1964), vacated on other grounds, 381 U.S. 739. Id. at 38.  (Footnotes omitted.)

After quoting from Mr. Justice Frankfurter in Morgan IV, supra, that Commissioners "are not assumed to be flabby creatures any more than judges are," id. at 38, this Commission went on to draw from Professor Davis:

A "crystallized point of view" on policy questions is not disqualifying, 2 Davis, Administrative Law, Sec. 12.01, nor is the expression of an opinion as to whether certain types of conduct are prohibited by law, F.T.C. v. Cement Institute, 333 U.S. 683, at 702-703 (1948), nor the expression of views on economic questions in issue.  Skelly Oil Co. v. F.P.C., 375 F. 2d 6, 18 (C.A. 10, 1967), aff'd, in part and rev'd. in part on other grounds, 390 U.S. 747. Commissioner Johnson's writings quite clearly indicate that he has strong views on the general question of concentration of control...  But that is not the issue.  The issue is whether he has given the appearance of prejudging the narrower question of whether the present ownership of KRON-TV and KRON-FM constitute a concentration of control inconsistent with the public interest, beyond the necessary and proper determination that the issue is sufficiently substantial to require a hearing.  We cannot find such a prejudgment...  A general invitation to members of the public to make their views known, if the articles may be so characterized, indicates a willingness to hear what is fully appropriate to, if not required by, the office -- it does not indicate the predisposition of any particular case.  Id.  (Footnotes omitted.)


My own philosophy in approaching these matters has been best summed up in Mr. Justice Cardozo's incisive reminder that Judicial officers "do not stand aloof on... chill and distant heights." Cardozo, The Nature of the Judicial Process 168 (1921).

Jerome Frank has given a fuller statement of the same attitude.  If impartiality and lack of bias are defined to mean the total absence of preconception in a judge (as Bell's management seems to assume in its petition), Judge Frank wrote, "Then no one has ever had a fair trial and no one ever will." In re Linahan, 138 F. 2d 650-653 (2nd Cir. 1943). Judge Frank was surely right in pointing out that preferences, interests, and viewpoints are "the essence of living," and "only death yields complete dispassionateness, for such dispassionateness signifies utter indifference...  "He spoke of the great harm done "by the myth that, merely by putting on a black robe and taking the oath of office as a judge, a man ceases to be human and strips himself of all predilections, and becomes a passionless thinking machine." Id.

Needless to say, the Bell management petition does not draw on the great Morgan litigation, the Cement Institute, or the Commission's Chronicle case.  These leading precedents, which control the situation before us and demark the bounds of my proper activity, manifestly cannot be ignored.  They are fundamentals that given spirit and animation to a lively administrative process designed to foster differing views in the hope of promoting intelligent policy analysis.

B.  We are left with the several points, summarized in Part IV, raised specifically by the Bell management's petition.

1.  Bell management charges my October 19 address with demonstrating a "deep-seated bias and prejudice" against the Bell System.  It does not, however, go on to explain just how I might be prejudiced against the best interests of the Bell System.  Management comes forward  [*533]  with no convincing specifics, only an open-ended accusation.  The speech expressed only a passionate concern for better financial and other management policies leading to more shareholder profits, expanded opportunities for Bell's employees, and a more sophisticated telephone industry for the nation's public.  See, address, supra, at p. 7, 8, 10.

Moreover, my remarks were based in substantial part on past policies as displayed in past activies during past proceedings, much of it in the 1967 FCC hearings concerning Bell management's activities over at least a score of years.  Address at p. 7.  To my knowledge there has never been a case before this one in which a deciding officer's past decisions, or his subsequent public references to them, have been alleged to constitute a bias or prejudice in dealing with future cases.

2.  Bell's management charges that my address disregarded any damage it might do to the Bell System.  Yet Bell does not allege a specific instance of damage, nor can it; this is a charge that defies elementary common sense, since it was my sole intention to suggest profit-increasing innovations and even the possibility of a higher rate of return (address at p. 11) -- all of which would generally be considered to be helpful to, not a hindering of, a utility's interests.

The charge that my mind is "so closed" as to make argument before me useless has been dealt with at Part III, supra, where a list of my prior votes displays that Bell has been accorded evenhanded treatment, on a case-by-case basis, in matters coming before me.  While I must, and will, remain free to vote against AT&T's positions when I believe the merits require me to do so, the matter of my "closed mind" is something which only I am really qualified to speak to.  I believe my past opinions and other statements in this area (as well as others within the Commission's jurisdiction) show me to be about as openminded as any member of the Commission to the widest possible range of legal, economic, political and social arguments.  Indeed, a part of Bell's criticism seems to be directed to precisely this quality of openmindedness: that I am willing to listen to diverse and novel arguments and discuss them on their merits, rather than dismiss them out of hand as unconventional.  I intend to continue to follow that bias toward discourse as the path to truth and wise public policy.  I believe that is the ultimate in open-mindedness.

Bell seems to attach special significance to the fact that I delivered the October 19 speech of my "own volition." No case is cited to document this supposed impropriety, no doubt because no case could be found.  Although it may not a always be the case in corporate life that petitions and statements are issued of one's "own volition," it is a characteristic that free men cherish and I am among them.  I do not recall any opinion or statement I have issued during my four-and-one-half years as an FCC Commissioner that was not issued of my "own volition." In any event, the New York Times letter in Morgan IV was instituted on the Secretary's "own volition," and Mr. Justice Frankfurter and the Court found nothing inappropriate in that.

Specifically, Bell's management charges me with prejudgment of four categories of what are described as pending proceedings:

(a) Docket No. 16258 (Phase 2) involves, among other matters, the Western Electric relationship and accelerated depreciation.  Termination  [*534]  of the Western Electric consent decree is not now even in issue before the Commission.  These two matters have been considered in part in the Commission's five-year-old investigation of Bell's rates and services.  My remarks centered on the 1956 consent decree allowing Bell to retain Western Electric, and Bell management's attitude over the past 16 years toward the accelerated depreciation provisions of the 1954 Internal Revenue Code.

As I have already noted above, my remarks in any event were prefaced with this declaration: "I will express no final position before examining the full record." Address at 8.

It is important to stress that these matters have been of continuing interest to this Commission over the span of decades.  Many in the Commission, in fact, believe that it will be two or three years before the Commission makes an ultimate determination in Docket No. 16258 (Phase 2).  This long proceeding necessarily suggests that comments now can only be of the most tentative kind -- even if I desired otherwise, which I expressly did not.

I have deliberately striven to keep an open mind on these issues, even requesting Bell's views on occasion.  This was well illustrated in recent oral argument before the Commission on Docket No. 16969, Computer Service Problems, when I indicated may need for more information on this phase of the proceedings and suggested a willingness to consider that the constraints on Bell/Western Electric be removed.  (See, Official Report of Computer Service Proceedings, Docket No. 16979, Sept. 3, 1970, oral argument transcript at 23-27):

Commissioner JOHNSON. Mr. Chairman, if I may put some questions to Bell; and you can address them now or later in written comments as you wish.

Do you believe the Bell System would be better off from the company's point of view if the 1956 consent decree were abrogated and Bell were permitted to compete on the same basis with any other carriers in this field?

Mr. ASHLEY.  I have not reflected upon that question.  We really have not given it any consideration.  In recent years it has not exactly been an open question.

Commissioner JOHNSON.  Do you believe under what is before us here this morning that the consent decree would keep Bell out of data processing?

My own conclusions on this phase of the docket are far from fixed.  As this lengthy proceeding draws on I will continue to seek at every turn comment from the Bell System that will aid me in arriving at the appropriate ultimate determination.

On accelerated depreciation matters, I stress that my Chicago address spoke only of the 1954-1969 period -- that is, past cases and not future action.

As further evidence of my lack of bias, and willingness to consider fully all evidence presented on matters involving the Bell System, I would note that in July 1970 I joined my colleagues in approving a change in the Commission's rules concerning the treatment of depreciation under the Tax Reform Act of 1969 In that decision, which I supported, the Commission decided to permit the use of accelerated depreciation with normalization for income tax purposes and also for the determination of cost of service in ratemaking.  24 F.C.C. 2d 357 (1970). In that proceeding, the Commission had been urged by consumer parties representing the State of California and the City of San Francisco to require normalization for accounting purposes but  [*535]  to require flow-through for retemaking purposes.  That view, which would have adversely affected Bell, was rejected by the Commission with my concurrence.

Finally, it has been my consistent position since joining the Commission, that separation of function principles should be applied in common carrier rate cases -- a position that Bell and I, for somewhat different but consistent reasons, have repeatedly urged without success.  ("Separation of functions" means that the same staff that prosecutes a case should not also decide it).  Bell's objection to the present non-separation of function at the staff level has been that the procedures are unfair to the parties.  I have agreed with Bell's contention, but my concern has been that the failure to separate also deters effective consumer advocacy in ratemaking proceedings.  See The General Telephone System, 6 F.C.C. 2d 434, 436 (1967); AT&T, 9 F.C.C. 2d 30, 122 (1967); F.C.C. 70-1059; and Book Review of Davis, Discretionary Justice in Stan. L Rev. (forthcoming Fall 1970).

(b) Dockets Nos. 18128 and 18684 involve private line rates, including rates for program transmission services.  I made no direct comment on these dockets in my October 19 address.  I could only be said to have remotely touched on the issues in those passages, address at p. 10-11, where I speculated generally about the advisability of raising rates for Bell.  My own conclusion, at 11, was hardly a conclusion at all: "Well, the answer is that we don't know the answer." This falls far short of prejudicing anybody on anything remotely involved in a rate case.  The irony comes when, as I noted earlier, users who have a deep interest in another phase of this docket have charged me with a pro-Bell prejudgment which, they insist, works against the interests of certain Bell System bulk users in favor of Bell itself.  Associated Press v. F.C.C., Nos. 23,833, 23,836, 23,839, 23,841, 23,842, and 23,843 (D.C. Cir., consolidated Jan. 26, 1970).

(c) There are pending applications by new specialized common carriers.  My comments in Chicago on these applications were even more vague and noncommittal.  At p. 27, in the conclusion of my address, I did say vaguely that "some form of competition may be the answer." This is hardly vigorous advocacy, even of the kind involved in the Cement Institute, Morgan IV, or Chronicle cases.  In an earlier passage, as noted above (address at p. 22-23), I touched briefly on data communications: "Because of the pendency of Commission proceedings, I do not want to say much about service in the data field." I then merely quoted a Bell management official.

(d) AT&T has pending domestic satellite system applications.  I did not discuss in my Chicago address any merits of pending domestic satellite applications.  My sole reference to domestic satellites (at p. 25) was this: "Isn't it ironic that while we can use our space technology to put a man on the moon, we will have to suffer the humiliation of seeing Canadian and Indian domestic satellites in the skies before ours?" Needless to say, this is the fault of the past two administrations and this Commission -- not Bell -- and my speech did not suggest the contrary.

I did question Bell's past record in satellite technology, especially its failure to exploit its early successes with Telstar.  But this could  [*536]  hardly prejudge their showing on the merits as the operator of a new domestic satellite system.  I have yet to study the proposals.  And since I have not, and will not, discuss the merits of the pending applications, my mind is as open on that new question as it is on any new set of facts that comes before me.

3.  Bell management goes on to charge that the speech cannot meet "minimum requirements of substantive and procedural due process" as set out in Segal and Smith, supra, and "amplified" by the Federal courts in American Cyanamid Co. v. F.T.C., supra, which quotes from Amos Treat & Co. v. S.E.C., supra, a test for "the very appearance of complete fairness."

The reliance on Segal and Smith is misplaced.  This old 1937 case is now substantially impaired by later Federal court precedents, though never explicitly overruled.

In Segal and Smith, the Commission grappled with disbarment proceedings against several Washington, D.C. communications attorneys, eventually suspending Mr. Segal for two months.  The Commission voted 5-1 (Commissioner Walker dissenting) to disqualify Commissioner Payne because of the Commissioner's "personal prejudice, bias, and malice toward the respondents." Id. at 13 (Commission's emphasis).

The facts in Segal and Smith are so totally inapposite to those presented in the Bell petition that little more analysis is required than that involved in stating them.  In that case, Commissioner Payne was intertwined in a libel suit against the respondents at the same time he was investigating, prosecuting, and proposing to judge the very same respondents in a disbarment proceeding!  In fact, the Commission in Segal and Smith carefully distinguished this personal bias or personal animus from permissible policy biases.  Id. at 13.

In dictum, the Segal and Smith opinion made little of the fact that Commissioner Payne had been a member of the special investigating committee that formulated the charges against the respondents.  Today, however, in the light of new precedents, this has become and additional factor in distinguishing Segal and, Smith from the facts presented in my own situation.

In American Cyanamid Co. v. F.T.C., supra, the Sixth Circuit reversed a Trade Commission decision because Chairman Dixon had not disqualified himself from participating in an FTC wonder-drug case.  Chairman Dixon, however, had served as chief counsel for the Senate subcommittee that had conducted the initial investigation which later led to FTC intervention.

Segal and Smith and American Cyanamid obviously present facts quite distinct from those involved in my October 19 address.  Even if I had presented firm policy convictions (and most of the statements were either about old matters or were very tentative and qualified) it could not possibly raise the specter of personal malice, or an inappropriate mixing of the prosecuting, legislating, and adjudicatory functions spelled out in Segal and Smith and American Cyanamid.

 [*537]  Bell management further states that its presence before the Commission will be prejudiced because an administrative adjudication "must be attended, not only with every element of fairness but with the very appearance of complete fairness," citing Amos Treat & Co. v. S.E.C., 306 F.2d 260, 267 (1962). I believe my present state of mind, my past voting record, the text of my speech, and this analysis of the law, adequately disposes of such a concern.  But I will address it further.

Arguably, I have met Bell's broad test simply by refraining from comment on Bell adjudications that are immediately before me or will be coming before me in the reasonably foreseeable future.  Moreover, I have been careful not to comment at all on certain matters, e.g., domestic satellites, that may well be decided within the coming months.  Their test, I think, cannot fairly be extended further -- to cover continuing matters in past decisions that the Commission has passed on once, and is supposedly done with for the time being, but will surely come before the Commission again in years ahead.  Too stringent a reading of the test would unduly dampen the Commission's policy planning function as well as the free interchange of discussion and comment over differing regulatory philosophies.

Whatever "the very appearance of complete fairness" may mean, I certainly do not take it as requiring me to go down the line with Bell management on the policies it pursues.  Complete fairness, to my mind, means lack of ex parte contacts, lack of financial conflict of interest, and lack of a dual role in mixing prosecuting and judging functions.  This has been the appropriate interpretation of "complete fairness." I believe the text of my remarks can easily pass that test.

4.  Bell's management rests its case, finally, on the recent Court of Appeals opinion in Cinderella Career and Finishing Schools, Inc. v. F.T.C., 425 F.2d 583 (D.C. Cir. 1970), which said, at 590, that Commissioners have no "license to prejudge cases or to make speeches which give the appearance that the case has been prejudged."

As the Bell petition correctly states, Cinderella is of recent vintage; the precise scope of its strong language is far from clear.  Nevertheless, there are several indications that the opinion is bound to be held closely to its facts.  The case (and two of the four precedents it rests on) involves principally Paul Rand Dixon and his public addresses.  In Cinderella, Chairman Dixon made remarks accusing a defendant of statutory violations while the defendant's appeal from an Examiner's adjudication was pending before the full Commission.

In the first place, Judge Tamm's opinion in Cinderella makes it clear that the holding was not intended to rule out all speeches, such as those addressing fundamental socio-economic issues going to the root of complex regulatory trends.  "We have no concern for or interest in the public statements of government officials," Judge Tamm wrote, "but we are charged with the responsibility of making certain that the image of the administrative process is not transformed from a Rubens to a Modigliani." Id. at 590.

What Judge Tamm appears to rule out are not all paintings, rather only those containing accusatory language regarding impending  [*538]  agency adjudications which are attempting to weigh guilt of a criminal nature.  This by no means eliminates all speeches, even critical ones.  Rightly interpreted, Cinderella eliminates language in public addresses excoriating a defendant attempting to prove himself free of guilt from violations of law; the case, on its facts, suggests no extension to the point of eliminating reasonable criticism -- however strongly stated -- of economic decisionmaking.  Thus, Cinderella and the facts presented by my own situation differ sharply.

Cinderella defines the test for disqualification on prejudgment grounds as whether "a disinterested observer may conclude that [the agency] has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it." Gilligan, Will & Co v. S.E.C., 267 F.2d 754 (2nd Cir. 1959) (Emphasis supplied).

This test suggests several points of departure between my October 19 address and that of Chairman Dixon:

(i) The speech's timing was of the essence in Chairman Dixon's case.  In reaching the result it did, the Cinderella court placed great weight on the timing of the speech, which occurred six weeks after notice was given that an Examiner's decision favorable to Cinderella would be appealed to the Commission by the agency's staff, and three days after a widely reported Court of Appeals decision involving Cinderella and the Commission in which the Court upheld the right of the agency to issue press releases dealing with pending cases involving suspected violations of statutory law.  F.T.C. v. Cinderella Career and Finishing Schools, Inc., 404 F.2d 1308 (D.C. Cir. 1968). In this context, the court stated, "we think the reasonable inference a disinterested observer would give [Chairman Dixon's] remarks would connect them inextricably with this case." Id. at 590.

While Chairman Dixon's discussion drove headlong into alleged violations of law that would be pending on appeal and were almost immediately before him, my speech clearly did not preview particular adjudications scheduled for hearing before the Commission within the foreseeable future.  (See, supra, the item-by-item account in Part V (B-2) of the matters I avoided.) Moreover, instead of commenting on specific, unresolved statutory violations, as Chairman Dixon did, I discussed long-standing economic decisions whose roots reach back far into past regulatory case law.

(ii) I would hope that any disinterested readers of my October 19 address would conclude that I have in no way prejudged any particular Bell case.  Rather, I have simply indicated my thoughts on how certain long-standing policies might be turned to the advantage of Bell's shareholders, employees, consumers, and even the management itself.

We must keep in mind that the Bell System and its many customers, in one sense, always have economic issues looming before this Commission.  Bell is a perpetual applicant and litigant before the Commission; generally it has several proceedings pending at once.  It is not an occasional, or one-time license applicant.  Its operations make it larger than most of the governments of the world -- by almost any measure.  On the other hand, the case in which Chairman Dixon found  [*539]  himself involved was the sole situation in recent years concerning accusations of illegality by a given "charm school."

(iii) A close reading of the briefs on appeal in the Cinderella case gives the clear impression that one issue was the truth or falsity of Cinderella's representations as tested by the statutory law.  Thus, the statements by Chairman Dixon might tend to persuade an impartial observer that he had prejudged the issue of guilt raised by supposedly illegal misrepresentations or unlawful deceptiveness; however, as noted, such unlawful deception was not the concern of my October 19 remarks.  I simply challenged the wisdom of past policies pursued.

On balance, I do not believe that Cinderella significantly undermines the principle established in F.T.C. v. Cement Institute, supra, that the expression of an opinion as to the wisdom of certain types of conduct does not disqualify an agency member from passing on a particular factual situation.

5.  Bell management concludes that my participation in agency actions would "undermine public confidence in the entire administrative process." On the contrary.  I do not think that my analysis of Bell's past managerial conduct in the light of my general regulatory philosophy -- most of which has appeared in past dissenting opinions -- will lead reasonable people to conclude that Bell will not get a fair hearing from me in the future, even in those cases possibly involving issues related to matters touched on in my speech.  See, e.g., "The Regulatory Process: A Personal View," Address by Commissioner Philip Elman, Federal Trade Commission, at the American Bar Association meeting, St. Louis, Missouri, August 11, 1970, reprinted in Wall St. J., Aug. 12, 1970 at 12, col. 3 and 116 Cong. Rec. S15606 (Sept. 16, 1970, daily ed.).

VI.  Conclusion

For the reasons outlined in the foregoing analysis, I respectfully conclude that the petition of disqualification filed by the American Telephone and Telegraph Company is without merit.

The traditional reluctance of higher courts to remove judges on bias charges, the customary independence of Presidential appointees, my statutory duty to promote the larger and more effective use of communications, the leading precedent of the Cement Cases, and this Commission's opinion in the recent Chronicle case, all lead me to conclude that no grounds exist for my stepping aside in all future Commission matters involving the Bell system.

The role which is truly improper is abdication -- by an agency or its Commissioners -- of their duty to search and question at every hand, inside the agency as well as outside, the performance of our large national monopolies.  Such an abdication of duty forfeits the tough adversary role the administrative process was originally designed to encourage.  Only then are the shareholders, employees, and general public truly disserved by a bias and prejudgment of the issues.







1.  "Why I Am a Conservative or For Whom Does Bell Toil?" FCC 56558, Oct. 19, 1970.

2.  Petition for Disqualification, Oct. 28, 1970.

3.  Statement of Joseph A. Beirne, President, Communications Workers of America, Oct. 28, 1970.

4.  "AT&T Rebuts Commissioner Johnson's Criticisms," 195 Management Report, Oct. 29, 1970.

5.  Letter from California Rural Legal Assistance, Nov. 2, 1970.

6.  Legal Opinion of FCC General Counsel, Nov. 9, 1970.




You may be wondering why a conservative like I would have so much trouble with the telephone company.  Well, let me tell you.

Now that Vice President Agnew has spilled the beans, and all the world knows that I have been just a "super permissive government official" all along, I might as well confess.

The Vice President's right.  It is no coincidence that I should come to Chicago to speak on economic issues.  The fact is that I have picked up a great deal of my economic philosophy right here.  Milton Friedman and his colleagues have made a believer out of me.

It hasn't been easy.  There aren't many genuine conservatives left -- especially in Washington.  And when folks found that I was getting some of my regulatory philosophy from Barry Goldwater's economic advisor I knew I would have to pay the price of trade press ridicule and industry suspicion.

In fact, I have spent most of my career as a government official -- first as Maritime Administrator and now as an FCC Commissioner -- unsuccessfully preaching the doctrine of free private enterprise competition and less government regulation to reluctant American businessmen committed to socialized enterprise and government protection of monopoly.

I didn't believe in socializing and subsidizing the American merchant marine and shipyards.  I felt that with the genius of American management, we ought to be able to win in world-wide competition -- as the American computer and industrial machinery companies have done.  I wanted less government involvement in shipping -- the industry wanted more regulation and socialization.  Now it has won out, as you may know.  President Nixon's proposals for dramatic increases in maritime subsidies have been approved -- notwithstanding the fact that almost every independent economist in the country argues there is absolutely no commensurate economic benefit whatsoever from this expenditure of tax dollars.

Why is it that principles of competition sound so good at Rotary and so frightening when competitors threaten to move in next door?

If the best products are to win out in the market place, if the theory is to work in practice, there must be informed consumers.  Why is it that consumer product industries almost universally resist efforts to provide relevant information about their products in advertising, packaging and prices that make comparisons easier?

If there is to be competition there must be competitors.  Why is it that an industry run by men like America's newspaper executives -- whose editorial commitment to free enterprise is unmatched -- are distressed that only 94% of the cities with daily newspapers have monopolies?  Why is it they feel compelled to press for a newspaper monopoly authorization bill (Administration-backed -- over the protests of the Assistant Attorney General for Antitrust) in order to further reduce competition in their business?

You get the idea.  In general, you see, my problem involves the distinction between the articulation of a theory and its application in practice.  It's the carrying of a conservative philosophy like private enterprise to its logical conclusion that gets me in trouble.

My problems are only rendered more extreme by the integration of my conservative economics into my conservative politics.

My politics are equally old-fashioned.  They are based on an American theory developed by a 200-year-old landed aristocrat named Thomas Jefferson: democracy.  He believed that the best government would come from an educated and informed people participating in the decisions that affect their daily lives.  Hardly anybody believes in this conservative doctrine anymore.

It's kind of a lonely crusade I wage.  For example, I felt that local citizens should participate more actively in the license renewal process of their local radio and television stations.  This was preferable, in my judgment, to regulation by the federal government in Washington.  I admit this sounds sort of like a George Wallace position.  And I suppose I shouldn't have been surprised that those Radic-Libs who control the broadcasting industry -- and therefore the Congress, Administration, and FCC -- wouldn't see it my way.  But I was a little saddened.

And so it goes.  The life of a conservative is hard.

The purpose of this long introduction has been to make it easier for you to understand the problems I've had with the telephone company.

You all recall the telephone company.  You have to recall the telephone company.  You lose your dime on the first try.

Well, a part of my responsibility as an FCC Commissioner is to see to it that the Bell System serves the public interest, convenience and necessity.

That it is a necessity no one doubts.

Just how convenient it is raises other issues.

As for the public interest, that seems to have been forgotten.

I used to talk and write about the public interest in telephone matters a lot: lower rates, more flexible services, optimal rates of technological growth and plant expansion, and so forth -- you know the litany.  Well, I've stopped.  It's not that I'm not interested, you understand.  It's just that it's not working.  It's kind of like falling in love by yourself.  It's a beautiful trip, but it's kind of lonely.

So I've decided to talk about Bell's interests.  That seems to be what most of the people who come to the FCC these days are talking about.  It's a tougher ball game to play, but that just makes it more of a challenge.  And at least you're not talking to yourself.

You can imagine my surprise, as I got into the subject, to discover that Bell management has been urging policies that don't even serve the company's interests.  I mean, I could understand how Bell's pursuit of its own interests would not always serve the public interest.  That probability was, after all, the original reason for regulation.  But why would Bell deliberately adopt policies that simultaneously produce (a) higher prices and worse service for the public, and also (b) lower profits for its shareholders?  That I just couldn't understand.  But the evidence was clear that higher prices, lower quality service, and lower profits had been the result of a number of Bell management's policies.  It was then it dawned on me: perhaps if I could present my case for public service from Bell in terms of Bell's own profit picture I might at least get the ear of some of the company's policy makers for a moment.  And so I continued my research into the uncharted wilderness on the way to higher profits for Bell.  What I have to report today are the results of preliminary investigation.  But I thought it might be of interest to you.

There are, as always, a few basic assumptions.  I assume that lower costs, and higher revenue from increased communications use and improved technology are in the private interests of the company.  I also assume some regulatory lag -- that is, that the company is allowed to keep a certain amount of windfall profits (from reduced costs or increased revenues) before the FCC and state commissions catch up with extravagant rates of return.

There are three basic areas where I believe the Bell System has not served its own interests -- what I will call financial operations, promotion of service and technological improvements.


Debt-equity structure. -- A big company like Bell needs capital.  Lots of it.  Last year it went to the market for a total of roughly $2 billion in external financing.  A few percentage points can make a big difference -- especially if you're a shareholder.  But basically, anytime you're a shareholder in a company with a regulated maximum rate of return your interests are served by its raising as much capital as possible through debt rather than equity -- up to a point.  Every dollar raised through equity dilutes your share of profits and reduces the rate of return on your investment; interest on every dollar raised through debt is tax deductible (unlike dividend payments), thus cutting the capital cost in half at the outset, and automatically contributing to your profits whatever the company makes above its costs.  The more cheap money the company can borrow the richer you get.  That's how the electric utilities rated A and B, with an average rate of return of 6.6% in 1968, earned for shareholders an average of 12.3% on equity.  Bell, by contrast, while earning 7 1/2% on its investment earned for shareholders only 9.3%.  It's a dramatic and shocking contrast, but true.

Only under intense questioning during the 1967 FCC hearings did Bell management finally concede the error of its ways over 10 these many years.  So long as the interest rates Bell must pay for debt are lower than the total rate of return it must pay on equity (which is virtually always the case), it is in Bell's interest to borrow rather than sell stock.  * But it is a bit ironic and tragically costly for everyone involved that Bell is only now going to more debt financing -- when it has to pay some of the highest interest rates in our nation's history (8 1/2 to 9%) -- and that it failed to borrow more during all those years when it could have borrowed in the 2% to 4% range. 

* I am assuming Bell's current debt-equity ratio.  There would, of course, come a point when additional debt might pose financial risk.  Most economists agree, however, that Bell is still a long way from that point.

Needless to say, the public has also been grossly disserved by Bell's financial policies.  Every dollar raised through equity rather than debt can cost the consumer five times as much.  But so long as our principal focus is on the shareholders' interests we needn't dwell on the public interest aspect of Bell's folly.

Stock options and stock financing. -- As a part of the Bell miscalculation on debt-equity ratio, there was for some time a rather extensive program of stock options for employees.  This program has now ended, but its effect was significantly to dilute ATT stock -- with a rather meager return in terms of financing and employee incentives.  It was nice for management and employees -- but mighty costly for shareholders.

There are two other matters which still may be considered in the FCC's lagging, five-year-old investigation of Bell's rates and services.  I will express no final position before examining the full record.  But I think there is significant evidence for the following two propositions.

Accelerated depreciation. -- You don't have to know very much accounting to know about depreciation -- the annual "cost" of your plant wearing out.  But when your plant is worth $41 billion, like Bell's is, how that depreciation is handled by the accountants can make a big difference in your costs, your taxes, your regulated rate of return, and your shareholders' profits.  Now there are a lot of inequities in the tax code favoring the corporations and the rich.  I think many of them ought to be changed.  But I'd agree with Milton Friedman that, as long as they're there, management's role is to minimize its company's tax burden -- not to make social policy judgments that the government might put the money to better use than the shareholders.  Since the 1954 Internal Revenue Code took effect Bell has been permitted to use "accelerated depreciation" -- that is, to charge off as a tax deductible business expense more depreciation than was formerly permitted.  Instead of figuring its Federal taxes based on accelerated depreciation, however, Bell continued to use "straight line" (normal) depreciation.  As a result the potential tax savings -- at least millions and perhaps billions of dollars -- have been lost forever for Bell's shareholders.  In a tight money market when the company has to obtain increasing amounts of additional financing, and is reportedly considering competing with the U.S. Treasury for the hearts and minds and money of America's savings bond holders, the use of accelerated depreciation in computing Federal taxes would have provided gilt edged returns.  Finally, in 1970, Bell changed its policy.  But its failure to use this technique for 16 years simply increased its own costs and those of its customers.

Western Electric. -- The Bell System owns its own supplier, the Western Electric Company.  Of course, it can set the prices it pays Western at whatever it wants.  But even under Bell's pricing it is currently "paying" Western more than $4 billion a year.  It's not a small business.  In part because of the tremendous economic power this gives Bell now, and would give Western if it could compete with other manufacturers, the Justice Department brought an antitrust action to make Bell sell Western, Bell fought the action (unwisely, as we will see shortly), and the case was settled with a "consent decree." The decree permits Bell to keep Western, but prohibits Western from entering the market to compete with other electrical and telephonic manufacturing companies.  It is clear that Bell's position has enhanced the position of its management: they have a "bigger" company to manage, and hence a good argument for higher salaries and more prestige.  But what has it done to Bell's shareholders?  A strong case can be made that they would be much better off if Bell would distribute the stock of Western Electric to them and at the same time move to abrogate the 1956 consent decree.  This may seem like a drastic move on ATT's part -- but the artificial constraints on Western Electric mean that the company cannot participate fully in the communications technology revolution that is only now beginning.  An obvious example is that Western Electric does not sell to non-Bell companies even though Bell claims Western Electric's prices are lower.  And this market may be one of the smaller that the present consent decree prevents Western Electric from serving.  What markets might Western Electric exploit if it were not held down by the consent decree: computers, satellites, CATV, television, photography, duplicating, educational systems and libraries?  The point is obvious.  With stock in both Bell and a viable, independent Western, most economists agree that Bell's shareholders would be a whole lot richer.  And the odds are that consumers would also enjoy the fruits of more intense competition: more technological innovation and lower prices.

Rate of return. -- Fundamental to Bell's financing is its authorized rate of return on capital investment.  The current theory of public utility regulation is that public commissions must hold down the monopolistic utilities' rate of return to reasonable levels.  It has occurred to me that this may be backwards.  Perhaps the public interest would be better served if we just forgot about the rate of return, and simply concentrated on reducing the costs-per-unit-service to customers and improving performance criteria.  At the very least, it seems to me we ought to have some idea of how the country would be different if Bell had a rate of return of 4%, 6%, 8%, 10%, 12% or whatever.  What would be Bell's response in terms of rates of technological innovation, new plant investment, quality of service, and so forth?  Well, the answer is that we don't know the answer.

For a company where every percentage point increase in the rate of return means $250 million annually, one would think the issue would have been addressed.  It has not been.

Indeed, during the 1967 hearings I put the question to Bell's lawyers, after roughly this kind of introduction.  How would Bell like a much higher rate of return, I asked.  How would it spend the money?  The answer? Here is an excerpt from the transcript:

Commissioner JOHNSON.  I appreciate you may not have prepared yourself to address yourself to such a question, but what would be unwarranted in your judgment about our permitting a rate of return to exceed 8 1/2 percent?  What would be the day-to-day consequences in day-to-day operations for the company and the public?

Mr. GARLINGHOUSE (Bell Counsel)...  I would say when we get above the range of 8 1/2 percent we would not be hampered in furnishing good service if the earnings were brought down to 8 1/2 percent.  The service is the ultimate goal that we are trying to achieve and earnings are a vehicle to get there.

* * *

...  Now how much higher than 8 1/2 percent would be warranted by the economic facts, I don't know.  What may be right today, may be wrong tomorrow, and it could very well be the rate of return should be higher in the future.  [Tr. pp. 10, 310-11].

How would the shareholders react to that?  I was offering them the chance to try for additional hundreds of millions of dollars a year and I couldn't even get the company's lawyers to address the question.


It is rather disturbing that Bell management would make fundamental errors in financing that cost shareholders and consumers alike millions or billions of dollars.  I began with the financial examples because they involves (1) such rather obvious blunders, (2) such large sums of money, and (3) are so directly and obviously related to shareholder losses.  But finance is, after all, common to all enterprises.  It is not unique to the expertise of Bell management.

Some of the most disheartening and fascinating of Bell management's errors involve the telephone business itself.  How has management responded to the opportunities to increase its business and reduce its costs?  It is in this area that we begin to uncover some rather fundamental lapses in communications and economic philosophy.

There is no one who I have ever been able to discover within ATT -- management, sales, or scientific research -- who has a sense of the social-political-economic role of the telephone in a modern-day industrialized society.  They can design, promote, distribute, and install a "Princess telephone" that will transmit the human voice -- even if they don't think to make it heavy enough to keep it from sliding off the bedside table.  But they are seemingly incapable of thinking about the ways in which people might use that instrument in their lives.

You can point out the fact that it costs more to call Washington from Alaska or Hawaii than from London.  What's the political consequence of that for the United States?  They haven't thought about it.

You can ask about the role of the telephone in uniting far-flung families and friends.  What would be the social impact of universal availability of a low price WATS service ("long distance" service without a per call charge)?  They don't know.  What factors now affect telephone usage in local exchanges -- where there is a flat monthly fee and every call is "free"?  In what ways does the pricing of "long distance" service inhibit usage?  How much lost revenue has Bell suffered as a result?

What would be the economic consequences for our nation if WATS (inward and outward) were made generally available?  We know what air freight has done to the warehousing business in some industries.  What is the correlation between "no cost" telephone service and the profits of a firm?  What are the economics of a company's closing local offices and taking calls at a single national number?

So many of Bell's decisions suggest a philosophy reminiscent of the story of the two librarians at a convention discussing the condition of their respective libraries.  "Oh, I'm so pleased," said one.  "All my books are in and on the shelves except for two, and they're coming in next Tuesday."

It's not the telephone company's job to encourage us to keep the phone on the hook any more than a librarian is doing her job if she wants to keep the books out of circulation.

And yet I cannot help but get the impression, at almost every turn, that the telephone company mentality is of exactly that character.  Management seems almost panicked at the prospect of the company's business expanding.  In a moment I will discuss their attitude toward off-peak pricing principles, the Carterfone, the New York Telephone breakdown, the Public Broadcasting network, cable television and data.  But the common impression running throughout is that of a company not only failing to promote increased usage of its service, not only failing to serve the increased business brought its way, but a company that would actually rather fight through Commission and courts -- with considerable vigor, expenditure, and occasional success -- than switch.

It's a tragicomic posture of the keepers of a disintegrating, condemned old plaintain home seeking its shelter in a storm -- because it's all they know.  But the humor quickly fades -- for shareholders and customers alike.  Bell's failure to understand telephone usage enough to develop new business, its failure to anticipate even the comparatively modest growth that has come along without cultivation, has cost its shareholders billions of dollars in potential profits forever lost.  Of course, it has also caused the public an awful lot of grief, inconvenience, and excess costs.

One of the most ironic features of Bell's failure to expand to meet demand is that it is one of the few companies in the world that could have done so at absolutely no risk whatsoever to itself.  Bell is authorized its "rate of return" on its capital necessarily employed in the business.  In other words, every time it can plant a dollar bill in the ground with Commission approval (seldom if ever denied) the dollar immediately starts earning 7 to 7 1/2% for the shareholders.  Even if the business does not develop to warrant the business the shareholders get their return.  It's not only a no-risk investment, it's an investment with a guaranteed return.  In fact, one of the responsibilities of a regulatory commission is to see to it that the company does not "gold plate" and overbuild beyond what is warranted, because of the unfair burden that places on customers.  But there is absolutely no incentive whatsoever for the telephone company to want to hold back in building to meet anticipated demand.

Off-peak pricing. -- In any business there are times when plant is idle -- and when any business at all will contribute to necessarily fixed costs.  "Off-peak pricing" is a simple principle widely used.  Anytime demand for goods or services increase substantially during limited times -- whether times of day of seasons of the year -- economies can often be effected by spreading that demand more evenly over time.  One of the easiest ways to do this is by changing prices, making them higher during the "peak" and lower during "off peak" periods.  For example, the airline industry and CAB, have come up with an intricate scheme of pricing to keep the planes in the air.

There is a significant peak in telephone usage during the four or five hours around noon every work day.  During many of the 20 other hours of the day the telephone system is almost totally idle.  But the Bell System, and the FCC, have had great difficulty in responding to this obvious problem with as much imagination as the airlines and CAB.  This is especially tragic for Bell's shareholders, because with a $41 billion investment in plant, any minute when it is not being used to peak capacity is costing them a great deal in lost profits.  It is also costing the consumer unjustifiably -- for he must sustain the financial and other costs of a facility which is substantially overbuilt.  Most of the limited off-peak pricing changes (lower rates at night and weekends) -- each of which has produced higher revenues for Bell -- have come grudgingly.  In most instances Bell has vigorously fought them at the FCC -- delaying their effective date and reducing their impact.  The price cuts are always substantially less than the nature of the off-peaks would justify -- and the shareholders are entitled to.  As a result, Bell has shown a much less smooth demand curve than it very easily could have achieved by fuller plant utilization.  It has lost revenue.  It has charged unnecessarily high prices.  It has suffered the excruciating embarrassment of breakdowns in the system.  For all of these failures its shareholders have paid a high price indeed.

Carterfone. -- The saga of Tom Carter and his Carterfone is another prime example of a whole flock of instances in which corporate intransigence has won out over common sense and common shareholders' dollars.  Bell is afraid of anything that has not received its papal imprimatur being plugged into its telephone system.  In an extreme burst of jingoism, it even has the FCC referring to such equipment as "foreign" attachments.  This is kind of like the electric company trying to discourage the installation of air conditioners and washer-dryer combinations.  However, it is more than just an hilariously funny posture in which to find a twentieth century telephone company.  *If the phone company would only encourage the use of its system by innovative equipment manufacturers (rather than discourage them).  It would suddenly find 200 million Americans working for Bell on their own time -- rather than working against it.  The increase in communications traffic in this country -- which ought to be Bell's principal concern and measure of effectiveness -- would jump enormously; because 200 million people can think of a lot more things to do with a communications network for themselves than one corporation can think up for them -- particularly if it's not thinking.

Tom Carter's device was simple, popular, effective, and harmless to the telephone system.  It was scarcely even an attachment.  It simply permitted a coupling between a telephone set and a land mobile radio transmitter-receiver.  It increased the use of the telephone system -- and the potential profits of Bell's shareholders.  It was fought by Bell through the FCC and courts -- for 11 years.

New York telephone service. -- We are all familiar with the costly breakdown in New York telephone service and the subsequent Bell implicit and explicit admissions of management failure.  As ATT Chairman Romnes has candidly conceded, "There's no question but that our people in New York missed the boat in estimating the growth." But New York is not atypical of a basic ATT failing.  We used to assume the company could handle a slowly growing homogeneous demand for Plain Old Telephone Service (appropriately known to company men as "Pots").  Now not even that assumption is safe.  But it certainly is not a company geared to rapid growth and accelerating change.  In New York it wasn't simply that Bell's plant expansion wasn't fast enough -- investment was actually cut back at crucial time periods.  New York serves to illustrate the long lead times in the ATT system.  Lower cost planned expansion was replaced by high cost crash programs.  Many customers went unserved.  And how does one calculate the costs to the company of the failure to inaugurate interstate Picturephone, or the problems with rate increases in New York state, or in the general deterioration of the service reputation of the company -- all of which were consequences of the New York fiasco?  It all could have been avoided.  It wasn't.  The shareholders suffered.

ETV service. -- In 1966 the Ford Foundation proposed that the benefits of satellite technology be used for educational broadcasting.  In 1967 the Public Broadcasting Act was passed -- providing for free or reduced rate interconnection for public broadcasting.  Here was a golden opportunity for ATT to respond to a national challenge that had commanded national support.  Quick provision of reliable service at a price public broadcasting could afford would have provided great benefits to the image of the company.  It was a new growth field.  Investments here would pay big dividends.  The investment would return profit immediately, and even more in the future.  What happened?  ATT had to be dragged, kicking and screaming, to the FCC where it has fought for three years the service to public broadcasting that Congress ordered.  For a period of time Public Broadcasting was getting horrendous, interrupted service and the FCC was forced to intervene on that account.  The company blew a public relations dream -- and to this day it is presenting a most unstatesmanlike posture which can only continue to have adverse long-term consequences.  Bell's position is even more difficult to understand in light of its treatment of the commercial networks.  The tariff for commercial network interconnection was filed in 1947 as a promotional tariff, but the rates remained unchanged for more than 20 years, being raised only recently.  Now the FCC is holding a hearing to decide, among other things, whether these rates are high enough.  There is strong evidence to suggest that commercial networks enjoyed "reduced rates" during part of this time period.  The shareholders seemingly can't win.  Bell can't optimize on selling service to commercial enterprises or on giving it away to public corporations.

CATV. -- If you believe the pundits, we may be on the verge of a nationwide revolution in communications -- as mass communications and personal communications services merge in a new technology that will change our nation.  One thing seems sure.  Whatever happens the Bell System will play at best a minor role.  Bell is not a particularly significant factor in CATV.  There are no test communities where the Bell System is applying its expertise for CATV communications.  Suppose in the early sixties Bell had successfully argued that CATV should be common carrier service available to all comers, and then moved to demonstrate its potential.  How different things might be today, as the Bell System seemed ready to rewire the nation with the most cost-effective combination of cable and Picturephone.  It is apparently not to be -- and no one will ever know what Bell has missed.  But one can safely estimate the shareholders have once again been robbed of a multi-billion dollar profit potential.

Privacy. -- The usefulness of the nationwide telephone system depends in large part on the fact that it is a private communications network.  You and I would like a telephone conversation to be as close a substitute for a private face-to-face conversation as possible.  We assume that no one else is listening.  But the past few years we have seen an increasing erosion of the privacy and integrity of the telephone system.

Especially disturbing is the fact that Bell has had so little to say on this issue.  There have been no strong oppositions to amended wiretapping legislation, no court actions against private or public wiretapping, no public opposition to unauthorized public agency wiretapping.  In fact, one increasingly hears reports of Bell Systems local company cooperation with all types of communications interception.

The effect of this Bell policy is cumulative and growing.  As people come to believe that the telephone is untrustworthy, their usage declines.  The company loses the patronage.  By failing to resist unauthorized and unnecessary "interconnection" to its system, Bell fails to protect one its most important assets -- people's trust in the privacy of the telephone, and the company's public commitment to the users' (and shareholders') interests.

Coin phones. -- It's a little matter, in some ways, but one of great consequence to individual users on occasion -- and significant to shareholders.  I'm talking about the pay phones -- their geographic distribution, the number that are out of service, and Bell's delay in converting to a system where you can dial an operator without depositing a dime.  There is no way of computing the social costs for all those individuals who were prevented from making emergency calls for the want of a dime -- or an operating phone.  But the economic costs to shareholders have been significant.  Any time someone might have made a long distance credit card or collect call and didn't -- for want of a dime -- they have been the losers.  Bell insisted that direct operator access without a dime was impossible -- notwithstanding the fact that those "backward" telephone systems in foreign countries have offered the service for years.  Finally, it relented -- after years of lost profits had passed.

Data Communications. -- Because of the pendency of Commission proceedings, I do not want to say much about service in the data filed.  There is much to be said, and many have already spoken.  A Bell official recently said: "[We] recognize that we haven't always been on top of the job in serving our data customers." The Commission's staff has concluded: "In an industry of the size and growing complexity of the communications common carrier industry, the entry of new carriers could provide a useful regulatory tool which would assist in achieving the statutory objective of adequate and efficient service at reasonable charges." Bell now proposes to build a 60 city digital network to be available by 1973-1974.


Satellites. -- If there is a cow more sacred than all other at Bell, it is its belief that its performance in technological innovation knows no equal. The definitive evaluation of technological change in the communications industry has not been written.  It should be.  At least in satellites, however, it's clear that Bell forfeited an early lead in the technology.  Bell built Telstar -- a random orbit satellite.  Then it relaxed.  It failed to develop the much lower cost synchronous satellite system, which does not require the elaborate tracking and telemetry devices and uses fewer satellites.  Bell has been virtually absent from the development of an entirely new international industry.  Bell banked on an obsolete, capital-intensive technology (random-orbit satellites) when innovation was taking place toward a much less capital-intensive development (synchronous satellites).

TD-2 Microwave. -- TD-2 microwave is simply the engineers' name for an improved system of microwave transmission.  It is, however, one area of communications technology where we have some industry case studies.  Competitors had jumped ahead in developing this particular type of microwave.  Bell had to make a crash effort to catch up.  Whether this crash effort would have been successful without Bell's basic monopoly advantages of FCC protection of Bell-maintained barriers to competitive entry cannot be determined.  But TD-2 Microwave does suggest that Bell is not the fountainhead of all innovation.

My next two examples of technological innovation are ones I feel I need to be a little more tentative about.  Based on conversations with a number of people in communications, in and out of the Bell System, I feel my conclusions in these two areas are correct.  But I do want to note that the evidence is not as clear as in the TD-2 microwave and communications satellite cases.

Transistors. -- Bell is very proud of its role in developing transistors.  But the evidence is in many ways much more ambiguous.  In any event, many of the developments since transistors have taken place outside the Bell System -- for example, in semi-conductors.  Certainly the very competitive Japanese are now simply exporting the applications of this new technology right back to us.

ESS. -- Bell is now in the process of installing its version of electronic switching.  Depending on the time schedule, it will have made the conversion by the year 2000.  Whatever the schedule, Bell may be installing obsolete technology.  Those who have studied the ESS technology decision at Bell suggests that it may have chosen a less-advanced technology than that available -- in a decision which overemphasizes risk minimization, and an ultraconservative concern over system capability.  As a result the Bell System may have to make costly revisions in its pattern of technological innovation in switching.  This question also illustrates the difficulty in assessing the optimal pattern of technological innovation in a monopoly with vertical integration.  Bell is now buying Japanese PBXs for use in the New England area where solid-state equipment is required.

I cannot close this discussion without some comment about international comparisons in telecommunications.  Whenever one questions Bell's performance, the non-sequitur reply is usually "have you ever used the British or French telephone system?" This is a strawman, as anyone who has made comparative studies in this industry recognizes.  I would suggest that we can learn a great deal about performance from telecommunications systems in other countries such as Sweden, Switzerland, West Germany, or Japan.  Isn't it ironic that while we can use our space technology to put a man on the moon, we will have to suffer the humiliation of seeing Canadian and Indian domestic satellites in the skies before ours?  In many countries there are numerous other services, technologies, or lower prices that we do not have in this country -- even if it can be shown that on some absolute scale an evaluation might find the American system superior.


This speech is already much too long.  But I felt a few examples were really necessary to make the point.

Bell management's policies disserve the public interest in many ways.  We all know that.  Few in the company -- or the FCC- seem to care very much.

The point is that many (though not all) of these socially retrogressive policies also fail to serve Bell's shareholders -- robbing them of billions of dollars.  Sometimes the benefits go to management.  Often as not they go to no one.

For whom does Bell toil?  It's hard to tell.  It's not the public.  It's not the shareholders.  Management?  Well, yes, but it's not that simple either.

The fact is that a national monopoly with a $41 billion plant, and over 50 federal and state regulatory agencies, enjoys the benefit of neither a competitive spur nor an effective regulatory check.  When the FCC fails to probe, and question Bell management; when the FCC does not permit its staff to play a tough adversary role in Bell's rate hearings; the shareholders of the company are seriously disserved as well as the public.

Some form of competition may be the answer.  Whether such a conservative approach can still muster any adherents in a Republican Administration under the influence of Radic-Lib American businessmen remains to be seen.







OCTOBER 28, 1970.


American Telephone and Telegraph Company respectfully requests that, in view of your manifest bias against the Bell System, you excuse yourself from further participation in matters before the Federal Communications Commission involving any companies in the Bell System, In support thereof, it is respectfully shown as follows:

1.  In a public speech of October 19, 1970 for the Digitronics Users Association Conference, entitled "Why I am a Conservative or For Whom Does Bell Toll?" (F.C.C. Public Notice No. 56558), you demonstrated a deep-seated bias and prejudice against the Bell System.

2.  This wholly one-sided attack is unfounded.  It ignores fact and disregards any damage it might do to the Bell System and the consumers of its services.  It is apparent from the speech that your bias against the Bell System is to pervasive and yor mind is so closed as to render useless any demonstration to you on our part that your specific accusations and charges are without merit and factually unsupportable.  But wholly apart from the merits of your charges, the fact that you have made them on your own volition, in the form of a public speech, is entirely incompatible with the dispassionate objectivity required of your high office as a public regulatory official with adjudicatory responsibilities.  Your remarks reflect a prejudgment of matters of significance to the Bell System in practically every aspect of the System's operations subject to regulation by the Commission.  Many of these subjects are at issue before the Commission in pending proceedings in which the Bell System companies are entitled under the law to an impartial and objective determination.  *

* Major examples, to cite only a few, are dockets Nos. 16258 -- Phase 2 (involving, among other things, the Western Electric relationship and depreciation) and 18128 and 18684 (involving private line rates, including those for program transmission services): the pending applications by new specialized common carriers; and AT&T's pending domestic satellite system applications.

3.  Your further participation in Commission decisions involving the Bell System in the wake of your publicly demonstrated bias cannot be reconciled with the minimum requirements of substantive and procedural due process which the law guarantees to all parties in administrative proceedings.  Segal and Smith, 5 F.C.C. 3 (1937), makes it very clear that personal bias and prejudice disqualify a Commissioner from participating in judicial or quasi-judicial proceedings before the Commission.  Indeed, that basis for disqualification in Scgal and Smith, supra, has been amplified by a far more stringent standard of conduct applied by the federal courts in recent years.  In American Cyanamid Co. v. Federal Trade Comm'n, 363 F.2d 757 (1966), the Court stated that "It is fundamental that both unfairness and the appearance of unfairness should be avoided," (p. 767) and quoted from Amos Treat & Co. v. Securities & Exchange Comm'n, 306 F.2d 260, 267 (1962), that:

"'[An] administrative hearing of such importance and vast potential consequences must be attended, not only with every element of fairness but with the very appearance of complete fairness.  Only thus can the tribunal conducting a quasi-adjudicatory proceeding meet the basic requirement of due process.'"

4.  Very recently, the Court of Appeals for the District of Columbia in Cinderella Career and Finishing Schools, Inc. v. Federal Trade (Comm'n, 425 F.2d 583 (1970), made it plain that individual Commissioners have no "license to prejudge cases or to make speeches which give the appearance that the case has been prejudged" (at 590).  Because of a speech made by then Chairman Dixon while an appeal from an examiner's decision was pending before the Federal Trade Commission, and despite the fact that Mr. Dixon's vote was not necessary for a majority, the court in that case set aside the Commission's order and remanded the case to the Commission for a new decision without the participation of Commissioner Dixon.  As the Court in Cinderella emphasized (425 F.2d at 590):

"...  It requires no superior olfactory powers to recognize that the danger of unfairness through prejudgment is not diminished by a cloak of self-righteousness...."

5.  It is apparent that, because of your speech, your participation in pending or future Commission proceedings involving the Bell System would violate these precedents.  Moreover, in light of your public attack on the Bell System, your participation in such proceedings would undermine public confidence in the entire administrative process.  Accordingly, it is hereby requested that you disqualify yourself from participation in further Commission proceedings involving companies of the Bell System.

Respectfully submitted.







It appears that someone in the Bell System management has blown his cool in attempting to stifle commentary by a knowledgeable public official, whose sole obligation is to the American public.

Commissioner Johnson has recounted several serious problems of the Bell System, which in his opinion the company's management has not decided to face until quite recently -- when the telephone system was on the verge of collapse in a number of metropolitan areas.  None of these problems has been any kind of secret.

Company management is deluding itself if it believes Mr. Johnson has damaged the company.  After all, the Commissioner is not responsible for the 20% decline in company stock value in the last several years; he is not the one who delayed the planning for new facilities to take care of demands that company planners knew was coming.

The company has admitted its faults and misjudgments publicly over the last year.  The public record is replete with breast-beating apologies of company officials, some of whom have been downgraded into the Corporate Siberia at 195 Broadway.

The Commissioner has served for four years on the Commission.  He has had adequate opportunity to become acquainted with the company's operations.  He should not be stifled in his guardedly speaking out on matters which are the responsibility of the Commission any more than Chairman Dean Burch, who on Monday of this week discussed the many economic problems involved in the proposed domestic satellite communications system, pending in Docket No. 16495.

The attorneys for the Bell System ought to know that the petition filed today should more appropriately have been sent to the Federal Communications Commission, not to an individual Commissioner.  The Commission itself should have the opportunity to judge the fitness of a member to take part in a case.

Had the company a case, it would have presented factual information in its petition -- no matter with whom filed.  Instead, it is a sorry litany of rhetoric sounding like a product of the office of Vice President Spiro Agnew.



195 MANAGEMENT REPORT, AT&T, October 29, 1970.

Charges are "without merit and factually unsupportable"


In asking FCC Commissioner Nicholas Johnson to disqualify himself from participating in FCC matters involving the Bell System, AT&T said yesterday (See 195 MR, No. 43, Oct. 28, 1970) that the specific accusations and charges Mr. Johnson made in his Chicago speech were without merit and factually unsupportable.  The fact that he volunteered the charges in a public speech, the Company said, is entirely incompatible with the dispassionate objectivity required of his high office as a public regulatory official.

Commissioner Johnson's speech, AT&T said, reflects a prejudgment of matters of significance to the Bell System in practically every aspect of its operations that are subject to regulation by the Commission.

In his address, Commissioner Johnson criticized numerous areas of Bell System performance and practice.  Here are brief statements of Mr. Johnson's allegations, followed by AT&T's position with regard to each.


Commissioner Johnson maintains AT&T financing has been mistimed, that the Company raised money over equity offerings when interest rates were low, and must now resort to debt financing when rates are high.  He states: "... it is a bit ironic and tragically costly for everyone involved that Bell is only now going to more debt financing -- when it has to pay some of the highest interest rates in our nation's history."

It is not true that the Bell System is "only now" resorting to more debt financing.  The fact of the matter is that since 1965 we have met nearly all of our new money requirements through bond issues.  That we are able to do so we owe to the prudence of AT&T management in holding debt to a moderate level in the past.

It is the aim of AT&T management to use the mode of financing most attractive in the light of current and foreseeable circumstances.  Accordingly, during the early 1960s, when the market performance of AT&T stock was very strong, equity capital was raised on very favorable terms, thus maintaining borrowing margins that have proved extremely valuable in the difficult markets sinc e that time.

If, on the other hand, we had followed Mr. Johnson's retrospective counsel, we would have foregone the sale of equity when market conditions for this mode of financing were at their most favorable.  In this event, borrowing margins would have been dissipated unnecessarily -- and we would have been forced to the sale of equity in the face of the adverse market conditions of the late 1960s.  Under these conditions, equity offerings would undoubtedly have been extremely costly.  How shareowners would benefit from such action is difficult to see.


The Commissioner states that "... at least millions and perhaps billions of dollars have been lost forever for Bell's shareholders" by the System's failure to take advantage of accelerated depreciation.

This is simply not true.  No benefits accrue to shareowners when funds generated through tax deferrals are required to be "flowed through" to customers in the form of lower rates.  Under these circumstances the company would have no reserve to meet its future tax liability in the event of a change in Federal tax policy or a reversal of economic conditions.  Whatever benefit present customers might derive from a flow-through of funds generated by accelerated depreciation would be offset by a liability to be borne by future customers or future shareowners or both.

The Bell System is using accelerated depreciation in 1970, following the passage of the Revenue Act of 1969.  We actively supported the provision of that measure that permits accelerated depreciation provided tax deferrals are "normalized." Normalization precludes "flow-through" and makes tax deferrals available as interest-free working capital, benefiting both customers and shareowners alike.


Mr. Johnson maintains that AT&T should voluntarily divest itself of the Western Electric Company and says that "most economists agree that (in this event) Bell's shareholders would be a whole lot richer."

We do not know what Mr. Johnson's authority is for his assertion that "most economists" agree that AT&T stockholders would benefit from a spin-off of Western Electric.  The fact of the matter is that whatever increase in Western Electric's own earnings might follow such a spin-off would be more than offset by the higher costs the Bell telephone companies would have to pay for materials.  Further, this divestiture of Western Electric would deprive the telephone companies of an assured source of supply in routine and emergency and would certainly impede the introduction of technology.  In short, while a spin-off might stimulate a short-term speculative flurry at the outset, it is difficult to see how shareowners would benefit over the long term from the impaired performance that would be the consequence of splitting up the Bell System team.  And the public would surely suffer.

Western Electric has been a unit of the Bell System since 1882.  Mr. Johnson's statement that AT&T management's motive for "holding on" to WE is to enlarge its own salaries and perquisites hardly merits a rejoinder.


Under the heading "Promotion of Service," the Commissioner castigates the Bell System for what he calls some of its "most disheartening and fascinating... management errors." A principal argument is that the System has failed "to promote increased usage of its service."

A sufficient rejoinder might be that the Bell System today serves more than half again as many telephones as it served 10 years ago, and handles two and a half times as many interstate long distance calls.

Mr. Johnson, however, makes the more specific allegation that the Bell System has resisted "off-peak" pricing and the increased customer usage it would generate.

The facts are that the principle of "off-peak" pricing was recognized in Bell System rate-making as long ago as 1901 -- a generation before the Commissioner was born, a decade before our interstate business first became subject to regulation.  And reduced rates for interstate calls during the evening and night-time hours have been continuously in effect since 1919.

Bell System rate schedules for "off-peak" hours have been amended many times to the benefit of customers down through the years.  Today a three-minute call from New York to California can be made for as little as 80 cents, a one-minute call for 35 cents.


Referring to AT&T's insistence on effective and appropriate ground rules for interconnection of such devices as the Carterfone, Mr. Johnson says this is "another instance in which corporate intransigence has won out over common sense and common shareholders' dollars."

The Bell System opposed the indiscriminate attachment of customer-owned equipment to its lines because of the need to protect the quality and reliability of the telephone network and the service it provides the public.  It would have been irresponsible to open the network to the attachment of such equipment until reasonable protection of the network could be assured.  This assurance was provided in the revised interconnection tariffs filed in the fall of 1968 and subsequently accepted by the Federal Communications Commission.  The need for protection of the network has subsequently been confirmed in a study prepared under the Commission's aegis by a committee of the National Academy of Sciences.  In the meantime a steadily increasing number of customer-owned devices and systems have been attached to the network under the terms of the revised tariffs.

What Mr. Johnson neglects to point out is that as long ago as 1958 the Bell System introduced Data-Phone service for the specific purpose of accommodating the attachment to its lines of a wide variety of data input devices.  Today there are more than 100,000 Data-Phone sets in service.


"AT&T," the Commissioner states, "had to be dragged, kicking and screaming, to the FCC where it has fought for three years the service to public broadcasting that Congress ordered" in the Public Broadcasting Act of 1967.

Congress did not "order" the Bell System or anybody else to provide program transmission service to public broadcasting.  What it said is that the common carriers might provide such service at free or reduced rates without violating the terms of the Communications Act.  And since December 1968, the Bell System has in fact been providing network service to the Corporation for Public Broadcasting at what amounts to "out of pocket" costs; CPB pays nothing for the cost of putting up and taking down the connections.  These rates were initiated voluntarily by AT&T in the interest of helping CPB get started pending a determination of its total network requirements.  This arrangement has been extended several times -- it now serves 59 cities -- and, although service is provided CPB on temporarily idle facilities that can be "preempted." the reliability of service through September 1970 has been 99.67 per cent.

Moreover, in 1969 AT&T proposed and has started to construct a 105-city network to provide regular network service to CPB, 24 hours a day, at approximately one-third the rate charged commercial broadcasters.  These charges cover only the specific added costs that would be incurred in serving CPB and would not include payment for existing basic route facilities such as land, buildings and towers.  To lower our charges further would certainly not benefit the telephone using public or our shareowners.  The FCC has indicated our approach seems reasonable.


Commissioner Johnson said the Employee Stock Plan -- which ended in 1968 with the purchase of the last remaining shares authorized for that purpose -- had the effect of diluting stock value for non-employee incentives was "rather meager."

The facts simply don't bear out Mr. Johnson's cursory conclusions.  During the 1958-1965 period -- which included AT&T's equity offerings to shareowners in 1961 and 1964 -- about 39 per cent of the new shares issued were shares sold to employees under the Plan.  These shares accounted for about 21.5 per cent of the total capital raised during that period, and about 36 per cent of the amount raised through sale of equity securities.

This clearly was more than a "meager return" from a financing standpoint.

At the same time, this capital was obtained on reasonable terms which benefit all shareowners, not just employees.  In fact, average proceeds per share from the sale of stock to employees have substantially exceeded book value per share for the benefit of all shareowners rather than "diluting" the stock as alleged by Commissioner Johnson.  The average proceeds per share from all stock offered to employees since World War II actually were $5 per share higher than the average for all shares issued during that period.

In short, the Employee Stock Plan has been good for the business and its shareowners because it helped to raise the large amounts of capital needed on reasonable terms.  And we believe it has been good for employees; it provided an excellent investment and encouraged thrift and a deeper sense of personal involvement in the business.


Commissioner Johnson said that in the process of installing electronic switching machines, Bell "may be installing obsolete technology."

The introduction of electronic central offices throughout the nationwide network represents the largest single project ever undertaken by a private industry.  Not only in terms of cost -- which is expected to reach $20 billion or more -- but also in terms of the skilled manpower and man hour requirements and the intrinsic complexity of the job.  Far from being obsolete, ESS embodies the most up-to-date electronic technology.  By the mid 1970's, we'll be installing electronic central offices at the rate of just about one every working day.  As to Mr. Johnson's point that we may be installing obsolete technology, no one is more aware of the rapid pace of technological development in the telecommunications field than the Bell System.  As innovation continues, of course, the design of ESS machines will be modified to incorporate devices and techniques that improve the performance and reliability of electronic switching.  The point is that the nationwide switched network is an "organic" entity: in planning transmission and switching facilities, the Bell System folds the future into the present: what we install today must work compatibly with what we install tomorrow.  It's that sort of systems approach toward building and managing the network that has added greatly to its capacity and versatility and has kept down the cost of providing telecommunications service.


Commissioner Johnson said that Bell is very proud of its role in developing the transistor, but "the evidence is in many ways much more ambiguous.  In any event, many of the developments since transistors have taken place outside the Bell System."

Of course, we are proud of the Bell System's role in the development of the transistor, since three Bell Laboratories scientists were awarded the Nobel prize in physics in 1956 for their discovery of the transistor effect.  This does not seem ambiguous to us.  As to "other developments" that have taken place outside the Bell System, we have never made the claim that we had a monopoly on research and development in solid state physics; however, it is acknowledged by the scientific community that the entire solid state industry stems principally from the discovery of the transistor effect, and that the Bell System has remained at the forefront of transistor development ever since.  Secondly, in the interventing years since that discovery, Bell Laboratories has made seminal contributions to the development of microelectronics, laser and maser technology, electroluminescence, superconductivity, information theory, magnetic memory devices, data transmission, and satellite communications.  One index to the innovative capacity of Bell Telephone Laboratories lies in the fact that since its establishment in 1925, its engineers and scientists have been awarded 14,000 patents, an average of one a day.


Commissioner Johnson said that telephone service problems in New York are not "atypical of a basic AT&T failing."

While we don't completely understand the thrust of Commissioner Johnson's remark, substantial amounts of data made available to the FCC in conjunction with its "Quality of Telephone Service Survey" indicate that New York City's service results certainly have been atypical of the levels of service being furnished to the majority of Bell System customers.

And while it's true that New York City has service problems, service is steadily improving.  Backing up the New York Telephone Company's service improvement effort are an almost $1 billion construction program for 1970, $1.1 billion planned for '71, and $1.2 billion for '72.  The 1970 program represents an increase of some $264 million over 1969 and almost half a billion over 1968.  The employee force now stands at more than 100,000, an increase of more than 25,000 employees since 1968.

Furthermore, New York is an atypical city in terms of its communications needs and usage.  For example, calling patterns in the New York metropolitan area are basically different from those of smaller U.S. cities.  The patterns are characterized by intense demand for inter-office trunking (only five per cent of New York City's traffic is intra-office), high usage of the nationwide switched network, and a broadly diffused community of interest that reaches out to other metropolitan regions, even those a considerable distance away; on an average business day, 31,000 calls are made from New York to Los Angeles, 52,000 from New York to Chicago, but only 9,500 from New York to the Buffalo region.

One additional indication of the extraordinary concentration of communications facilities in New York City that makes it atypical is the fact that 30 per cent of all Bell System PBXs are located in Manhattan, south of 59th street.


Commissioner Johnson said that the Bell System has not met the needs of data communications users.

We are meeting those needs and our data communication services are being constantly modified and expanded to meet the changing needs and the growing demands of data communications users.  We introduced Data-phone service in 1958 to allow direct communications between data processing machines.

Presently we provide 75 different types of data sets with some 20 speeds of operation ranging from 150 bits per second up to half a million bits per second.  By year's end, our direct dial network and private line voice channels will be able to accommodate 4,800 bits per second and 10,800 bits per second, respectively.

To meet data users needs over the next decade, we will have in operation a digital network that will be integrated into our present network.  This network will serve 60 major cities on a private line basis by 1974, with a switched service capability in these cities soon after that.  A variety of data speeds will be provided, some beyond the needs of computer manufacturers over the next decade.


Commissioner Johnson posed the question: "How the country would be different" if Bell had rates of return either much higher or much lower than at present?

Mr. Johnson assumes that some sort of earnings curve can be drawn through various levels of service quantity, quality and costs -- although each of these factors has innumerable inputs affecting any given level.

It seems obvious that there is no specific level of earnings that is "just right" for all conditions.  Earnings levels vary with changes in the operating environment and financial climate.  The FCC itself recognizes this and has always insisted on a continuing surveillance of our earnings vis-a-vis the operating environment and financial climate.


Commissioner Johnson said the coin telephones, "their geographic distribution, the number that are out of service, and Bell's delay in converting to a system where you can dial an operator without depositing a dime..." are "of great consequence to the individual users on occasion -- and significant to shareowners."

The Bell System has some 1.3 million public and semi-public telephones.

By and large, coin service is good, but there are some problems in the New York City area.  However, New York Telephone is making an all-out effort to improve coin service.

Of New York City's 100,000 public and semi-public telephones, some 10,000 are inspected daily.  Some 13 per cent, or 355, of the city's total repair force is dedicated to keeping coin phones in working order.

The Bell System is committed to the Dial Tone First program and is moving ahead with its Dial Tone First conversion program on a scheduled basis.  Because of the program's cost -- more than $100 million to convert the System's more than 1.3 million coin phones -- conversion will not be completed for a number of years.

Among the cities that now have or are converting to Dial Tone First are: New York; Washington, D.C.; Hartford, Conn.; Danville, Ill.; Cheyenne, Wyoming; Newark; Sandusky, Ohio; and Philadelphia.


Commissioner Johnson said that "Bell has failed to protect one of its most important assets -- people's trust in the privacy of the telephone...."

Contrary to Commissioner Johnson's charge that the Bell System has had little to say on the wiretapping issue and fails to resist unauthorized "interconnection" to its system, we have consistently advocated Federal and state legislation to strengthen privacy of communications.  Over the years, Bell System representatives have repeatedly spoken out before the Congress and the state legislatures on this subject.

AT&T Vice President Hubert Kertz, for example, testified before the U.S. Senate Judiciary subcommittee on Administrative Practice and Procedure on May 18, 1967: "Wiretapping is an invasion of privacy and we believe strongly that it should be stopped."

He pointed to the pressing need for a "clear-cut Federal law that makes wiretapping as such illegal and strengthens the privacy of communications."

He expressed, too, the long-standing policy of the Bell System that "privacy of communications is a basic concept in our business...  Any undermining of this confidence," he said, "would seriously impair the usefulness and value of telephone communications...  We welcome legislation which strengthens this privacy."

We do, however, recognize that national security and organized racketeering are matters of grave concern to the government and to all law-abiding citizens.  The extent to which privacy of communications should yield and where the line between privacy and police powers should be drawn in the public interest are matters of national public policy.  This is a matter to be resolved by the Congress.

We constantly take many protective measures to safeguard the integrity of our nationwide telephone network.  Our employees are carefully trained and regularly reminded about the vital importance attached to secrecy of communications.  Adherence to the rules preserving privacy is a basic condition of employment.

In addition, our plant employees are trained to look for illegal wiretaps.

When one is discovered, it is removed or disabled, and law enforcement authorities and the subscriber are promptly notified.


In connection with the TD-2 microwave radio relay system, Commissioner Johnson said that "competitors had jumped ahead in developing this particular type of microwave.  Bell had to make a crash effort to catch up."

TD-2 was not developed on a crash effort, as Mr. Johnson claims, nor to meet competition from commercial suppliers.  It has, in fact, been in use since 1950, and has been continuously improved over the years to increase its capacity and improve the efficient use of the radio frequency spectrum.  The system's original capacity of 2,400 circuits has been increased to 12,000 circuits, while transmission performance has been improved.  This increased capacity has helped to keep down the cost of long distance telephone calls.


In discussing CATV service, Mr. Johnson speculates as follows: "suppose in the early sixties Bell had successfully argued that CATV should be a common carrier service...." He then implies that, because the Bell System did not establish a monopoly position at that time, our shareowners" have once again been robbed of a multibillion dollar profit potential."

In discussing CATV service, Mr. Johnson speculates as follows: "Suppose in the early Sixties that the Bell System had successfully argued that CATV should be a common carrier service" -- flies in the face of his own knowledge that as early as 1958 the FCC had ruled that the CATV business was not a common carrier service.  In short, what Mr. Johnson is saying is that if things had been different, things would be different.



CALIFORNIA RURAL LEGAL ASSISTANCE, San Francisco, Calif., November 2, 1970.

Mr. DEAN BIRCH, Chairman Federal Communications Commission, Washington, D.C.

Re: American Telephone & Telegraph petition for disqualification dated October 18, 1970, to Commissioner Johnson.

DEAR MR. CHAIRMAN: We are writing on behalf of the Spanish Speaking/Surnamed Political Association, the Mexican-American Political Association, the Mexican-American Legal Defense & Educational Fund and California Rural Legal Assistance.  These four organizations have been frustrated in their efforts to secure equal government treatment by the Federal Communications Commission.

We have carefully read American Telephone & Telegraph's request that Commissioner Johnson be disqualified.  The validity of this attack is questionable.  AT&T's primary objection is that Commissioner Johnson has not fallen prey to its propaganda,

Our organizations feel that if, in fact, AT&T's ground for disqualification of Commissioner Johnson is correct, then we too have a ground for seeking the disqualification of the remaining six Commissioners in our Petition to Intervene presently before the FCC (in re Applications of Pacific Telephone and Telegraph Company File #3710-3712-C1-P-70, Opinion 49745, FCC July 15, 1970).  It is clear from said opinion that six of the seven Commissioners believe that Pacific Telephone property interests are to be more highly valued than three million Spanish-surnamed individuals' employment and communication rights.

Our organizations, however, have exercised a restraint that AT&T is apparently unable to exercise.  We have exercised such restraint on the grounds that in the long run our judicial and quasi-judicial system cannot be effective if judges are required to remain absolutely neutral and ignore the realities of life.  All that we ask is that in each individual case judges and commissioners be willing to exercise their independent judgment without regard to the particular preferences or biases that they might have.

Although this letter is not cash in terms of a petition for disqualification, we do wish to formally inform the Commission that our organizations will file a Petition for Disqualification of all the commissioners who have previously ruled adversely to us if the Commission does set a precedent of disqualifying Commissioner Johnson.  Our ground will be that six Commissioners have elevated monopoly property rights above individual rights.

Respectfully submitted.


ROBERT L. GNAIZDA, Deputy Director.


November 9, 1970.


To: Commissioner Johnson.

From: General Counsel.

Subject: Petition of AT&T requesting that you disqualify yourself in proceedings involving the Bell System.

I have your request for my views on the petition filed October 28, 1970 by American Telephone and Telegraph Company requesting that you disqualify yourself "from participation in further Commission proceedings involving companies of the Bell System." The petition rests entirely upon reference to a speech given by you on October 19, 1970 to the Digitronics Users Association Conference entitled, "Why I am a Conservative or For Whom Does Bell Toil?" It is urged without further analysis that the speech per se exhibits pervasive bias against the Bell System and that it reflects a prejudgment "of matters of significance to the Bell System in practically every aspect of the System's operations subject to regulation by the Commission," including subjects at issue in pending proceedings.

It is my opinion that the petition is so broad in its application that it does not provide a basis for a determination on the merits.  Thus, the petition requests that you disqualify yourself in any proceeding involving any Bell System company.  However, the Commission has a continuing regulatory function with respect to AT&T involving both formal and informal proceedings, and AT&T also participates in both formal and informal proceedings involving applications of other parties and proceedings of broader scope in which the substantiality of its interests may vary considerably.  While the petition does make mention of four pending proceedings as examples of those in which it claims you have closed your mind to persuasion, the full reach of the requested relief remains openended, and even with respect to the four proceedings which are mentioned, no attempt is made to relate any particular language in the speech to any particular issues in those proceedings.

The petition thus calls for a disqualification whose scope the petitioner has not defined and which I am unable to determine.  I think that a party seeking such severe relief should provide an adequate statement of the parts of the speech relied upon and all of the pending proceedings as to which it seeks disqualification, as well as the specific issues involved and affected, rather than leaving it to you or to me to search out and piece together these elements.

Under the circumstances, it seems to me that the appropriate course is to reject the AT&T petition, as written, on the ground that it does not particularize specific bases for the relief requested.

RICHARD E. WILEY, General Counsel.

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