A DOMINANT AND RECURRENT theme in the regulation of network industries has been that the firm possessing a bottleneck facility be restricted in the lines of business in which it may engage. The regulatory quarantine is one incumbent burden of the sort described in the preceding chapter. But it is typically not part of the original regulatory contract. Rather, the quarantine model has developed over time to address a variety of perceived evils of regulated monopoly. Its most visible example has been the line-of-business restrictions imposed on the regional Bell operating companies (RBOCs) by the now-defunct Modification of Final Judgment (MFJ), the consent decree that forbade, among other things, the RBOCs from providing certain forms of longdistance service. Although the quarantine model can be found in the electric utility industry also—most notably in the Public Utility Holding Company Act of 1935—the analysis in this chapter relies principally on examples from telecommunications, where the quarantine model again figured prominently in the Telecommunications Act of 1996.

The 1982 MFJ terminated one of the most significant antitrust suits since the breakup of Standard Oil. The breakup of the Bell System, which took effect on January 1, 1984, constituted a large-scale vertical divestiture. The divestiture assigned the long-distance and equipment manufacturing functions of the Bell System to AT&T. The local exchange services were divided among seven regional operating companies: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell (now called SBC), and U S WEST.

The terms of the MFJ required the RBOCs to provide “equal access” to the local network to all long-distance carriers and subjected the RBOCs to line-of-business restrictions.