[Federal Register Volume 61, Number 146 (Monday, July 29, 1996)]
[Proposed Rules]
[Pages 39397-39424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19135]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Chapter I
[CC Docket No. 96-149, FCC 96-308]
Implementation of the Non-Accounting Safeguards of Sections 271
and 272 of the Communications Act of 1934, as Amended; and Regulatory
Treatment of LEC Provision of Interexchange Services Originating in the
LEC's Local Exchange Area
AGENCY: Federal Communications Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is issuing this Notice of Proposed Rulemaking
seeking comment on proposed regulations to implement, and, where
necessary, to clarify the non-accounting separate affiliate and
nondiscrimination safeguards prescribed by Congress in section 272 of
the Telecommunications Act of 1996. Congress enacted these safeguards
to help prevent Bell Operating Companies (BOCs) from improperly using
their market power in the local telephone market to gain an unfair
advantage over their rivals in the in-region interLATA service markets
and certain other businesses, such as the manufacturing of
telecommunications equipment. These safeguards are intended to
encourage the development of robust competition in all
telecommunications markets. The Commission also seeks comment on
whether to relax the dominant carrier classification that currently
applies to the (BOCs) provision of in-region, interstate, domestic
interLATA services, as well as whether it should modify its existing
rules for regulating independent local exchange carriers' (LECs)
provision of interstate, interexchange services in areas where those
LECs provide local telephone service. The Commission also considers
whether to apply the same regulatory classification to BOC and
independent LEC provision of in-region international service as the
Commission adopts for their provision of in-region, interstate,
domestic, interLATA services and in-region, interstate, domestic,
interexchange services, respectively.
DATES: Comments are due on or before August 15, 1996 and Reply Comments
are due on or before August 30, 1996. Written comments by the public on
the proposed and/or modified information collections are due August 15,
1996. Written comments must be submitted by the Office of Management
and Budget (OMB) on the proposed and/or modified information
collections on or before September 27, 1996.
ADDRESSES: Comments and reply comments should be sent to Office of the
Secretary, Federal Communications Commission, 1919 M Street, NW., Room
222, Washington, DC 20554, with a copy to Janice Myles of the Common
Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC 20554.
Parties should also file one copy of any documents filed in this docket
with the Commission's copy contractor, International Transcription
Services, Inc., 2100 M Street, NW., Suite 140, Washington, DC 20037. In
addition to filing comments with the Secretary, a copy of any comments
on the information collections contained herein should be submitted to
Dorothy Conway, Federal Communications
[[Page 39398]]
Commission, Room 234, 1919 M Street, NW., Washington, DC 20554, or via
the Internet to dconway@fcc.gov, and to Timothy Fain, OMB Desk Officer,
10236 NEOB, 725-17th Street, NW., Washington, DC 20503 or via the
Internet to fain_t@al.eop.gov.
FOR FURTHER INFORMATION CONTACT: Melissa Waksman, Attorney, Common
Carrier Bureau, Policy and Program Planning Division, (202) 418-1580,
or Radhika Karmarkar, Attorney, Common Carrier Bureau, Policy and
Program Planning Division, (202) 418-1580. For additional information
concerning the information collections contained in this NPRM contact
Dorothy Conway at 202-418-0217, or via the Internet at dconway@fcc.gov.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice
of Proposed Rulemaking adopted July 17, 1996 and released July 18, 1996
(FCC 96-308). This NPRM contains proposed or modified information
collections subject to the Paperwork Reduction Act of 1995 (PRA). It
has been submitted to the Office of Management and Budget (OMB) for
review under the PRA. OMB, the general public, and other Federal
agencies are invited to comment on the proposed or modified information
collections contained in this proceeding. The full text of this Notice
of Proposed Rulemaking is available for inspection and copying during
normal business hours in the FCC Reference Center (Room 239), 1919 M
St., NW., Washington, DC. The complete text also may be purchased from
the Commission's copy contractor, International Transcription Service,
Inc., (202) 857-3800, 2100 M St., NW., Suite 140, Washington, DC 20037.
Paperwork Reduction Act
This NPRM contains either a proposed or modified information
collection. The Commission, as part of its continuing effort to reduce
paperwork burdens, invites the general public and the Office of
Management and Budget (OMB) to comment on the information collections
contained in this NPRM, as required by the Paperwork Reduction Act of
1995, Public Law No. 104-13. Public and agency comments are due at the
same time as other comments on this NPRM; OMB notification of action is
due September 27, 1996. Comments should address: (a) Whether the
proposed collection of information is necessary for the proper
performance of the functions of the Commission, including whether the
information shall have practical utility; (b) the accuracy of the
Commission's burden estimates; (c) ways to enhance the quality,
utility, and clarity of the information collected; and (d) ways to
minimize the burden of the collection of information on the
respondents, including the use of automated collection techniques or
other forms of information technology.
OMB Approval Number: None.
Title: Implementation of the Non-Accounting Safeguards of Sections
271 and 272 of the Communications Act of 1934, as amended; and
Regulatory Treatment of LEC Provision of Interexchange Services
Originating in the LEC's Local Exchange Area.
Form No.: N/A.
Type of Review: New collection.
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Number of Estimated time
Information collection respondents per response Total annual
(approx.) (hours) burden (hours)
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Network disclosure.............................................. 5 48 240
Installation and maintenance reporting--timeliness.............. 5 8 40
Installation and maintenance reporting--quality................. 5 1 5
Procurement procedure........................................... 5 2 10
Nondiscriminatory information provision......................... 5 36 180
Third party reporting, compliance monitoring, and other
information collection......................................... 5 16 80
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Total Annual Burden: 555 hours.
Respondents: Bell Operating Companies.
Estimated costs per respondent: $0.
Needs and Uses: The NPRM seeks comment on a number of issues, the
result of which could lead to the imposition of information
collections. The NPRM seeks comment on certain reporting requirements
to implement the non-accounting nondiscrimination requirements of the
1996 Act.
SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING
I. Introduction
1. In February 1996, Congress passed and the President signed the
``Telecommunications Act of 1996.'' This legislation makes sweeping
changes affecting all consumers and telecommunications service
providers. The intent of this legislation is ``to provide for a pro-
competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced
telecommunications and information technologies and services to all
Americans by opening all telecommunications markets to competition.''
Upon enactment, the 1996 Act permitted the Bell Operating Companies
(BOCs) to provide interLATA services that originate outside of their
in-region states. The 1996 Act permits the BOCs to provide in-region
interLATA services upon our finding that they have met the requirements
of new section 271 of the Communications Act. Under section 271, we
must determine, among other things, whether a BOC seeking to provide
in-region interLATA services has complied with the safeguards imposed
by new section 272 of the Communications Act and the rules that we
adopt to implement the provisions of that section.
Under the 1996 Act, a ``local access and transport area'' (LATA) is
``a contiguous geographic area (A) established before the date of
enactment of the [1996 Act] by a [BOC] such that no exchange area
includes points within more than 1 metropolitan statistical area,
consolidated metropolitan statistical area, or State, except as
expressly permitted under the AT&T Consent Decree; or (B) established
or modified by a [BOC] after such date of enactment and approved by the
Commission.'' 47 U.S.C. Sec. 153(25). LATAs were created as part of the
Modification of Final Judgment's (MFJ) ``plan of reorganization'' by
which the BOCs were divested from AT&T. Pursuant to the MFJ, ``all BOC
territory in the continental United States [was] divided into LATAs,
generally centering upon a city or other identifiable community of
interest.'' United States v. Western Elec. Co., 569 F. Supp. 990, 993
(D.D.C. 1983). The purpose of establishing the LATAs was only to
delineate the areas within which the respective BOCs would be permitted
to provide telecommunications services (i.e., intraLATA services); it
was ``not to distinguish the area in which a telephone call [would] be
`local' from
[[Page 39399]]
that in which it [would] become a `toll' or long distance call.'' Id.
at 995. LATAs are comprised of combinations of local exchanges, and are
generally much larger than the traditional local exchange areas and
local calling areas defined by local regulators. While AT&T proposed to
create 161 LATAs to cover the BOCs' territory, there were, at the time
of the plan of reorganization, approximately 7,000 local exchanges
within that territory. Id. at 993 n.9. There are currently 182 BOC
LATAs. Bell Communications Research, Local Exchange Routing Guide,
Sec. 1, at 1-2 (Mar. 1, 1996) (Local Exchange Routing Guide).
3. In this Notice of Proposed Rulemaking (NPRM), we consider rules
to implement, and, where necessary, to clarify the non-accounting
separate affiliate and nondiscrimination safeguards prescribed by
Congress in section 272. That section addresses the BOCs' provision of
interLATA telecommunications services originating in states in which
they provide local exchange and exchange access services, interLATA
information services, and BOC manufacturing activities. The MFJ
prohibited the BOCs from providing information services, providing
interLATA services, or manufacturing and selling telecommunications
equipment or manufacturing customer premises equipment (CPE). This
prohibition was based on the theory that the BOCs could leverage their
market power in the local market to impede competition in the interLATA
services, manufacturing and information services markets. The
information services restriction was modified in 1987 to allow BOCs to
provide voice messaging services and to transmit information services
generated by others. We also seek in this proceeding to determine
whether to relax the dominant carrier classification that currently
applies to the BOCs' provision of in-region, interstate, domestic
interLATA services, and whether to apply the same regulatory
classification to the BOCs' provision of in-region, international
services.
4. This proceeding is one of a series of interrelated rulemakings
that collectively will implement the 1996 Act. Certain of these
proceedings focus on opening markets to entry by new competitors. Other
proceedings will establish fair rules for competition in these markets
that are opened to competitive entry, and yet other proceedings will
focus on lifting outmoded legal and regulatory constraints. We seek in
the instant rulemaking to adopt safeguards to govern the BOCs' entry
into certain new markets. Specifically, this proceeding focuses on the
non-accounting BOC separate affiliate and nondiscrimination safeguards
that Congress adopted in the 1996 Act to foster the development of
robust competition in all telecommunications markets. As discussed more
fully below, these safeguards are intended both to protect subscribers
to BOC monopoly services, such as local telephony, against the
potential risk of having to pay costs incurred by the BOCs to enter
competitive services, such as interLATA services and equipment
manufacturing, and to protect competition in those markets from the
BOCs' ability to use their existing market power in local exchange
services to obtain an anticompetitive advantage in those new markets
the BOCs seek to enter.
5. This proceeding also examines whether the potential risks of
BOCs' using market power in local exchange and exchange access services
to obtain an advantage in the markets for BOC affiliates that provide
in-region, interstate, domestic, interLATA services will be
sufficiently limited such that we can relax the dominant carrier
classification that under our current rules would apply to such
interLATA services provided by a BOC affiliate. We also consider
whether we should modify our existing rules for regulating the
provision of in-region, interstate, interexchange services by an
independent LEC (an exchange telephone company other than a BOC).
Finally, we consider whether to apply the same regulatory treatment to
the BOC affiliates' and independent LECs' provision of in-region,
international services, as we adopt for their provision of in-region,
interstate, domestic, interLATA and in-region, interstate, domestic,
interexchange services, respectively.
6. We use the term ``independent LECs'' to refer to both the
independent LECs and their affiliates. For purposes of this proceeding,
we define an independent LEC's ``in-region services'' as
telecommunications services originating in the independent LEC's local
exchange areas or 800 service, private line service, or their
equivalents that: (1) terminate in the independent LEC's local exchange
areas, and (2) allow the called party to determine the interexchange
carrier, even if the service originates outside the independent LEC's
local exchange areas.
A. Background
The 1996 Act seeks to eliminate artificial legal and regulatory
barriers, as well as economic impediments, to entry into
telecommunications markets. This new scheme permits the BOCs to engage
in the activities from which they were barred by the MFJ if they
satisfy certain statutory conditions that are intended to prevent them
from improperly using their market power in the local exchange market
against their competitors in the interLATA telecommunications services,
interLATA information services, and manufacturing markets, and from
improperly allocating the costs of their new ventures to subscribers to
local exchange access services, and if they have taken sufficient steps
to open their local exchange networks to competition.
8. Enactment of the 1996 Act opens the way for BOCs to provide
interLATA services in states in which they currently provide local
exchange and exchange access services. Their provision of such
interLATA services offers the prospect of increasing competition among
providers of such services. BOCs can offer a widely recognized brand
name that is associated with telecommunications services, the ability
for consumers to purchase local, intraLATA and interLATA
telecommunications services from a single provider (i.e., ``one-stop
shopping''), and other advantages of vertical integration. Similar
benefits could follow from BOC provision of interLATA information
services and BOC manufacturing activities.
9. In lifting or modifying the restrictions on the BOCs, the new
regulatory scheme established by the 1996 Act indicates that BOC entry
into in-region interLATA services raises issues for competition and
consumers, even after a BOC has satisfied the requirements of section
271(d)(3)(A) and (C). BOCs currently provide an overwhelming share of
local exchange and exchange access services in areas where they provide
such services--approximately 99.5 percent of the market as measured by
revenues. If it is regulated under rate-of-return regulation, a price
caps structure with sharing (either for interstate or intrastate
services), a price caps scheme that adjusts the X-factor periodically
based on changes in industry productivity, or if its entitlement to any
revenues is based on costs recorded in regulated books of account, a
BOC may have an incentive to improperly allocate to its regulated core
business costs that would be properly attributable to its competitive
ventures.
10. In addition, a BOC may have an incentive to discriminate in
providing exchange access services and facilities that its affiliate's
rivals need to compete in the interLATA telecommunications and
interLATA information services
[[Page 39400]]
markets. For example, a BOC could seek to grant undue preferences to
its interLATA affiliate in furnishing such services and facilities, in
order to gain a competitive advantage for its interLATA affiliate.
Moreover, to the extent carriers offer both local and interLATA
services as a bundled offering, if a BOC were to discriminate, it could
entrench its position in local markets by making its rivals' offerings
less attractive alternatives for local and access services. With
respect to BOC manufacturing activities, a BOC may have an incentive to
purchase only its own equipment, even if such equipment is more
expensive or of lower quality than that available from other
manufacturers. Although the 1996 Act permits the BOCs to engage in
previously restricted activities, it imposes a mix of structural and
non-structural safeguards that are intended to protect subscribers to
BOC monopoly services and competitors against potential improper cost
allocation and discrimination. Our goal in this proceeding is to
establish non-accounting separate affiliate and nondiscrimination
safeguards to implement Congress's objectives.
11. The emergence of efficient, facilities-based alternatives to
the local exchange and exchange access services offered by the BOCs
will, over time, eliminate the need for safeguards that Congress
prescribed in the 1996 Act and the implementing rules that we will
adopt in this proceeding. We began the movement toward that ultimate
goal when we adopted our NPRM to implement new section 251 of the
Communications Act. Other proceedings, such as our upcoming access
reform rulemaking and the jurisdictional separations reform proceeding,
also will contribute to achieving our goal of fostering efficient
competition in local telecommunications markets. Until we reach that
goal, we seek to minimize the burden on the BOCs of the rules that we
adopt in this proceeding, but at the same time we seek to avoid the
potential exposure of both ratepayers in local markets controlled by
the BOCs and competitors of the new BOC service providers to the
potential risk of improper cost allocations and unlawful
discrimination.
B. Overview of Sections 271 and 272
12. The 1996 Act conditions BOC entry into in-region interLATA
service on compliance with certain provisions of sections 271 and 272.
Section 271 sets forth prerequisites, including a competitive checklist
requiring compliance with certain provisions in sections 251 and 252,
for approval of a BOC's application to provide in-region interLATA
service. Section 271(b)(1) conditions a BOC's ability to provide
interLATA service originating in its region upon receipt of Commission
approval under section 271(d)(3). Section 271(d)(3), in turn, requires
the Commission to make three findings before approving BOC entry.
First, the Commission must find that the interconnection agreements or
statements approved at the state level under section 252 satisfy the
competitive checklist contained in section 271(c)(2)(B). Second, the
Commission must ensure that the structural and nondiscrimination
safeguards mandated in section 272 will be met. Finally, the Commission
must find that BOC entry into the in-region interLATA market is
``consistent with the public interest, convenience, and necessity.'' In
acting on a BOC's application for authority to provide in-region
interLATA services, the Commission must consult with the Attorney
General and give substantial weight to the Attorney General's
evaluation of the BOC's application. In addition, the Commission must
consult with the applicable state commission to verify that the BOC
complies with the requirements in subsection (c).
13. Section 272 establishes separate affiliate requirements that
apply to BOC provision of manufacturing of telecommunications equipment
and CPE, interLATA telecommunications services that originate in-region
(other than certain previously authorized activities and certain
incidental interLATA services), and interLATA information services (in-
region and out-of-region). The statutory separate affiliate
requirements for manufacturing and in-region interLATA
telecommunications services expire three years after a BOC or any BOC
affiliate is authorized to provide in-region interLATA services. The
statutory interLATA information services separate affiliate requirement
expires four years after enactment of the 1996 Act. The statute gives
the Commission the discretion to extend either of these periods by rule
or order. This NPRM concerns the non-accounting separate affiliate and
nondiscrimination requirements of sections 271 and 272.
14. The structural separation requirements of section 272 are
intended to prevent potential improper cost allocations by the BOCs in
two principal ways. First, by requiring the BOCs and their separate
affiliates to use different employees for their respective activities,
section 272 allows the cost of each employee to be assigned directly to
the appropriate entity thereby reducing the joint and common costs that
require allocation between the telephone operating companies and the
affiliates engaged in competitive businesses. Second, by requiring a
BOC to maintain appropriate records documenting transactions between
the BOC and its affiliate, section 272 discourages the improper
allocation of costs between the two entities by making detection of
such practices easier.
15. The structural separation requirements of section 272, in
conjunction with the affirmative nondiscrimination obligations imposed
by that section, are intended to address concerns that the BOCs could
potentially use local exchange and exchange access facilities to
discriminate unlawfully against competitors in order to gain a
competitive advantage for their affiliates that engage in competitive
activities. These safeguards seek to prevent a BOC from discriminating
in favor of its affiliates by, for example: 1) providing exchange
access services to its interLATA service affiliate at a lower rate than
the rate offered to competing interLATA service providers; 2) providing
a higher quality service to its interLATA service affiliate than the
service it provides to competing interLATA service providers at the
same price; 3) purchasing products needed for its local exchange
network that are manufactured by its affiliate even when the
affiliate's competitors offer the same or higher quality product at a
lower price, or a higher quality product at the same price charged by
the affiliate; or 4) providing advance information about network
changes to its competitive affiliates.
16. If a BOC charges its competitors prices for inputs that are
higher than the prices charged, or effectively charged, to the BOC's
affiliate, then the BOC can create a ``price squeeze.'' In that
circumstance, the BOC affiliate could lower its retail price to reflect
its unfair cost advantage, and competing providers would be forced
either to match the price reduction and absorb profit margin reductions
or maintain their retail prices at existing levels and accept
reductions in their market shares. If the price squeeze was severe
enough and continued long enough, the BOC affiliate's market share
could become so large, and the competitors so weakened, that the
affiliate could unilaterally raise and sustain a price above
competitive levels by restricting its output. Alternatively, the BOC
affiliate could simply match its competitors' prices and extract
supracompetitive profits.
[[Page 39401]]
Unlawful discriminatory preferences in the quality of the service or
preferential dissemination of information provided by BOCs to their
affiliates, as a practical matter, can have the same effect as charging
unlawfully discriminatory prices. If a BOC charged the same rate to its
affiliate for a higher quality access service than the BOC charged to
non-affiliates for a lower quality service, or disclosed information
concerning future changes in network architecture to its manufacturing
affiliate before the BOC disclosed it to others, the BOC could
effectively create the same ``price squeeze'' discussed above.
C. Classification of Carriers as Dominant or Non-Dominant
17. Between 1979 and 1985, the Commission conducted the Competitive
Carrier proceeding, in which it examined how its regulations should be
adapted to reflect and promote increasing competition in
telecommunications markets. In a series of orders, the Commission
distinguished two kinds of carriers--those with market power (dominant
carriers) and those without market power (non-dominant carriers). In
the Competitive Carrier Fourth Report and Order (48 FR 52452 (November
18, 1983)), the Commission defined market power alternatively as ``the
ability to raise prices by restricting output'' and as ``the ability to
raise and maintain price above the competitive level without driving
away so many customers as to make the increase unprofitable.'' The
Commission recognized that, in order to assess whether a carrier
possesses market power, one must first define the relevant product and
geographic markets. Throughout the Competitive Carrier proceeding, the
Commission relaxed its tariff filing and facilities authorization
requirements for non-dominant carriers and focused its regulatory
efforts on constraining the ability of dominant carriers to exercise
market power.
18. This proceeding considers whether we should relax the dominant
carrier regulation that under our current rules would apply to in-
region, interstate, domestic, interLATA services provided by the BOCs'
interLATA affiliates. As a preliminary matter, we note that there are
two ways in which a carrier can profitably raise and sustain prices
above competitive levels and thereby exercise market power. First, a
carrier may be able to raise and sustain prices by restricting its own
output (which usually requires a large market share); second, a carrier
may be able to raise and sustain prices by increasing its rivals' costs
or by restricting its rivals' output through the carrier's control of
an essential input, such as access to bottleneck facilities, that its
rivals need to offer their services. We seek comment on whether the BOC
affiliates should be classified as dominant carriers under our rules
only if we find that they have the ability profitably to raise and
sustain prices of in-region, interstate, domestic, interLATA services
significantly above competitive levels by restricting their own output,
or whether the affiliates should be classified as dominant if the BOCs
have the ability to raise and sustain prices of such interLATA services
significantly above competitive levels by raising the costs of their
affiliates' interLATA rivals.
19. We then seek comment, with respect to both types of market
power, on whether the BOC affiliates should be classified as dominant
or non-dominant. In considering whether a BOC affiliate could raise its
prices by restricting its own output, we seek comment on whether, in
light of the requirements established by, and pursuant to, sections 271
and 272, together with other existing Commission rules, the BOCs will
be able to use, or leverage, their market power in the local exchange
and exchange access markets to such an extent that their interLATA
affiliates could profitably raise and sustain prices of in-region,
interstate, domestic, interLATA services significantly above
competitive levels by restricting their own output. In considering
whether a BOC affiliate could cause increases in prices for in-region,
interstate, domestic, interLATA services by raising the costs of its
affiliate's interLATA rivals, we seek comment whether the statutory and
regulatory safeguards will prevent a BOC from engaging in unlawful
discrimination or other anticompetitive conduct that will raise its
affiliate's rivals' costs. We also seek comment on whether regulating
BOC in-region interLATA affiliates as dominant would help to prevent
improper allocations of costs or discrimination by the BOCs in favor of
their interLATA affiliates, or would at least mitigate the effects of
such activities. We also consider whether we should modify our existing
rules for regulating independent LECs' provision of in-region,
interstate, interexchange services.
20. In our recent order addressing BOC provision of interLATA
services originating out-of-region, we considered whether, on an
interim basis, BOC provision of out-of-region services should remain
subject to dominant carrier regulation. Interim BOC Out-of-Region Order
(61 FR 35964 (July 9, 1996)) at para. 2. We found, inter alia, that, on
an interim basis, if a BOC provides out-of-region domestic, interstate,
interexchange services offered through an affiliate that satisfies the
separation requirements imposed on independent LECs in the Competitive
Carrier Fifth Report and Order (49 FR 34824 (September 4, 1984)), we
would remove dominant carrier regulation for such services. Id. In the
Interexchange NPRM (61 FR 14717 (April 3, 1996)), we asked whether we
should modify or eliminate the separation requirements imposed as a
condition for non-dominant treatment of independent LEC provision of
interstate, interexchange services originating outside their local
exchange areas. Interexchange NPRM at para. 61. We also sought comment
on whether, if we modify or eliminate these separation requirements for
independent LECs, we should apply the same requirements to BOC
provision of out-of-region interstate, interexchange services. Id.
21. Finally, we consider whether to apply the same regulatory
classification to the BOC affiliates' and independent LECs' provision
of in-region, international services as we adopt for their provision of
in-region, interstate, domestic, interLATA services and in-region,
interstate, domestic, interexchange services, respectively. In doing
so, we emphasize that there is more than one basis for finding a United
States (U.S.) carrier dominant in the provision of international
services. The issue we address in this NPRM is whether a BOC affiliate
or independent LEC should be regulated as dominant in the provision of
in-region, international services because of the BOC or independent
LEC's current retention of bottleneck facilities on the U.S. end of an
international link. The separate issue of whether a BOC, an independent
LEC, or any other U.S. carrier should be regulated as dominant in the
provision of international services because of the market power of an
affiliated foreign carrier in a foreign destination market was
addressed by the Commission last year in the Foreign Carrier Entry
Order (61 FR 4937 (February 9, 1996)). That decision adopted a separate
framework for regulating U.S. international carriers (including BOCs or
independent LECs ultimately authorized to provide in-region
international services) as dominant on routes where an affiliated
foreign carrier has the ability to discriminate in favor of its U.S.
affiliate through control of bottleneck services or facilities in the
foreign destination market. No carriers are exempt from this policy to
the extent they have foreign affiliations.
II. Scope of the Commission's Authority
22. As a preliminary matter, we address the scope of the
Commission's
[[Page 39402]]
authority to adopt rules implementing the non-accounting provisions of
sections 271 and 272 of the Communications Act, as amended. In the
following subsections, we address the scope of the Commission's
authority over interLATA services and interLATA information services
and its authority over manufacturing activities.
A. InterLATA Services and InterLATA Information Services
23. Sections 271 and 272 by their terms address BOC provision of
``interLATA'' services and ``interLATA'' information services. Many
states contain more than one LATA, and thus, interLATA traffic may be
either interstate or intrastate. Accordingly, we must determine whether
sections 271 and 272, and our authority pursuant to those sections,
apply only to interstate interLATA services and interstate interLATA
information services, or to interstate and intrastate interLATA
services and interstate and intrastate interLATA information services.
24. The MFJ, when it was in effect, governed BOC provision of both
interstate and intrastate services. The 1996 Act provides:
Any conduct or activity that was, before the date of enactment
of this Act, subject to any restriction or obligation imposed by the
[MFJ] shall, on and after such date, be subject to the restrictions
and obligations imposed by the Communications Act of 1934 as amended
by this Act and shall not be subject to the restrictions and the
obligations imposed by [the MFJ].
This section supersedes the MFJ, and explains that the
Communications Act is to serve as its replacement. As set forth below,
we believe that section 271 and 272 of the Act were intended to replace
the MFJ as to both interstate and intrastate interLATA services and
interLATA information services. Thus, we propose that our rules
implementing these sections apply to both interstate and intrastate
services. We seek comment on this tentative conclusion, on our
analysis, and on any alternative views that commenters may propose.
25. Sections 271 and 272 make no explicit reference to interstate
and intrastate services, but they do make reference to a different
geographic boundary--the LATA, as originally defined by the MFJ and now
by the 1996 Act. The interLATA/intraLATA distinction appears to some
extent to have supplanted the traditional interstate/intrastate
distinction for purposes of these sections.
26. As to interLATA services, the MFJ prohibited the BOCs and their
affiliates from providing any interLATA services, interstate or
intrastate, unless specifically authorized by the MFJ or a waiver
thereunder. Reading sections 271 and 272 as applying to all interLATA
services fits well with the structure of the statute as a whole.
Sections 251 and 252 of the Act establish rules and procedures for
competitive entry into local exchange markets. In the Interconnection
NPRM (61 FR 18311 (April 25, 1996)), we tentatively concluded that
Congress intended these sections to apply to both interstate and
intrastate aspects of interconnection. These new obligations imposed on
BOCs (as well as other LECs), enacted at the same time as sections 271
and 272, clearly are part of the process for entry into the interLATA
marketplace. Indeed, BOCs are permitted to provide in-region interLATA
services only after they have met the requirements of section 271,
including a competitive checklist requiring compliance with certain
provisions in sections 251 and 252.
27. We note also that the structure of sections 271 and 272
themselves indicates that these sections were intended to address both
interstate and intrastate services. For instance, BOCs are directed to
apply for interLATA entry on a state-by-state basis, and the Commission
is directed to consult with the relevant State Commission before making
any determination with respect to an application in order to verify the
BOC's compliance with the requirements for providing in-region
interLATA services. As we believe it did in sections 251 and 252,
Congress appears to have put in place rules to govern both interstate
and intrastate services, and provided a role for both the Commission
and the states in implementing those rules.
28. By contrast, reading sections 271 and 272 as limited to the
provision of interstate services would mean that the BOCs would have
been permitted to provide in-region, intrastate, interLATA services
upon enactment and without any guidance from Congress as to entry
requirements or safeguards, subject only to any pre-existing state
rules on interexchange entry. Any such rules, presumably, would not
have been directed at BOC entry, which had for many years been
prohibited. Concerns about BOC control of bottleneck facilities over
the provision of in-region interLATA services are equally important for
both interstate and intrastate services. Thus, the reasons for imposing
the procedures and safeguards of sections 271 and 272 apply equally to
the BOCs' provision of both intrastate and interstate, in-region,
interLATA services. We find it implausible that Congress could have
intended to lift the MFJ's ban on BOC provision of interLATA services
without making any provision for orderly entry into intrastate
interLATA services, which constitute approximately 30 percent of
interLATA traffic. Based on the preceding analysis, we tentatively
conclude that our authority under sections 271 and 272 applies to
intrastate and interstate interLATA services and intrastate and
interstate interLATA information services provided by the BOCs or their
affiliates.
29. We believe that section 2(b) of the Communications Act does not
require a contrary result. Section 2(b) provides that, except as
provided in certain enumerated sections not including sections 271 and
272, ``nothing in [the Communications Act] shall be construed to apply
or to give the Commission jurisdiction with respect to * * * charges,
classifications, practices, services, facilities, or regulations for or
in connection with intrastate communications service by wire or radio
of any carrier * * *.'' In enacting sections 271 and 272 after section
2(b) and squarely addressing therein the issues before us, we
tentatively conclude that Congress intended for sections 271 and 272 to
take precedence over any contrary implications based on section 2(b).
We note also, that in enacting the 1996 Act, there are instances where
Congress indisputably gave the Commission intrastate jurisdiction
without amending section 2(b). Thus, we believe that the lack of an
explicit exception in section 2(b) should in this instance create less
of a presumption that the Commission's jurisdiction under sections 271
and 272 is limited to interstate services than would ordinarily be the
case.
30. We seek comment on the jurisdictional analysis set forth above.
In particular, we ask that parties disagreeing with this analysis set
forth their own alternative analysis of how sections 271 and 272 apply
to interstate and intrastate interLATA services and interLATA
information services.
31. To the extent that commenters disagree with the analysis set
forth above, we also seek comment on the extent to which the Commission
may have authority to preempt state regulation with respect to some or
all of the non-accounting matters addressed by sections 271 and 272.
The Commission has authority to preempt state regulation of intrastate
communications services where such state regulation would thwart or
impede the Commission's exercise of its lawful authority over
interstate communications services, such as when it is not ``possible
to separate the
[[Page 39403]]
interstate and intrastate portions of the asserted FCC regulation.''
Thus, we seek specific comment on (1) the extent to which it may not be
possible to separate the interstate and intrastate portions of the
regulations we propose here to implement sections 271 and 272, and (2)
the extent to which state regulation inconsistent with our regulations
may thwart or impede the Commission's exercise of lawful authority over
interstate interLATA services. We seek comment, for example, on
potentially inconsistent state regulations regarding: (1) a BOC
affiliate's ability to use, co-use, or co-own facilities with the BOC;
(2) a BOC affiliate's ability to share personnel with the BOC; and (3)
a BOC's ability to discriminate in favor of its affiliate.
32. We note that when the Commission adopted rules to govern the
BOCs' provision of enhanced services rules prior to the enactment of
the 1996 Act, it preempted certain inconsistent state structural
separation requirements dealing with the intrastate portion of
jurisdictionally mixed enhanced services. The U.S. Court of Appeals for
the Ninth Circuit upheld this exercise of our preemption authority,
agreeing that the state separation requirements would essentially
negate the Commission's goal of allowing BOC provision of interstate
enhanced services on a non-separated basis. Along the same lines, it is
conceivable that a state may try to impose separate affiliate or
nondiscrimination requirements on the intrastate portion of
jurisdictionally mixed services that are inconsistent with the
requirements in section
33. We believe that California III may provide support for
Commission preemption of such inconsistent state regulations, to the
extent that the regulations would thwart or impede the Commission's
exercise of its authority over interstate interLATA services or
interstate interLATA information services pursuant to sections 271 and
272. We seek comment on this analysis. We also seek comment on whether
state regulation of intrastate services that is less stringent than the
Commission's regulation of interstate services could thwart or impede
the Commission's exercise of its authority over interstate, interLATA,
information services.
B. Manufacturing Activities
34. To the extent that sections 271 and 272 address BOC
manufacturing activities, we believe that the same statutory analysis
set forth above would apply. We see no basis for distinguishing among
the various subsections of sections 271 and 272. Even apart from that
analysis, however, we believe that the provisions concerning
manufacturing clearly apply to all manufacturing activities. Section
2(b) of the Communications Act limits the Commission's authority over
``charges, classifications, practices, services, facilities, or
regulation for or in connection with intrastate communications
service.'' We believe that the manufacturing activities addressed by
sections 271 and 272, however, are not within the scope of section
2(b). Alternatively, if section 2(b) applies with respect to BOC
manufacturing, we believe that such manufacturing activities plainly
cannot be segregated into interstate and intrastate portions. Thus, any
state regulation inconsistent with sections 271 and 272 or our
implementing regulations would necessarily thwart and impede federal
policies, and should be preempted. We tentatively conclude, therefore,
that our authority under section 272 extends to all BOC manufacturing
of telecommunications equipment and CPE. We seek comment on this
tentative conclusion.
III. Activities Subject to Section 272 Requirements
35. Section 272 provides that a BOC (including any affiliate) that
is a LEC subject to the requirements of section 251(c) may provide
certain services only through a separate affiliate. Under section 272,
BOCs (or BOC affiliates) may engage in the following activities only
through one or more affiliates that are separate from the incumbent LEC
entity: (A) manufacturing activities; (B) interLATA telecommunications
services that originate in-region; and (C) interLATA information
services. We discuss each of these activities separately below and seek
comment where necessary about which activities are subject to the
section 272 separate affiliate requirements. Section 272(a)(2)(B)
exempts from the separate affiliate requirement for interLATA
telecommunications services certain incidental interLATA services (as
described in sections 271(g)(1), (2), (3), (5), and (6)), out-of-region
services (as described in section 271(b)(2)), and previously authorized
activities (as described in section 271(f)). Although they are
information services, electronic publishing (as defined in section
274(h)) and alarm monitoring services (as defined in section 275(e))
are exempted from the section 272 separate affiliate requirements, and
are subject to their own specific statutory separate affiliate and/or
nondiscrimination requirements.
36. We tentatively conclude that the separate affiliate and
nondiscrimination safeguards adopted in this proceeding pursuant to
section 272 will apply to a BOC's provision of both domestic and
international interLATA telecommunications services that originate in a
BOC's in-region states. The 1996 Act defines ``interLATA services'' as
``telecommunications between a point located in a local access and
transport area and a point located outside such area.'' Because this
definition does not distinguish between domestic and international
calls, we tentatively conclude that Congress intended to apply the same
safeguards to BOC provision of domestic and international interLATA
services that originate in-region. Similarly, in the provisions
concerning interLATA information services, Congress has not
distinguished between domestic and international provision of these
services. The 1996 Act does not specify a definition for ``interLATA
information services.'' Consequently, we tentatively conclude that the
safeguards adopted in this proceeding will apply to BOC provision of
both domestic and international interLATA information services. We seek
comment on these tentative conclusions.
37. As a threshold matter, we note that section 272(a)(1) requires
a BOC to provide services subject to the section 272 separate affiliate
requirements through ``one or more affiliates.'' Based on this
statutory language, we tentatively conclude that a BOC may, if it
chooses, conduct all, or some combination, of its manufacturing
activities, interLATA telecommunications services, and interLATA
information services in a single separate affiliate, as long as all the
requirements imposed pursuant to the statute and our regulations are
otherwise met. We seek comment on this tentative conclusion. If a BOC
places its local exchange operations in a separate affiliate, pursuant
to section 272(a)(1), the local exchange affiliate must be separate
from the BOC affiliate or affiliates engaged in covered competitive
activities.
38. Section 272(h) provides that ``[w]ith respect to any activity
in which a Bell operating company is engaged on the date of enactment
of the Telecommunications Act of 1996, such company shall have one year
from such date of enactment to comply with the requirements of this
section.'' Section 271(f) states ``[n]either [section 271(a)] nor
section 273 shall prohibit a [BOC] from engaging, at any time after the
date of enactment of the [1996 Act], in any activity to the extent
authorized by, and subject to the terms and conditions contained in''
an order of the MFJ Court. As further discussed below, section
[[Page 39404]]
272(h) appears to cover activities included in the definition of
``previously authorized activities'' described in section 271(f). We
therefore seek comment on whether, subject to the exceptions discussed
below, section 272(h) applies to the activities listed in section
272(a)(2)(A)-(C) that the BOCs were providing on the date the 1996 Act
was passed. Parties contending that section 271(f) bars the Commission
from applying section 272(h) to such activities should explain their
interpretation of the requirements of section 272(h).
A. Manufacturing
39. Section 273(a) allows a BOC to manufacture and provide
telecommunications equipment, and to manufacture CPE, if the Commission
has authorized that BOC or any BOC affiliate to provide in-region
interLATA services under section 271(d). BOCs may only engage in
manufacturing activities through a separate affiliate that meets the
requirements of section 272. Section 273 sets out certain additional
safeguards and nondiscrimination requirements applicable to BOC entry
into manufacturing activities, including separate affiliate
requirements applicable to entities that certify either
telecommunications equipment or CPE manufactured by unaffiliated
entities. As noted above, in this NPRM we address the non-accounting
separate affiliate and nondiscrimination requirements of sections 271
and 272; we will address the additional safeguards established in
section 273 in a separate proceeding.
B. InterLATA Telecommunications Services
40. Section 271 addresses the entry of the BOCs into the provision
of three categories of interLATA telecommunications services: services
that originate in-region, services that originate out-of-region, and
incidental interLATA services. Section 272, in turn, requires a BOC to
establish a separate affiliate for:
(B) Origination of interLATA telecommunications services, other
than-
(i) incidental interLATA services described in paragraphs (1),
(2), (3), (5), and (6) of section 271(g);
(ii) out-of-region services described in section 271(b)(2); or
(iii) previously authorized activities described in section 271(f).
Id. Sec. 272(a)(2)(B).
The 1996 Act defines ``telecommunications'' as ``the transmission,
between or among points specified by the user of information of the
user's choosing without change in the form or content of the
information as sent and received.'' ``Telecommunications service'' is
defined as ``the offering of telecommunications for a fee directly to
the public or to such classes of users as to be effectively available
directly to the public regardless of facilities used.''
41. Section 271(g) provides:
For purposes of this section, the term ``incidental interLATA
services'' means the interLATA provision by a Bell operating company
or its affiliate--
(1)(A) of audio programming, video programming, or other
programming services to subscribers to such services of such company
or affiliate;
(B) of the capability for interaction by such subscribers to
select or respond to such audio programming, video programming, or
other programming services;
(C) to distributors of audio programming or video programming
that such company or affiliate owns or controls, or is licensed by
the copyright owner of such programming (or by an assignee of such
owner) to distribute; or
(D) of alarm monitoring services;
(2) of two-way interactive video services or Internet services
over dedicated facilities to or for elementary and secondary schools
as defined in section 254(h)(5);
(3) of commercial mobile services in accordance with section
332(c) of this Act and with the regulations prescribed by the
Commission pursuant to paragraph (8) of such section;
(4) of a service that permits a customer that is located in one
LATA to retrieve stored information from, or file information for
storage in, information storage facilities of such company that are
located in another LATA;
(5) of signaling information used in connection with the
provision of telephone exchange services or exchange access by a
local exchange carrier; or
(6) of network control signaling information to, and receipt of
such signaling information from, common carriers offering interLATA
services at any location within the area in which such Bell
operating company provides telephone exchange services or exchange
access.
42. Under the 1996 Act, BOC provision of ``incidental interLATA
services'' is treated differently than BOC provision of other in-region
interLATA telecommunications services in two respects. First, section
271(b)(3) specifies that a BOC, or any BOC affiliate, may provide
incidental interLATA services originating in any state immediately
after the date of enactment of the 1996 Act, while section 271(b)(1)
conditions BOC provision of other in-region interLATA services upon
prior approval by the Commission. Second, section 272(a)(2)(B)(i)
exempts from the section 272 separate affiliate requirement all of the
incidental interLATA telecommunications services listed in subsection
271(g), except a BOC's provision of a service ``that permits a customer
that is located in one LATA to retrieve stored information from, or
file information for storage in, information storage facilities of such
company that are located in another LATA.'' Section 271(h) requires
that the Commission ensure that the provision of incidental services by
a BOC or its affiliate ``will not adversely affect telephone exchange
service ratepayers or competition in any telecommunications market,''
and states that the provisions of section 271(g) ``are intended to be
narrowly construed.'' We seek comment on what, if any, non-accounting
structural or nonstructural safeguards the Commission should establish
to implement the requirements of section 271(h). We seek comment
regarding the interplay between section 271(h) and section 254(k),
which prohibits telecommunications carriers from ``us[ing] services
that are not competitive to subsidize services that are subject to
competition.'' Parties proposing that the Commission adopt specific
safeguards to implement section 271(h) should explain how these
safeguards would be consistent with section 272(a)(2)(B)(i), which
exempts incidental interLATA services from the section 272 separate
affiliate requirements.
43. Section 272(a)(2)(B)(iii) exempts from ``origination of
interLATA telecommunications services'' for which a separate affiliate
is required ``previously authorized activities described in section
271(f).'' We seek comment on whether, in light of section 272(h),
Congress intended section 272(a)(2)(B)(iii) to grant a permanent
exemption for previously authorized activities from the separate
affiliate requirements of section 272.
44. We note that section 272(a)(2)(B)(iii) refers to ``previously
authorized activities'' as defined in section 271(f), which includes
manufacturing activities and interLATA information services. We also
note that section 272(a)(2)(A) and (C) expressly require the BOCs to
engage in manufacturing activities and the provision of interLATA
information services in accordance with section 272. Therefore, we seek
comment on whether sections 272(a)(2)(A) and (C), in combination with
section 272(h), require that BOCs come into compliance with section
272, within one year of the date of passage of the 1996 Act, with
respect to any manufacturing activities or interLATA information
services in which they were engaged on the date of passage. We seek
comment, in particular, on whether Congress
[[Page 39405]]
intended to treat previously authorized manufacturing and interLATA
information services differently from previously authorized interLATA
telecommunications services.
45. Subject to the exceptions discussed in the preceding
paragraphs, section 272 safeguards apply to interLATA
telecommunications services which originate within a BOC's region.
Section 271(i)(1) defines an in-region state as ``a State in which a
Bell operating company or any of its affiliates was authorized to
provide wireline telephone exchange service pursuant to the
reorganization plan approved under the AT&T Consent Decree, as in
effect on the day before the date of enactment of the
Telecommunications Act of 1996.'' Section 153(4)(B) indicates that the
definition of a BOC includes ``any successor or assign of any such
company that provides wireline telephone exchange service.'' We note
that two pairs of BOCs have proposed to merge their operations (through
both mergers and acquisitions). If these or other mergers among the
BOCs are completed, we believe, pursuant to section 153(4)(B), that the
in-region states of the merged entity shall include all of the in-
region states of each of the BOCs involved in the merger. We seek
comment on this interpretation. We are concerned, however, that our
existing and proposed safeguards may not be sufficient to address
potential concerns about the practices of proposed merger partners
during the pendency of the merger. Specifically, a BOC could
potentially discriminate, during this period, in favor of the interLATA
affiliate of the BOC's future merger partner that is offering service
in the BOC's in-region area. Therefore, we seek comment on what effect,
if any, the entry into a merger agreement by two or more of the BOCs
has upon the application of the section 271 and 272 non-accounting
separate affiliate and nondiscrimination requirements to the BOCs that
are parties to the agreement, and what, if any, additional safeguards
are required to ensure that these BOCs do not provide the affiliates of
their merger partners with an unfair competitive advantage during the
pendency of their merger agreement. We note also the possibility that
the BOCs may enter into joint ventures for the provision of interLATA
services. We seek comment regarding what effect, if any, joint venture
arrangements involving two or more of the BOCs have upon the
application of the section 271 and 272 requirements to those BOCs.
C. InterLATA Information Services
46. The MFJ originally barred the BOCs from providing information
services. This restriction was subsequently narrowed, and then
eliminated entirely in 1991. As a consequence, the BOCs were providing
information services at the time the 1996 Act became law. We note that,
although the 1996 Act distinguishes between in-region interLATA
telecommunications services and out-of-region interLATA
telecommunications services, no such distinction is made with respect
to interLATA information services. The 1996 Act defines ``interLATA
service'' as referring to telecommunications service. Thus, where the
1996 Act draws distinctions between in-region and out-of-region
``interLATA services,'' as it does in section 271(b), these
distinctions do not apply to information services. Specifically,
section 272(a)(2)(B) excepts out-of-region interLATA telecommunications
services described in section 271(b)(2) from the section 272 separate
affiliate requirements. By contrast, section 272(a)(2)(C) states that a
separate affiliate is required to provide ``[i]nterLATA information
services, other than electronic publishing (as defined in section
274(h)) and alarm monitoring services (as defined in section 275(e)).''
Based on the statutory language, we tentatively conclude that the BOCs
must provide interLATA information services through a separate
affiliate, regardless of whether these services are provided in-region
or out-of-region. We seek comment on this tentative conclusion.
1. Definition of ``Information Services''
47. The 1996 Act defines ``information service'' as ``the offering
of a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing, or making available information via
telecommunications, and includes electronic publishing, but does not
include any use of any such capability for the management, control, or
operation of a telecommunications system or the management of a
telecommunications service.'' We seek comment on what services are
included in the statutory definition of information services. In this
regard, we note that in the Computer III proceeding, the Commission
established rules for BOC provision of ``enhanced services,'' pursuant
to which the BOCs were permitted to provide certain enhanced services
prior to the passage of the 1996 Act.
48. The Commission's existing regulatory framework distinguishes
between ``basic'' services and ``enhanced'' services. Basic services
are common carrier transmission services, and are subject to Title II
regulation. Enhanced services, which combine common carrier services
with non-common carrier services, are not subject to Title II
regulation. Under the Commission's rules, the term ``enhanced
services'' refers to ``services, offered over common carrier
transmission facilities used in interstate communications, which employ
computer processing applications that act on the format, content, code,
protocol or similar aspects of the subscriber's transmitted
information; provide the subscriber additional, different, or
restructured information; or involve subscriber interaction with stored
information.''
49. We seek comment on whether all activities that the Commission
classifies as ``enhanced services'' fall within the statutory
definition of ``information service.'' Prior to passage of the 1996
Act, neither the Commission nor the MFJ court resolved the question of
whether enhanced services were equivalent to information services under
the MFJ. We note that the Joint Explanatory Statement states that the
definition of ``information services'' used in the 1996 Act was based
on the definition used in the MFJ. If parties contend that
``information services'' differ from ``enhanced services'' in any
regard, they should identify the distinctions that should be drawn
between the two categories, describe any overlap between the two
categories, and delineate the particular services that would come
within one category and not the other.
2. InterLATA Nature of Information Services
50. Section 272(a)(2)(C) requires that a BOC provide interLATA
information services only through a separate affiliate. In contrast,
the 1996 Act does not establish any separate affiliate requirement for
the provision of intraLATA information services. Under the Commission's
existing regulatory scheme, enhanced services have not been regulated
under Title II. Thus, the Commission previously has not made a
regulatory distinction between intraLATA and interLATA information
services, as the 1996 Act now does.
51. In order to determine which activities are subject to the
separate affiliate requirement, we invite parties to comment on how we
should distinguish between an interLATA information service and an
intraLATA information service. In general, BOC provision of information
services
[[Page 39406]]
involves both basic underlying transmission components, which transmit
end-user information without change in the form or content of the
information, and enhanced or information service functionality, which
generates, acquires, stores, transforms, processes, retrieves, utilizes
or makes available end-user information. We seek comment regarding
whether an information service (such as voicemail) should be considered
an interLATA service only when the service actually involves an
interLATA telecommunications transmission component. In the
alternative, should we classify as an interLATA information service any
information service that potentially involves an interLATA
telecommunications transmission component (e.g., the service can be
accessed across LATA boundaries)? We ask parties to comment with
specificity upon the types of services that should be classified as
interLATA or intraLATA information services.
52. We further request comment regarding whether and how the manner
in which a BOC structures its provision of an information service
affects whether the service is classified as interLATA, and thus
subject to the separate affiliate and nondiscrimination requirements of
the Communications Act. For example, if the non-transmission computer
facilities that a BOC uses to provide an information service are
located in a different LATA from the end-user, should that service be
classified as an interLATA information service? Alternatively, must an
interLATA information service incorporate non-transmission components
or functionalities that are located in different LATAs?
53. We seek comment on the relevance of what BOCs have done in the
past in determining now what activities may only be offered through a
separate affiliate. We note that, prior to the 1996 Act, some BOCs
received MFJ waivers in order to employ transmission services that
crossed LATA boundaries for the provision of certain enhanced services.
We seek comment regarding whether the fact that a BOC in the past
applied for or received an MFJ waiver for the provision of a particular
enhanced service presumptively renders that service an interLATA
information service subject to the separate affiliate requirements of
section 272.
54. All of the BOCs currently are providing enhanced services in
some or all of their in-region states, pursuant to comparably efficient
interconnection (CEI) plans approved by the Commission's Common Carrier
Bureau. Because the MFJ barred BOC provision of interLATA services, we
seek comment regarding whether, when a BOC has not applied for or
received an MFJ waiver to provide a particular enhanced service, but
instead is providing that enhanced service pursuant to a CEI plan
approved prior to the enactment of the 1996 Act, we should presume that
enhanced service to be an intraLATA information service that is not
subject to the separate affiliate requirements of section 272. To the
extent that existing services offered pursuant to approved CEI plans
are not subject to section 272, we seek comment regarding whether
passage of the 1996 Act directly or indirectly affects how we should
treat such services.
3. Impact of the 1996 Act on Existing Commission Requirements for
Information Services
55. Because the 1996 Act does not establish regulatory requirements
for BOC provision of intraLATA information services, we conclude that,
with respect to these services, our existing Computer II, Computer III,
and ONA requirements remain in place to the extent that they are
consistent with the 1996 Act. The Commission developed those
requirements to address the same concerns that Congress sought to
address through the establishment of separate affiliate and
nondiscrimination requirements in sections 271 and 272. We note that
the combination of our Computer II, Computer III, and ONA proceedings
established various unbundling and interconnection requirements for BOC
provision of enhanced services. Under Computer II, the BOCs and other
facilities-based carriers must unbundle their basic services from their
enhanced services. Under Computer III and ONA, the BOCs must further
unbundle the manner in which they provide basic services and make these
unbundled basic services available to competing ESPs. Under our rules,
these interconnection and unbundling requirements associated with the
provision of enhanced services continue to apply to the BOCs regardless
of whether they provide enhanced services on an integrated or a
separated basis.
56. We conclude that we should continue to enforce those existing
Computer II, Computer III, and ONA requirements that are consistent
with the 1996 Act, and we ask commenters to specify whether, and to
what extent, the existing requirements are inconsistent with the 1996
Act. If parties contend that the statute supersedes our Computer II,
Computer III, and ONA unbundling and interconnection requirements for
BOC provision of intraLATA information services, they should identify
the specific provisions of section 271 and 272 that they believe
supersede our requirements, as well as the specific unbundling and
interconnection requirements they believe these provisions impose upon
the BOCs.
57. We recognize that some of the anticompetitive concerns we
sought to address through the establishment of the Computer II,
Computer III, and ONA requirements may now be addressed by new
statutory provisions or by the anticipated competition that
implementation of the statute should foster. We consequently seek
comment on which, if any, of our Computer II, Computer III, and ONA
rules may have been rendered unnecessary by the 1996 Act. Parties
should also address the possible impact of the statutory requirements
on our pending Computer III Further Remand Proceedings.
D. Overlap Between InterLATA Information Services and Services Subject
to Other Statutory Requirements
58. Under the 1996 Act, electronic publishing is specifically
included within the category of information services. InterLATA
provision of electronic publishing, however, is specifically exempted
from the separate affiliate requirements of section 272. Instead,
section 274 establishes specific separate affiliate and
nondiscrimination requirements which apply to the provision of
electronic publishing services by the BOCs.
59. The 1996 Act defines ``electronic publishing'' to mean:
the dissemination, provision, publication, or sale to an
unaffiliated entity or person, of any one or more of the following:
news (including sports); entertainment (other than interactive
games); business, financial, legal, consumer, or credit materials;
editorials, columns, or features; advertising; photos or images;
archival or research material; legal notices or public records;
scientific, educational, instructional, technical, professional,
trade, or other literary materials; or other like or similar
information.
The 1996 Act lists specific services that do not fall within the
definition of electronic publishing. These excepted services include,
among other things: common carrier provision of telecommunications
service, information access service, information gateway service, voice
storage and retrieval, electronic mail, certain data and transaction
processing services, electronic billing or advertising of a BOC's
regulated telecommunications services, language translation or data
format conversion, ``white pages''
[[Page 39407]]
directory assistance, caller identification services, repair and
provisioning databases, credit card and billing validation for
telephone company operations, 911-E and other emergency assistance
databases, video programming and full motion video entertainment on
demand.
60. We will examine the meaning of the phrase ``electronic
publishing'' in greater depth in a separate proceeding on the section
274 separate affiliate and nondiscrimination requirements. For the
purposes of this proceeding, we seek comment in order to distinguish
information services that are subject to the section 272 requirements
from electronic publishing services that are subject to the section 274
requirements. We anticipate that this issue will arise with respect to
services that are neither clearly encompassed by the statutory
definition of ``electronic publishing'' nor specifically listed in the
delineated exceptions to that definition. We seek comment on whether,
where such classification questions arise, we should classify as
``electronic publishing'' services those services for which the carrier
controls, or has a financial interest in, the content of information
transmitted by the service. We note that under the MFJ, ``electronic
publishing'' was defined as ``the provision of any information which a
provider or publisher has, or has caused to be originated, authored,
compiled, collected, or edited, or in which he has a direct or indirect
financial or proprietary interest, and which is disseminated to an
unaffiliated person through some electronic means.'' United States v.
Western Elec. Co., 552 F. Supp. 131, 178, 181 (D.D.C. 1982).
61. The 1996 Act defines ``telemessaging'' as ``voice mail and
voice storage and retrieval services, any live operator services used
to record, transcribe, or relay messages (other than telecommunications
relay services), and any ancillary services offered in combination with
these services.'' We tentatively conclude that telemessaging is an
information service. Unlike electronic publishing and alarm monitoring
services, which are information services that are specifically exempted
from the section 272(a) separate affiliate requirements, BOC provision
of telemessaging services is not specifically exempted from these
requirements. Therefore, we tentatively conclude that BOC provision of
telemessaging on an interLATA basis is subject to the section 272(a)
separate affiliate requirements, in addition to the section 260
safeguards, which apply to all incumbent LECs, including the BOCs. We
seek comment on this tentative conclusion.
IV. Structural Separation Requirements of Section 272
62. Section 272(b) of the Communications Act establishes five
structural and transactional requirements for the separate affiliate
(or affiliates) established pursuant to section 272(a). Specifically,
the 1996 Act requires that the separate affiliate:
(1) shall operate independently from the [BOC];
(2) shall maintain books, records, and accounts in the manner
prescribed by the Commission which shall be separate from the books,
records, and accounts maintained by the [BOC] of which it is an
affiliate;
(3) shall have separate officers, directors, and employees from
the [BOC] of which it is an affiliate;
(4) may not obtain credit under any arrangement that would
permit a creditor, upon default, to have recourse to the assets of
the [BOC]; and
(5) shall conduct all transactions with the [BOC] of which it is
an affiliate on an arm's length basis with any such transactions
reduced to writing and available for public inspection.
We discuss each of these requirements below.
63. We note that section 272(a)(1) requires a BOC to provide
services subject to the section 272 separate affiliate requirements
through ``one or more affiliates.'' As we tentatively concluded above,
a BOC may, if it chooses, conduct all, or some combination, of its
manufacturing activities, interLATA telecommunications services, and
interLATA information services in a single separate affiliate. A BOC's
potential incentive and ability to favor its affiliate and to
improperly allocate costs may vary, however, depending on the activity
involved. For this reason, the structural and transactional
requirements of section 272(b) may need to be implemented differently
with respect to the three activities enumerated in the statute. We seek
comment on whether the 1996 Act permits us to, and if so, whether we
should, interpret or apply any of the section 272(b) requirements
differently with respect to BOC provision of services regulated under
Title II (namely, provision of interLATA telecommunications services)
as opposed to nonregulated activities (namely, manufacturing and
interLATA information services). In addition, we seek comment on how
such different regulatory requirements could be imposed on the three
activities if all three are provided through one affiliate.
A. Section 272(b)(1)
64. Section 272(b)(1) states that the separate affiliate ``shall
operate independently from the [BOC].'' The 1996 Act does not elaborate
on the meaning of the phrase ``operate independently.'' Under
principles of statutory construction, a statute should be interpreted
so as to give effect to each of its provisions. Accordingly, we
tentatively conclude that we should interpret the ``operate
independently'' requirement in section 272(b)(1) as imposing
requirements beyond those listed in subsections 272(b)(2)-(5). We seek
comment on this tentative conclusion. We also seek comment on what
requirements the Commission should adopt to implement the statutory
requirement that affiliates operate independently.
65. In the Computer II proceeding, the Commission required AT&T to
provide CPE and enhanced services through separate subsidiaries. The
Commission extended the Computer II requirements to the BOCs after
divestiture. Computer II mandated ``maximum separation,'' based on a
determination that structural separation was an effective means of
ensuring that the BOCs treated unaffiliated ESPs and CPE vendors
identically to their own affiliated enhanced service and CPE
operations. Under Computer II, the BOC's enhanced services subsidiary
could not construct, own, or operate its own transmission facilities,
and was required to obtain basic transmission capacity from the
regulated carrier pursuant to tariff. In addition, the Commission
prohibited the regulated entity and unregulated subsidiaries from using
in common any leased or owned physical space or property on which was
located transmission equipment or facilities used to provide basic
transmission services. In Computer II, the Commission also required the
BOC to provide unregulated services through computer facilities that
were separate from those used to provide regulated services. In
addition, the Commission prohibited the regulated entity and the
unregulated subsidiaries from developing software for each other. In
Computer II, the Commission also prohibited a subsidiary that provided
both CPE and enhanced services from marketing any other equipment to
affiliated entities--e.g., transmission or other network equipment. We
noted, however, that BOC manufacturing affiliates could continue to
sell directly to affiliated carriers.
66. In the Competitive Carrier proceeding, the Commission also
established certain separation
[[Page 39408]]
requirements that independent LECs need to meet in order to be
regulated as non-dominant in the provision of interstate interexchange
services. These requirements are less stringent than the Computer II
separate subsidiary requirements. In Competitive Carrier, the
Commission required, in order for independent LECs to be non-dominant,
that they provide interstate interexchange services through an
affiliate and that the affiliate: 1) maintain separate books of
account; 2) not jointly own transmission or switching facilities with
the exchange telephone company; and 3) obtain any exchange telephone
company services at tariffed rates and conditions. We seek comment on
whether the ``operate independently'' requirement in section 272(b)(1)
should be interpreted as imposing one or more of the separation
requirements established in Computer II or Competitive Carrier.
67. We note that section 274(b) states that ``[a] separated
affiliate or electronic publishing joint venture shall be operated
independently from the [BOC],'' and then prescribes specific activities
that the electronic publishing affiliate can and cannot perform. We
seek comment on the relevance of the ``operated independently''
requirement in section 274(b) when construing what Congress intended in
section 272(b)(1). For example, among other restrictions, section
274(b) prohibits a BOC from ``perform[ing] hiring or training of
personnel on behalf of a separated affiliate,'' as well as
``perform[ing] research and development on behalf of a separated
affiliate.''
B. Section 272(b)(2)
68. Section 272(b)(2) states that the affiliate shall maintain
separate books, records, and accounts in the manner prescribed by the
Commission. As noted above, we will address the implementation issues
associated with this section in a separate rulemaking.
C. Section 272(b)(3)
69. Section 272(b)(3) states that the affiliate ``shall have
separate officers, directors, and employees from the [BOC] of which it
is an affiliate.'' In Computer II, the Commission required the separate
subsidiary to have its own operating, marketing, installation, and
maintenance personnel for the services and equipment it offered./ Under
Computer II, however, the Commission permitted certain administrative
services to be shared on a cost reimbursable basis. Specifically, the
Commission permitted the sharing of the following administrative
services: accounting, auditing, legal services, personnel recruitment
and management, finance, tax, insurance, and pension services. We
tentatively conclude that section 272(b)(3) prohibits the sharing of
in-house functions such as operating, installation, and maintenance
personnel, including the sharing of administrative services that are
permitted under Computer II if those services are performed in-house.
We seek comment on whether section 272(b)(3) prohibits the BOC and an
affiliate from sharing the same outside services, such as insurance or
pension services. We also seek comment on what other types of personnel
sharing may be prohibited by section 272(b)(3).
D. Section 272(b)(4)
70. Section 272(b)(4) states that the affiliate ``may not obtain
credit under any arrangement that would permit a creditor, upon
default, to have recourse to the assets of the [BOC].'' This
restriction appears to be designed to protect subscribers to a BOC's
exchange and exchange access services from bearing the cost of default
by BOC affiliates. We tentatively conclude that a BOC may not co-sign a
contract, or any other instrument with a separate affiliate that would
allow the affiliate to obtain credit in a manner that violates section
272(b)(4). We seek comment on this tentative conclusion and on what
other types of activities are prohibited by this provision. Parties are
invited to comment on whether we should establish specific requirements
regarding the types of activities that are contemplated by arrangements
that are consistent with the requirements of section 272(b)(4). To the
extent that there are a range of options, we seek comment on the
relative costs and benefits of each.
E. Section 272(b)(5)
71. Section 272(b)(5) states that the affiliate ``shall conduct all
transactions with the [BOC] of which it is an affiliate on an arm's
length basis with any such transactions reduced to writing and
available for public inspection.'' As previously noted, we will address
the implementation issues associated with this accounting requirement
in a separate rulemaking. We seek comment, however, in this NPRM about
whether implementation of the ``arm's length'' requirement specified in
section 272(b)(5) necessitates any non-accounting safeguards.
V. Nondiscrimination Safeguards
A. Nondiscrimination Provisions of Section 272
72. After a BOC affiliate enters competitive markets, that BOC will
become subject to the economic incentives of the marketplace and
therefore may have an incentive to favor its competitive affiliate or
to take actions that could weaken the affiliate's rivals. As previously
noted, a BOC's control of essential local exchange facilities provides
a BOC with the opportunity to take these actions. In brief, a BOC could
provide inferior service to, charge higher prices to, withhold
cooperation from, or fail to share information with its rivals in
competitive markets. If a BOC were to provide inferior service to a
rival, the quality of the rival's interLATA telecommunications service
or information service would be degraded, making the rival less
attractive to customers and lowering the prices the rival could charge.
If a BOC were to charge higher prices to the rival, the rival would
have to charge higher prices to customers and consequently lose market
share or accept lower profits. In another example, a BOC could possibly
withhold cooperation from an interexchange carrier that needs the BOC's
assistance to introduce an innovative new service, until the BOC's
affiliate is ready to initiate the same innovative service. A BOC could
also share information with its manufacturing affiliate or set
standards that enable its manufacturing affiliate to produce equipment
at a lower cost or with superior compatibility with the BOC's network
as compared to that of competing manufacturers. A BOC's behavior in one
area could affect a rival in its provision of multiple services. For
example, a BOC's provision of degraded local service could affect the
rival's provision of telecommunications and information services.
73. Sections 272(c)(1) and (e) set forth nondiscrimination
safeguards that apply to BOC provision of manufacturing, interLATA
telecommunications services, and interLATA information services.
Section 272(c)(1) sets forth broad nondiscrimination safeguards that
govern a BOC's dealings with its section 271(a) affiliate and is
subject to the sunset provisions set forth in section 272(f). Section
272(e), on the other hand, establishes more specific duties that must
be fulfilled by the BOC and its affiliates that are subject to section
251(c), and is specifically excepted from the sunset provisions that
apply to the other requirements in section 272. We seek comment on
whether, before
[[Page 39409]]
sunset, the non-accounting requirements of section 272(e) are subsumed
completely within the requirements of section 272(c)(1). In addition,
we invite parties to comment on any additional interplay between
sections 272(c)(1) and 272(e) that are not specifically addressed
below.
74. A number of terms and requirements in section 272(c)(1) overlap
with the terms and requirements of section 272(e)(1)-(4). In addition,
some of these terms appear in other sections of the 1996 Act, in
particular, section 251. We seek comment on the interplay between the
definitions of the terms ``services,'' ``facilities,'' and
``information'' in various subsections of 272, and between section 272
and section 251(c). We seek comment on what regulations, if any, are
necessary to clarify the types or categories of services, facilities,
or information that must be made available under section 272(c)(1) and
(e) in light of section 251(c). In particular, we seek comment on
whether Congress meant something different by the terms ``services''
and ``facilities'' as used in section 271(c)(1) and (e). Additionally,
variations on some of these terms appear in the four subsections of
section 272(e), and we seek comment on the significance of these
differences. We seek comment on whether further defining these terms,
and the term ``goods,'' would enable competing providers to detect
violations of this section by enabling them to compare more accurately
a BOC's treatment of its affiliates with a BOC's treatment of
unaffiliated competing providers. We note that, for example, a
requesting entity may have equipment with different technical
specifications from a BOC affiliate's equipment. Therefore, we further
seek comment on whether the terms of sections 272(c)(1) and (e) could
be construed to require a BOC to provide a requesting entity with a
quality of service or functional outcome identical to that provided to
its affiliate even if this would require the BOC to provide goods,
facilities, services, or information to the requesting entity that are
different from those provided to the BOC affiliate.
75. The 1996 Act allows certain entities to interconnect with the
local exchange carrier's network and to ``acquire access to network
elements on an unbundled basis'' under just, reasonable, and
nondiscriminatory terms and conditions.'' In Computer III, the
Commission imposed unbundling and interconnection requirements which
allowed ESPs to acquire unbundled basic services from the BOCs, AT&T,
and GTE in order to provide enhanced services. Sections 272(c)(1) and
272(e) require that varying categories of entities receive
nondiscriminatory treatment from the BOCs. The unbundling required by
our Computer III and ONA rules, and the provisions of sections 251,
272(c)(1), and 272(e) are all available to different categories of
entities. We seek comment on the impact of the variations between these
categories of entities when implementing sections 272(c)(1) and (e),
and the applicability of these sections to ESPs that are currently able
to obtain unbundled network services under Computer III and ONA.
B. Applicability of Pre-Existing Nondiscrimination Requirements
76. Although the 1996 Act imposes specific nondiscrimination
requirements on BOCs and their section 272(a) affiliates, we note that
certain statutory provisions that predate the 1996 Act also impose
nondiscrimination requirements on all common carriers. Under section
201, all common carriers have a duty ``to establish physical
connections with other carriers,'' and to furnish telecommunications
services ``upon reasonable request therefor.'' Section 201 also
requires that ``[a]ll charges, practices, classifications, and
regulations . . . shall be just and reasonable.'' In addition, section
202 makes it unlawful for any common carrier ``to make any unjust or
unreasonable discrimination in charges, practices, classifications,
regulations, facilities, or services,'' or ``to make or give any
unreasonable preference or advantage to any particular person, class of
persons, or locality.'' Pursuant to these statutory provisions, the
Commission established requirements for interconnection between local
exchange carriers and interexchange telecommunications service
providers, and for interconnection between BOCs and ESPs. We seek
comment on the relationship between the nondiscrimination obligations
imposed by sections 272(c)(1) and 272(e) and the Commission's pre-
existing nondiscrimination provisions. In particular, we seek to
determine what non-accounting nondiscrimination rules, if any, are
necessary to implement the section 272(c)(1) and 272(e)
nondiscrimination requirements.
77. The nondiscrimination provisions of sections 272(c)(1) do not
apply to the conduct of BOC affiliates, and the nondiscrimination
provisions of section 272(e) do not apply to BOC affiliates that are
not subject to section 251(c). By its terms, section 272(c) applies to
the conduct of a BOC alone. Section 272(e) applies to the conduct of a
BOC or a BOC affiliate that is subject to section 251(c) (i.e. an
affiliate that is an incumbent LEC). For this reason, a BOC might have
the incentive and ability to transfer network capabilities of its local
exchange company to the operations of its competitive affiliates to
avoid the nondiscriminatory provision of these capabilities as required
by sections 272(c)(1) and (e). Section 272(a), however, requires any
BOC affiliate that is a local exchange carrier subject to section
251(c) to be separate from the section 272(a) affiliates required for
the provision of competitive activities. We tentatively conclude,
therefore, that any transfer by a BOC of existing network capabilities
of its local exchange entity to its affiliates is prohibited by section
272(a), and we seek comment on this tentative conclusion. In addition,
section 153(4)(B) states that the definition of a BOC includes ``any
successor or assign of any such company that provides wireline
telephone exchange service.'' Thus, we seek comment regarding whether,
in the alternative, a transfer by a BOC of network capabilities to a
competitive affiliate would qualify that affiliate as a successor or
assign of the BOC under section 153(4)(B), thus subjecting the
competitive affiliate to the nondiscrimination requirements of sections
272(c)(1) and 272(e).
78. If parties do not believe that section 272(a) and section
153(4)(B) prevent such transfers of local exchange network
capabilities, we seek comment on whether additional regulations are
necessary to prevent discriminatory practices in the provision of these
capabilities by BOC affiliates. Because a BOC affiliate's provision of
interLATA telecommunications services is subject to sections 201 and
202 of the Communications Act, we seek comment as to whether those
nondiscrimination obligations would provide sufficient protection
against discriminatory practices by a BOC interLATA telecommunications
affiliate, or whether we should impose additional non-accounting
safeguards to prevent a BOC from discriminatorily providing these
network capabilities through its interLATA telecommunications
affiliate. In contrast, information services affiliates and
manufacturing affiliates, because they are not ``common carriers''
under the Communications Act, are not subject to sections 201 and 202.
Therefore, we seek comment as to whether other provisions of the
Communications Act permit us to, and if so whether we should, place any
additional nondiscrimination requirements on affiliates that engage in
[[Page 39410]]
these activities. We also seek comment on whether nondiscrimination
provisions that are established in other sections of the Communications
Act, for example the restrictions on manufacturing affiliates in
section 273 or those on electronic publishing affiliates in section
274, affect our treatment of other services under sections 272(c)(1)
and 272(e), particularly when one affiliate engages in multiple
activities.
C. Section 272(c)(1)
79. Section 272(c)(1) provides that, in its dealings with its
affiliate, a BOC ``may not discriminate between that company or
affiliate and any other entity in the provision or procurement of
goods, services, facilities, and information, or in the establishment
of standards.'' As noted above, section 202 of the Communications Act
makes it unlawful for any common carrier ``to make any unjust or
unreasonable discrimination in charges, practices, classifications,
regulations, facilities, or services.'' We seek comment, therefore, on
whether Congress intended to impose a stricter standard for compliance
with section 272(c)(1) by enacting this flat prohibition on
discrimination.
80. We tentatively conclude that the prohibition against
discrimination in section 272(c)(1) means, at minimum, that BOCs must
treat all other entities in the same manner as they treat their
affiliates, and must provide and procure goods, services, facilities
and information to and from these other entities under the same terms,
conditions, and rates. We seek comment on this tentative conclusion, as
well as on what regulations, if any, are necessary to implement this
provision. Comments should be specific in terms of needed regulations,
the problem they would address, and how they would address the
identified problem. We also seek comment on whether a BOC can treat
unaffiliated entities differently with respect to the activities at
issue in section 272(c)(1), as long as such disparate treatment is
justified upon an appropriate showing of differences between the
unaffiliated entities (e.g., such as differences in the unaffiliated
entities' network architecture). We also seek comment on whether the
nondiscrimination safeguards should vary based on whether the affiliate
is providing interLATA telecommunications services, interLATA
information services, or manufacturing. In particular, we seek comment
on whether, in addition to any tariffing or structural separation
requirements proposed in this NPRM, any specific non-accounting
safeguards are needed to enforce the nondiscriminatory pricing
requirement of section 272(c)(1).
81. Section 272(c)(1) states, inter alia, that a BOC may not
discriminate in the provision of goods, services, facilities, and
information. As BOCs enter competitive markets, they may have
additional incentives and opportunities to discriminate in favor of
their affiliates in violation of section 272. As indicated above, a BOC
could provide unaffiliated telecommunications carriers or information
service providers with inferior connections, or could disclose
information to its affiliates before disclosing this information to
unaffiliated carriers, providers, or manufacturers.
82. The Commission has previously adopted a regulatory scheme to
ensure that the BOCs do not discriminate in the provision of basic
services used to provide enhanced services or in disclosing changes in
the network that are relevant for the competitive manufacture of CPE.
We believe that the existing Computer III regulatory scheme contains
non-accounting safeguards that provide protection against the type of
BOC behavior that section 272(c)(1) seeks to curtail. The Computer III
requirements provide for nondiscriminatory access to unbundled network
services as well as nondiscriminatory access to the same quality of
service, installation, and maintenance. In addition, BOCs are required
to provide information to third parties regarding information on
changes to the network and new network services. BOCs are also required
to report on the quality and timeliness of installation and
maintenance. We seek comment on whether any of the nondiscrimination
safeguards that the Commission applied to the BOCs in the Computer III
and ONA proceedings, which were adopted in lieu of the structural
separation requirements of Computer II, are sufficient to implement
section 272(c)(1).
83. We further seek comment on the scope of the term ``goods,
services, facilities and information'' for which the 1996 Act prohibits
discrimination. We note that our Computer III requirements do not
specifically address ``goods,'' and therefore seek comment on what
regulations, if any, would be necessary to define that term. We also
seek comment on whether the separate customer proprietary network
information (CPNI) provisions of the 1996 Act affect the requirement to
provide information on a nondiscriminatory basis in this section.
84. Section 272(c)(1) requires, inter alia, that the BOCs not
discriminate with regard to their procurement of goods, services,
facilities, and information. We note that this provision prohibits, for
example, a BOC from purchasing manufactured network equipment solely
from its affiliate, purchasing the equipment from the affiliate at
inflated prices, or giving any preference to the affiliate's equipment
in the procurement process and thereby excluding rivals from the market
in the BOC's service area and undermining competition. We seek comment
on how the BOCs could establish nondiscriminatory procurement
procedures designed to ensure that other entities are treated on the
same terms and conditions as a BOC affiliate in the procurement of
goods, services, facilities, and information. We also seek comment on
the nature and extent of rules necessary to ensure that such procedures
are implemented.
85. Section 272(c)(1) also prohibits a BOC from discriminating in
the establishment of standards. We seek comment on what ``standards''
are encompassed by this provision. We also seek comment on what
procedures, if any, we should implement to ensure that the BOC does not
discriminate between its affiliate and other entities in setting
standards. For instance, should BOCs be required to participate in
standard-setting bodies in the development of standards covered by this
section? We note that, for example, a BOC could act anticompetitively
by creating standards that require or favor equipment designs which are
proprietary to its affiliate. A BOC's knowledge of both its affiliate's
and its competitors' networks might also allow a BOC to adopt or modify
equipment standards that its affiliates would be able to comply with
more easily, or at less cost, than could unaffiliated carriers. We seek
comment on what regulations, if any, are necessary to implement this
nondiscrimination safeguard.
86. We note that the difference in language between section 272(c)
and sections 272(a) and (e) might appear to allow a BOC affiliate that
provides local exchange services to avoid compliance with section
272(c). Although sections 272(a) and 272(e) apply to a BOC and an
affiliate subject to 251(c), section 272(c) refers only to the
``dealings'' by a ``Bell operating company'' with its section 272(a)
affiliates. Section 153(4), however, states that a ``Bell operating
company'' includes ``any successor or assign [of a BOC] * * * that
provides wireline telephone exchange service.'' Reading these sections
together, we
[[Page 39411]]
tentatively conclude that Congress did not intend for a BOC to be able
to move its incumbent local exchange operations to an affiliate in
order to avoid complying with section 272(c). Thus, we tentatively
conclude that, if a BOC affiliate is engaged in local exchange
activities and is therefore subject to section 251(c), then the local
exchange affiliate would be subject to 272(c) requirements when dealing
with BOC affiliates engaged in competitive activities.
D. Section 272(e)
87. Section 272(e) of the Communications Act places several
additional obligations on BOCs and BOC affiliates that are subject to
the requirements of section 251(c). Sections 272(f)(1) and 272(f)(2)
provide that the requirements of section 272(e) do not sunset. Some of
the provisions in section 272(e), however, could be interpreted as
subject to sunset because their requirements are contingent on the
existence of a separate affiliate. Section 272(e)(2) states that the
BOC ``shall not provide any facilities, services, or information
concerning its provision of exchange access to the affiliate described
in subsection (a) unless such facilities, services, or information are
made available to other providers of interLATA services in that market
on the same terms and conditions.'' Similarly, section 272(e)(4) states
that the BOC ``may provide any interLATA or intraLATA facilities or
services to its interLATA affiliate if such services or facilities are
made available to all carriers at the same rates and on the same terms
and conditions, and so long as the costs are appropriately allocated.''
If the BOCs did not maintain section 272(a) separate affiliates after
that requirement expired, it is unclear whether the nondiscrimination
requirements of sections 272(e) (2) and (4) would be maintained. We
seek comment on whether Congress intended to sunset the requirements in
sections 272(e) (2) and (4) if the BOCs eliminated their section 272(a)
separate affiliates. Commenters claiming that the requirements of those
sections survive the elimination of the section 272(a) separate
affiliates should explain in detail how these requirements should be
applied in those circumstances.
1. Section 272(e)(1)
88. Pursuant to section 272(e)(1), ``[a BOC] and an affiliate that
is subject to the requirements of section 251(c) shall fulfill any
requests from an unaffiliated entity for telephone exchange service and
exchange access within a period no longer than the period in which it
provides such telephone exchange service and exchange access to itself
or to its affiliates.''
89. In the 1996 Act, ``affiliate'' is defined as:
a person that (directly or indirectly) owns or controls, is owned or
controlled by, or is under common ownership or control with, another
person. For purposes of this paragraph, the term 'own' means to own
an equity interest (or the equivalent thereof) of more than 10
percent.
We tentatively conclude we should interpret ``an unaffiliated entity''
to include any entity, regardless of line of business, that is not
affiliated with a BOC under the foregoing statutory definition. We seek
comment on this tentative conclusion.
90. We seek comment on the scope of the term ``requests'' under
this subsection. We seek comment on whether these requests should
include, inter alia, initial installation requests, as well as any
subsequent requests for improvement, upgrades or modifications of
service, or repair and maintenance of these services.
91. We tentatively conclude that section 272(e)(1) requires BOCs to
treat unaffiliated entities nondiscriminatorily in the provision of
exchange services or exchange access in terms of timing, but does not
create any additional rights beyond those granted to unaffiliated
entities through the 1996 Act, pre-existing provisions of the
Communications Act, or other Commission rules. We seek comment on this
tentative conclusion.
92. We additionally seek comment on how to implement the phrase ``a
period no longer than the period in which it provides such * * *
service to itself or to its affiliates'' and whether rules are needed
to enforce this requirement. We note that, in offering new and advanced
services, slow provision of telephone exchange service or access
service may delay the offering of services by unaffiliated entities and
thus reduce their ability to compete. We seek comment on what
mechanisms, if any, we should establish in order to ensure that a BOC
fulfills service requests in compliance with this section. We further
seek comment on whether reporting requirements for service intervals
analogous to those imposed by Computer III and ONA would be sufficient
to implement this provision.
2. Section 272(e)(2)
93. Section 272(e)(2) states that a BOC and an affiliate that is
subject to the requirements of section 251(c) ``shall not provide any
facilities, services, or information concerning its provision of
exchange access to [a section 272(a) affiliate] unless such facilities,
services, or information are made available to other providers of
interLATA services in that market on the same terms and conditions.''
We seek comment on what regulations, if any, we should adopt to
implement this statutory requirement.
94. We seek comment on the scope of the term ``facilities, services
or information concerning [the] provision of exchange access.'' We also
seek comment on how to interpret the phrase ``other providers of
interLATA services in that market.'' We further seek comment on the
relevance of previous Commission proceedings or provisions of the MFJ
governing BOC provision of facilities, services or information when
implementing this section.
3. Section 272(e)(3)
95. Section 272(e)(3) provides that a BOC and an affiliate that is
subject to the requirements of section 251(c) ``shall charge [a section
272(a) affiliate], or impute to itself (if using the access for its
provision of its own services), an amount for access to its telephone
exchange service and exchange access that is no less than the amount
charged to any unaffiliated interexchange carrier for such services.''
We tentatively conclude that the BOCs' provision of telephone exchange
and exchange access services under tariffed rates, including their
affiliates' purchase at these rates pursuant to tariff or imputation of
these rates to the BOCs, is sufficient to implement this provision. We
also seek comment on the appropriate mechanism to enforce this
provision in the absence of tariffed rates for the specified services.
We seek comment on what additional regulations, if any, are necessary
to implement this statutory provision.
4. Section 272(e)(4)
96. Section 272(e)(4) states that a BOC and an affiliate that is
subject to the requirements of section 251(c) ``may provide any
interLATA or intraLATA facilities or services to its interLATA
affiliate if such services or facilities are made available to all
carriers at the same rates and on the same terms and conditions, and so
long as the costs are appropriately allocated.'' We seek comment
regarding the scope of the term ``interLATA or intraLATA facilities or
services.'' For example, does it include information services and all
facilities used in the delivery of such services? We seek comment on
what additional regulations, if any, are necessary to implement this
statutory provision.
[[Page 39412]]
VI. Marketing Provisions of Sections 271 and 272
97. Section 272(g)(1) provides that ``[a] Bell operating company
affiliate required by this section may not market or sell telephone
exchange services provided by the Bell operating company unless that
company permits other entities offering the same or similar service to
market and sell its telephone exchange services.'' We seek comment on
what regulations, if any, are necessary to implement this provision.
98. Section 271(e) restricts joint marketing by certain large
telecommunications carriers:
Until a Bell operating company is authorized pursuant to
subsection (d) to provide interLATA services in an in-region State,
or until 36 months have passed since the date of enactment of the
Telecommunications Act of 1996, whichever is earlier, a
telecommunications carrier that serves greater than 5 percent of the
Nation's presubscribed access lines may not jointly market in such
State telephone exchange service obtained from such company pursuant
to section 251(c)(4) with interLATA services offered by that
telecommunications carrier.
Section 272(g)(2) states that ``[a BOC] may not market or sell
interLATA service provided by an affiliate required by this section
within any of its in-region States until such company is authorized to
provide interLATA services in such State under section 271(d).''
Sections 271(e) and 272(g)(2) appear to be parallel provisions that are
intended to prevent BOCs and the largest interexchange carriers from
marketing local and long distance services jointly prior to the BOCs'
entry into in-region interLATA service, if the interexchange carrier is
purchasing incumbent LEC services pursuant to section 251(c)(4) for
resale. We note that, on its face, this provision does not preclude a
covered interexchange carrier from jointly marketing local exchange
services provided through interconnection of the interexchange
carrier's facilities with an incumbent LEC pursuant to section
251(c)(2), or through purchase of unbundled network elements pursuant
to section 251(c)(3). We tentatively conclude that the term ``market or
sell'' in section 272(g)(2) should be construed similarly to the term
``jointly market'' in section 271(e). We seek comment on this tentative
conclusion. We also seek comment on whether these sections encompass
such prohibitions as, for example, advertising the availability of
interLATA services combined with local exchange services, making these
services available from a single source, or providing bundling
discounts for the purchase of both services.
99. Section 272(g)(2) allows the BOC to market and sell the
interLATA services of its affiliate after the BOC enters the interLATA
market pursuant to section 271(d). Section 272(g)(3) provides that
``[t]he joint marketing and sale of services permitted under this
subsection shall not be considered to violate the nondiscrimination
provisions of subsection (c).'' Section 272(b)(3) requires the BOC and
its affiliate to maintain separate officers, directors, and employees,
and section 272(b)(5) requires a section 272(a) affiliate to conduct
``all transactions with the [BOC] * * * on an arm's length basis with
any such transactions reduced to writing and available for public
inspection.'' We invite parties to comment on the corporate and
financial arrangements that are necessary to comply with sections
272(g)(2), 272(b)(3), and 272(b)(5). We seek comment on whether the
affiliate must purchase marketing services from the BOC on an arm's
length basis pursuant to section 272(b)(5). We further seek comment on
whether, instead of allowing BOC personnel to market its affiliate's
services at arm's length, it is necessary to require a BOC and its
affiliate to jointly contract to an outside marketing entity for joint
marketing of interLATA and local exchange service in order to comply
with the provisions of section 272(b)(3).
100. We seek comment on additional issues raised by the marketing
provisions of the 1996 Act. We seek comment on the interplay between
the joint marketing provisions in sections 271 and 272 and the CPNI
provisions set forth in section 222 that are the subject of a separate
proceeding. We also seek comment on whether the joint marketing
provision in section 274(c) has any indirect bearing on how we should
apply the joint marketing provisions in sections 271 and 272.
VII. Enforcement of Sections 271 and 272
A. Mechanisms to Facilitate Enforcement of the Separate Affiliate and
Nondiscrimination Safeguards of Sections 271 and 272
101. Enforcement of the statutory separate affiliate and
nondiscrimination safeguards established by sections 271 and 272 and
the rules that we may adopt to implement those provisions will be
critical to ensuring the full development of competition in the local
and interexchange telecommunications markets. We seek comment generally
on the mechanisms necessary to facilitate the detection and
adjudication of violations of these safeguards and, specifically, on
how the Commission should exercise its enforcement powers under section
271(d)(6).
102. We seek comment on what requirements or mechanisms are
necessary to facilitate detection and adjudication of violations of the
separate affiliate and nondiscrimination requirements discussed above.
For instance, should we impose reporting requirements on BOCs analogous
to those requirements imposed by our CEI plans and ONA plans under
Computer III? We recognize, however, that this will impose burdens on
the BOCs as well as the Commission. Alternatively, would a third party
compliance monitoring or reporting system be a more effective method of
detecting violations of these provisions?
103. We seek comment on what mechanisms, other than reporting
requirements imposed on BOCs or their affiliates, would facilitate
detection and adjudication of violations of sections 271 and 272, by
both the Commission and third parties. In particular, we seek comment
on mechanisms that would allow third parties to identify the goods,
services, facilities, or information that have been provided to BOC
affiliates or other parties. For example, are the disclosure
requirements under section 272(b)(5) a sufficient means of detecting
violations? We seek comment on whether we should determine that a BOC
or its affiliate would be in violation of sections 272(c)(1) and (e) if
a BOC provides varying levels of service between its affiliate and
third parties as well as between third parties themselves. We also seek
comment on whether there are reasonable grounds by which a BOC or its
affiliate could justify deviation from a rate, term or condition
established under sections 272(c)(1) and (e). In proposing regulations
for this section, commenting parties should state specifically what
regulations or procedures should be required and how a specific
provision of sections 272(c)(1) or (e) make them necessary.
B. Section 271 Enforcement Provisions
104. Section 271(d)(6) of the Communications Act gives the
Commission specific authority to enforce the conditions that a BOC is
required to meet in order for the Commission to grant the BOC
authorization to provide in-region interLATA services. Specifically,
section 271(d)(6) states:
(A) COMMISSION AUTHORITY.--If at any time after the approval of
an application under [section 271(d)(3)], the Commission determines
that a [BOC] has ceased to meet
[[Page 39413]]
any of the conditions required for such approval, the Commission
may, after notice and opportunity for a hearing--
(i) issue an order to such company to correct the deficiency;
(ii) impose a penalty on such company pursuant to title V; or
(iii) suspend or revoke such approval.
(B) RECEIPT AND REVIEW OF COMPLAINTS.--The Commission shall
establish procedures for the review of complaints concerning
failures by [BOCs] to meet conditions required for approval under
[section 271(d)(3)]. Unless the parties otherwise agree, the
Commission shall act on such complaint within 90 days.
We seek to clarify the relationship between this section and the
Commission's existing enforcement authority under sections 206-209 of
the Communications Act. Section 206 provides that, ``any common
carrier'' found to be in violation of the Communications Act shall ``be
liable to the person or persons injured thereby for the full amount of
damages sustained in consequence of any such violation.'' Section 207
of the Communications Act permits any person ``damaged'' by the actions
of any common carrier to bring suit for the recovery of these damages.
Section 208(a) authorizes complaints by any person ``complaining of
anything done or omitted to be done by any common carrier'' subject to
the Communications Act or its provisions. Section 209 specifies that
the Commission will ``make an order directing the carrier to pay to the
complainant'' any damages amount a complainant successfully
establishes. We tentatively conclude that, in the context of
``complaints concerning failures by [BOCs] to meet the conditions
required for approval under [section 271(d)(3)],'' section 271(d)(6)
generally augments the Commission's existing enforcement authority. For
example, we believe that, in a situation where a complainant
successfully establishes conduct (such as a failure to provide
nondiscriminatory access to operator call completion services) that
would constitute both a failure by the BOC to meet the conditions of
its approval, as well as the basis for financial harm, the Commission
could impose any of the sanctions specified in section 271(d)(6)(A),
and could also award damages pursuant to its preexisting authority
under section 209. We seek comment on this tentative conclusion. We
also seek comment on whether, in a situation where a complaint alleges
that a BOC has ceased to meet the conditions for approval to provide
in-region interLATA telecommunications services and seeks damages as a
result of the underlying alleged violative conduct, a Commission
determination that the BOC has ceased to meet the conditions and the
imposition of a section 271(d)(6)(A) sanction would fulfill the
Commission's duty to ``act on such complaint within 90 days.''
105. In order to approve a BOC's application to provide in-region
interLATA services pursuant to section 271(d)(3), the Commission must
determine that the BOC: meets the requirements of section 271(c)(1);
satisfies the competitive checklist in section (c)(2)(B); complies with
the requirements of section 272; and demonstrates that the approval of
its application is consistent with the public interest, convenience,
and necessity. Section 271(d)(6)(A) sets forth various actions the
Commission may take at any time after the approval of an application,
and after notice and opportunity for a hearing, if it determines that a
BOC has ceased to meet any of these conditions. We believe that there
are two ways in which the Commission may determine that a BOC has
ceased to meet the conditions of its approval. First, the Commission
could make such a determination via the resolution of an expedited
complaint proceeding pursuant to section 271(d)(6)(B). Second, the
Commission could make such a determination on its own motion. We seek
comment on this interpretation.
106. In addition, we seek comment on what legal and evidentiary
standards are necessary to establish that a BOC has ceased to meet the
conditions required for its approval to provide in-region interLATA
service. As noted above, in order to establish a violation of section
201, a complainant must show that the defendant's terms of service and
charges are ``unjust and unreasonable.'' Similarly, in order to
establish a violation of section 202(a), a complainant must demonstrate
``unjust and unreasonable discrimination.'' Sections 271(c)(1),
(c)(2)(B), and 272, in contrast, set forth no such standards that we
must apply to complaints arising under these sections. We seek comment,
therefore, on the types of showings that should be required of a
complainant and a defendant BOC in order to ensure a full and fair
resolution, within the 90-day statutory window, of a complaint alleging
that a BOC has ceased to meet the conditions required for approval to
provide in-region interLATA services.
107. In the context of a complaint proceeding, we seek comment on
what constitutes a prima facie showing that a BOC has ceased to meet
any or all of the conditions for interLATA entry. Is it enough for
complainants invoking the expedited complaint procedures under section
271(d)(6)(B) to plead, along with proper supporting evidence, ``facts
which, if true, are sufficient to constitute a violation of the Act or
Commission order or regulation'' in order to establish a prima facie
showing that the BOC has ceased to meet the conditions for approval in
section 271(d)(3)? Is such a broad, generally applicable, standard more
likely to engender frivolous complaints, or is it more likely to
facilitate a complainant's ability to bring anti-competitive behavior
by a BOC to the attention of the Commission? In the alternative, should
the prima facie showing required be specific to the particular
condition at issue, i.e., the requirements of section 271(c)(1), the
conditions set forth in the competitive checklist of section
271(c)(2)(B), and the requirements of section 272? If so, commenters
should describe what specific acts or omissions are sufficient to
establish a prima facie showing that each of these conditions is no
longer met.
108. Currently, in a typical complaint proceeding, the complainant
generally has the burden of establishing that a common carrier has
violated the Communications Act or a Commission rule or order.
Ordinarily, this burden of proof does not, at any time in the
proceeding, shift to the defendant carrier. In the case of section
202(a) complaints, however, once a complainant alleging a violation
establishes that the services are like and that discrimination exists
between them, the burden shifts to the defendant carrier to show that
the discrimination is justified and, therefore, not unreasonable within
the meaning of section 202(a). In some instances, parties who have
initiated formal complaint proceedings with the Commission have
expressed concern that defendant carriers, in particular the BOCs, have
an inherent advantage in the proceedings because of their control over
the information regarding their service offerings and related practices
necessary for a full and fair resolution of the disputed issues. These
parties have further complained that the discovery mechanism contained
in the Commission's formal complaint rules of practice and procedure is
cumbersome and seldom produces on a timely basis information of
decisional significance. We, therefore, seek to assist parties in their
pursuit of complaints before the Commission that BOCs have ceased to
meet the conditions for interLATA entry, by ensuring the prompt and
fair resolutions these complaints within the statutory 90-day period.
[[Page 39414]]
109.With this objective in mind, we believe it appropriate to
inquire into whether the pro-competitive goals of the 1996 Act are
advanced by shifting the ultimate burden of proof from the complainant
to a defendant BOC, not just in complaints alleging discrimination
under section 202(a), but in all complaints alleging that a BOC has
ceased to meet any of the conditions for its approval to provide
interLATA services under section 271(d)(3). Because the defendant BOC
is likely to be in sole possession of information relevant to the
complainant's case, and because the complaint must be acted upon in 90
days, we believe that shifting the burden may be an efficient way of
resolving complaints invoking the expedited procedures of section
271(d)(6). We also find that by alleviating the burden on the
complainant, burden-shifting may be a means of facilitating the
detection of alleged anti-competitive behavior by the BOCs. We,
therefore, seek comment on whether the burden should shift to the
defendant BOC once the complainant makes a prima facie showing that a
BOC has ceased to meet the conditions of section 271(d)(3), as it does
when a complainant makes a prima facie showing of discrimination under
section 202(a). If the burden should not shift upon a prima facie
showing, we seek comment on what particular facts or circumstances
established by the complainant, if any, would warrant shifting the
burden of proof to a defendant BOC.
110. If we were to establish a rebuttable presumption, i.e., a
shift in the burden of proof to the BOC upon a particular showing by
the complainant, we seek comment on the type of evidentiary showing the
defendant BOC must make in order to rebut the presumption that it has
ceased to meet the conditions for approval. For example, is it enough
for the BOC to establish the propriety of its conduct? Further, we
invite parties to comment on whether the burden should shift to the
defendant for any and all alleged violations of sections 271 or 272.
Or, should rebuttable presumptions exist only for some of the
requirements of 271 and 272, such as the competitive checklist
requirements of section 271 and the nondiscrimination provisions of
section 272? If commenters believe that a rebuttable presumption should
exist for certain requirements but not others, they should explain with
specificity why violations of some requirements warrant a rebuttable
presumption and violations of others do not. In addition, we ask
parties to comment on whether there are other mechanisms, instead of
burden-shifting, that will facilitate the ability of a complainant to
obtain a full and fair resolution of its complaint within the 90-day
statutory window.
111. The Commission has effectively established a rebuttable
presumption under sections 201(b) and 202(a) whereby the rates and
practices of non-dominant carriers are presumed to be lawful. A
complainant challenging a non-dominant carrier's rates or practices
under these sections, therefore, must overcome this presumption of
lawfulness in order to bring a successful action. A dominant carrier,
on the other hand, is afforded no such presumption of lawfulness. We
tentatively conclude that, in the context of complaints alleging that a
BOC has ceased to meet the conditions required for the provision of in-
region interLATA services, we will not employ a presumption of
reasonableness in favor of the BOC or BOC affiliate, regardless of
whether the BOC or BOC affiliate is regulated as a dominant or non-
dominant carrier. We seek comment on this tentative conclusion.
112. Section 271(d)(6)(A) provides that if, at any time after
approval of a BOC application, the Commission determines that the BOC
has ceased to meet any of the conditions of its approval to provide
interLATA services, the Commission may, after notice and opportunity
for a hearing: (1) Issue an order to the BOC to ``correct the
deficiency;'' (2) impose a penalty pursuant to Title V; or (3) suspend
and revoke the BOC's approval to provide in-region interLATA services.
Pursuant to section 503(b)(1)(B), a person who ``willfully or
repeatedly'' fails to comply with any of the provisions of the
Communications Act or any rule, regulation, or order issued by the
Commission under the Communications Act, is liable to the United States
for a forfeiture penalty. Section 503(b)(2)(B) authorizes the
Commission to assess forfeitures against common carriers of up to one
hundred thousand dollars for each violation, or each day of a
continuing violation, up to a statutory maximum of one million dollars
for a single act or failure to act. In exercising such authority, the
Commission is required to take into account ``the nature,
circumstances, extent, and gravity of the violation and, with the
respect to the violator, the degree of culpability, any history of
prior offenses, ability to pay, and such other matters as justice may
require.''
113. We tentatively conclude that we will follow the procedures set
forth in Title V to impose Title V penalties, including forfeitures,
under this section. As to the non-forfeiture sanctions, we seek comment
on whether the Commission should exercise its enforcement discretion
and impose these sanctions on an individual case basis or whether we
should establish specific legal and evidentiary standards for each type
of sanction. Further, we seek comment on the appropriate ``notice and
opportunity for a hearing'' for the imposition of these non-forfeiture
sanctions both in the context of a complaint proceeding and on the
Commission's own motion. We interpret ``opportunity for hearing'' not
to require a trial-type hearing before an Administrative Law Judge
(ALJ) (an APA hearing), and invite comment on this interpretation. In
coming to this view, we note that section 271(d)(6)(A) does not require
a ``hearing on the record,'' which would trigger these extensive
procedural requirements under the APA. Moreover, although proceedings
under sections 204 and 205 of the Communications Act are generally
conducted as rulemakings, these sections use similar language with
respect to hearing requirements, and proceedings pursuant to sections
204 and 205 generally occur through written responses. In addition, we
note that, in allowing for forfeitures, section 271(d)(6)(A)
specifically requires the Commission to impose forfeitures pursuant to
Title V of the Communications Act. Section 503(b) of the Communications
Act, the general forfeiture provision, although leaving the choice to
Commission discretion, allows for either an adjudicatory proceeding
before an ALJ (an APA hearing) or a paper hearing before the Commission
pursuant to notice of apparent liability procedures. We also
tentatively conclude that Congress, by imposing a 90-day deadline for
complaints, did not intend to afford the BOCs trial-type hearings in
enforcement proceedings pursuant to section 271(d). Finally, we also
tentatively conclude that the filing of a complaint invoking the
expedited procedures of section 271(d)(6)(B) may trigger a hearing
under section 271(d)(6)(A) and that the written response by a BOC will
generally afford the BOC sufficient hearing rights to allow the
Commission to impose non-forfeiture sanctions. We invite comment on
these tentative conclusions.
114. We seek comment broadly on whether there are other ways, in
addition to the sanctions listed in section 271(d)(6)(A), by which the
Commission can create incentives for the BOCs to ensure that they
continue to meet the conditions required for approval under section
271(d)(3). For
[[Page 39415]]
example, would the adoption of alternative dispute resolution
procedures, analogous to those mandated under section 273(d)(5) of the
Communications Act, facilitate resolution of complaints alleging a
violation of any of these conditions? As we note above, section
271(d)(6)(B) of the Communications Act prescribes expedited procedures
for the review of complaints alleging that a BOC has ceased to meet the
conditions required for approval to provide in-region interLATA
services. Are there other ways to expedite the resolution of such
complaints? We seek comment on what else the Commission can do to
facilitate the ability of a complainant to obtain a determination that
a BOC has ceased to meet the conditions, which can then provide a basis
for pursuing a private right of action for the recovery of damages in
federal district court under section 207 of the Communications Act.
VIII. Classification of LECS and Their Affiliates as Dominant or Non-
Dominant Carriers
115. In this section, we seek comment on whether we should regulate
the BOC affiliates as non-dominant carriers in the provision of in-
region, interstate, domestic, interLATA services. We also seek comment
on whether we should continue to apply to independent LECs (i.e., LECs,
other than the BOCs) the existing separation requirements established
in the Competitive Carrier Fifth Report and Order, which are a
prerequisite for independent LECs to qualify as non-dominant carriers
in the provision of interstate, domestic, interexchange services
originating in their local exchange areas. Finally, we consider whether
to apply the same regulatory classification to the BOC affiliates' and
independent LECs' provision of in-region, international services as we
adopt in this proceeding for their provision of in-region, interstate,
domestic, interLATA services and in-region, interstate, domestic,
interexchange services, respectively.
A. Background
116. Under our rules, non-dominant carriers are not subject to rate
regulation, and may file tariffs that are presumed lawful on one day's
notice and without cost support. Non-dominant carriers are also subject
to streamlined section 214 requirements. In contrast, dominant carriers
are subject to price cap regulation, as specified by Commission order,
and must file tariffs on 14, 45, or 120 days' notice, with cost support
data for above-cap and out-of-band tariff filings, and with additional
information for new service offerings. Dominant domestic carriers must
also obtain specific prior Commission approval to construct a new line,
to extend a line or to acquire, lease or operate any line, as well as
to discontinue, reduce, or impair service.
117.In the Competitive Carrier First Report and Order (45 FR 76148
(November 18, 1980)), the Commission classified LECs and pre-
divestiture AT&T as dominant, with respect to both local exchange and
interstate long distance services, and therefore subject to the ``full
panoply'' of then-existing Title II regulation. In contrast, the
Commission classified MCI, Sprint, and other ``miscellaneous common
carriers'' as non-dominant carriers.
118. Later in the Competitive Carrier proceeding, the Commission
reconsidered how it should regulate the provision of interstate,
interexchange services by independent LECs. In the Competitive Carrier
Fourth Report and Order, the Commission determined that interexchange
carriers affiliated with independent LECs would be regulated as non-
dominant interexchange carriers. In the Competitive Carrier Fifth
Report and Order, the Commission clarified that an ``affiliate'' of an
independent LEC was ``a carrier that is owned (in whole or in part) or
controlled by, or under common ownership (in whole or in part) or
control with, an exchange telephone company.'' The Commission further
clarified that, in order to qualify for non-dominant treatment, the
affiliate providing interstate, interexchange services must: (1)
maintain separate books of account; (2) not jointly own transmission or
switching facilities with its affiliated exchange telephone company;
and (3) acquire any services from its affiliated exchange telephone
company at tariffed rates, terms and conditions. The Commission added
that any interstate, interexchange services offered directly by an
independent LEC (rather than through a separate affiliate) or through
an affiliate that did not satisfy the specified conditions would be
subject to dominant carrier regulation. The Commission observed that
these separation requirements would provide some ``protection against
cost-shifting and anticompetitive conduct'' by an independent LEC that
could result from its control of local bottleneck facilities.
119. In the Competitive Carrier Fifth Report and Order, the
Commission also addressed the possible entry of the BOCs into
interstate, interLATA services in the future:
The BOCs currently are barred by the [MFJ] from providing
interLATA services * * *. If this bar is lifted in the future, we
would regulate the BOCs' interstate, interLATA services as dominant
until we determined what degree of separation, if any, would be
necessary for the BOCs or their affiliates to qualify for
nondominant regulation.
120.Because the 1996 Act has superseded the MFJ's prohibition
against the BOCs' provision of interLATA services, we determine in this
proceeding whether we should regulate the BOCs or their affiliates as
dominant in the provision of in-region, interstate, domestic, interLATA
services. We also consider in this section whether we should modify our
existing rules that require independent LECs to comply with the
separation requirements described above in order to qualify for non-
dominant regulatory treatment in the provision of interstate, domestic
interexchange services that originate in their local exchange areas.
121. Our rules define a dominant carrier as one that possesses
market power, and a non-dominant carrier as a carrier not found to be
dominant (i.e., one that does not possess market power). As noted, in
the Competitive Carrier Fourth Report and Order, the Commission defined
market power alternatively as ``the ability to raise prices by
restricting output'' and ``the ability to raise and maintain price
above the competitive level without driving away so many customers as
to make the increase unprofitable.'' In determining whether the BOC
affiliates or independent LECs should be classified as dominant or non-
dominant, it is first necessary to define the appropriate product and
geographic markets for assessing the market power of BOC affiliates in
the provision of in-region, interstate, domestic, interLATA services
and the market power of independent LECs in the provision of
interstate, domestic, interexchange services originating in areas where
they control local exchange facilities. We also address the relevant
product and geographic market definitions for assessing the market
power of BOC affiliates and independent LECs in their provision of in-
region, international services.
B. Definition of the Relevant Product and Geographic Markets
122. In the Interexchange NPRM, we sought comment on whether we
should retain the relevant product and geographic market definitions
adopted in the Competitive Carrier proceeding with respect to the
provision of domestic interexchange services. Based on the analysis set
forth in the 1992 Merger Guidelines, we tentatively concluded that,
under certain circumstances, we should use narrower market definitions
than those adopted
[[Page 39416]]
in the Competitive Carrier proceeding. In this NPRM, we seek comment on
how we should apply in this proceeding the market definition approaches
that we proposed in the Interexchange NPRM, assuming they are adopted.
We also seek comment on how, if we do not adopt the approach proposed
in the Interexchange NPRM, we should define the relevant product and
geographic markets for purposes of this proceeding.
1. Relevant Product Markets
123. In the Competitive Carrier proceeding, the Commission defined
the relevant product market, for purposes of assessing the market power
of domestic interexchange carriers covered by that proceeding, as ``all
interstate, domestic, interexchange telecommunications services'' and
concluded that there were no relevant submarkets. In the Interexchange
NPRM, we questioned whether a narrower product market definition might
provide a ``more refined analytical tool'' for evaluating whether a
carrier or group of carriers together possess market power.
124. Under the 1992 Merger Guidelines, ``[m]arket definition
focuses solely on demand substitution factors--i.e., possible consumer
responses.'' 1992 Merger Guidelines at 20,571. However, ``[s]upply
substitution factors--i.e., possible production responses--are
considered . . . in the identification of firms that participate in the
relevant market and the analysis of entry.'' Id. In the Interexchange
NPRM, we noted that consideration of substitutability of demand
supports the use of a narrower relevant product market than that
defined in the Competitive Carrier proceeding. Based on this analysis,
we stated that ``we believe that we should define as a relevant product
market an interstate, interexchange service for which there are no
close substitutes or a group of services that are close substitutes for
each other, but for which there are no other close substitutes.''
125. We acknowledged, however, that it might be impracticable to
delineate all relevant product markets for interstate, domestic,
interexchange services. We also stated our belief that we need not do
so, in light of our previous finding that substantial competition
exists with respect to most interstate, domestic, interexchange service
offerings. We tentatively concluded that we should address the question
of whether a specific interstate, domestic, interexchange service (or
group of services) constitutes a separate relevant product market
``only if there is credible evidence suggesting that there is or could
be a lack of competitive performance with respect to that service (or
group of services).'' We sought comment on this tentative conclusion in
the Interexchange NPRM.
126. Applying the approach proposed in the Interexchange NPRM, we
note that, at this time, we are not aware of any evidence suggesting
that there is a particular interLATA service or group of services that
is or will be provided by the BOC affiliates or the independent LECs
with respect to which ``there is or could be a lack of competitive
performance.'' We therefore tentatively conclude that, if we adopt the
approach to product market definition outlined above (and proposed in
the Interexchange NPRM), we should treat all interstate, domestic,
interLATA telecommunications services as the relevant product market
for purposes of determining whether the BOC affiliates have market
power in the provision of interstate, domestic, interLATA services; for
independent LECs, we likewise tentatively conclude that we should treat
all interstate, domestic, interexchange telecommunications services as
the relevant product market. We seek comment on this tentative
conclusion. We also seek comment on whether credible evidence exists
that suggests that there is a particular interexchange service or group
of services that is or will be provided by the BOC affiliates or the
independent LECs with respect to which ``there is or could be a lack of
competitive performance.'' Parties recommending that particular
services be grouped in narrower relevant product markets should
substantiate this contention with relevant evidence. Specifically, in
order to make such a showing, in this proceeding or in the future, a
party must present pricing or performance data or an analysis of
structural factors that, in either case, show that the service or group
of services is not competitive.
127. We also seek comment on alternative approaches to product
market definition (including the product market definition established
in the Competitive Carrier proceeding) that we should adopt in this
proceeding if we decide not to adopt the approach proposed in the
Interexchange NPRM. Parties should also discuss how these alternative
approaches to product market definition should be applied in this
proceeding.
128. In the International Competitive Carrier Order (50 FR 48191
(November 22, 1985)), the Commission determined that, for international
service, demand and supply elasticity revealed distinct product
markets, international message telephone service (IMTS) and non-IMTS.
The Commission concluded that (a) AT&T was dominant in the provision of
IMTS, and (b) all other IMTS providers (e.g., Sprint and MCI), except
the non-contiguous domestic carriers, were not dominant. No carrier,
the Commission found, was dominant in the provision of non-IMTS
service. The Commission subsequently found AT&T to be non-dominant in
the provision of IMTS. We tentatively conclude that we should retain
the same product definition for the provision of international services
by the BOCs' affiliates and the independent LECs. We seek comment on
this tentative conclusion.
2. Relevant Geographic Markets
129. In the Competitive Carrier proceeding, the Commission
concluded that there was ``a single national relevant geographic market
(including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other
U.S. offshore points) for interstate, domestic, interexchange
telecommunications services, with no relevant submarkets.'' In the
Interexchange NPRM, we observed that ``more sharply focused market
definitions will aid us in evaluating whether the BOCs possess market
power with respect to the provision of interLATA services in areas
where they provide local access service.''
130. As previously noted, the 1992 Merger Guidelines focus on
demand substitution factors for purposes of market definition. In
considering these factors in the Interexchange NPRM, we noted that, at
its most fundamental level, interexchange calling involves a customer
making a connection from a specific location to another specific
location. We also expressed the view that most telephone customers do
not view interexchange calls originating in different locations to be
substitutes for each other. Accordingly, we tentatively concluded that
``the relevant geographic market for interstate, interexchange services
should be defined as all calls from one particular location to another
particular location.'' We sought comment on this tentative conclusion
in the Interexchange NPRM.
131. We recognized, however, that it would be impracticable to
conduct a market power analysis in each geographic market implied by
this point-to-point market definition. We also stated our belief that,
in the majority of cases, economic factors and the realities of the
marketplace should cause point-to-point markets to behave in a
sufficiently similar manner to allow us to evaluate broader, more
manageable groups of markets for purposes of market power analysis. We
tentatively concluded that we should generally continue to treat
interstate,
[[Page 39417]]
interexchange services as a single national market when examining
whether a carrier or group of carriers acting together has market
power. We expressed the belief, however, that there may be special
circumstances that require us to examine an area smaller than the
entire nation, for purposes of market power analysis. We therefore
proposed ``to examine a particular point-to-point market (or group of
markets) for the presence of market power if there is credible evidence
suggesting that there is or could be a lack of competition in that
market (or group of markets) and there is a showing that geographic
rate averaging will not sufficiently mitigate the exercise of market
power (if it exists) in that market (or group of markets).''
132. In applying that approach, we believe that there are special
circumstances that make it appropriate for us to examine an area
smaller than the entire nation for purposes of assessing the market
power of a BOC affiliate or independent LEC. As discussed above, it is
possible that a BOC, through cost misallocation or discrimination, may
be able to use its market power in local exchange and exchange access
services to disadvantage the BOC affiliate's interexchange competitors.
Such cost misallocation or discrimination conceivably could enable the
BOC affiliate eventually to obtain the ability to raise unilaterally
its price for in-region, interstate, domestic, interLATA services above
competitive levels by restricting its output. With respect to each
originating in-region location, the determination of whether a BOC
affiliate or independent LEC possesses market power in that market will
turn on the same issue--whether the BOC or independent LEC can leverage
the market power arising from its control of access facilities
sufficiently to give the BOC affiliate or independent LEC affiliate,
respectively, market power in that point-to-point market in the
provision of interstate, domestic, interLATA services or interstate,
domestic, interexchange services, respectively. We believe that, given
the BOCs' and independent LECs' current retention of monopoly control
over bottleneck facilities, a BOC or independent LEC can exercise
market power in either all or none of these point-to-point markets
originating in the areas where the BOC or independent LEC controls
local exchange facilities. We also recognize that geographic rate
averaging of interstate long distance services alone may not be
sufficient to offset the anticompetitive effects of a BOC's or
independent LEC's use of the market power resulting from its control
over local access facilities.
133. We tentatively conclude, therefore, that, at this stage, the
BOCs' current monopoly control of bottleneck facilities constitutes
``credible evidence suggesting that there is or could be a lack of
competition'' with respect to interstate, domestic, interLATA services
originating in a BOC's in-region area. Consequently, we tentatively
conclude that we should evaluate a BOC's point-to-point markets in
which calls originate in-region separately from its point-to-point
markets in which calls originate out-of-region, for the purpose of
determining whether a BOC interLATA affiliate possesses market power in
the provision of in-region, interstate, domestic, interLATA services.
Similarly, we tentatively conclude that we should evaluate an
independent LEC's point-to-point markets in which calls originate in
its local exchange areas separately from its markets in which calls
originate outside those areas, for the purpose of determining whether
an independent LEC possesses market power in the provision of in-
region, interstate, domestic, interexchange services.
134. We seek comment on this proposed approach. We invite parties
to discuss why they believe we should examine smaller or larger areas
for purposes of determining whether a BOC affiliate or independent LEC
possesses market power in the provision of interstate, domestic,
interLATA services or interstate, domestic, interexchange services,
respectively.
135. We seek comment on alternative approaches to geographic market
definition that we should adopt in this proceeding (including the
geographic market definition established in the Competitive Carrier
proceeding) if we decide not to adopt the approach proposed in the
Interexchange NPRM. Parties should also discuss how these alternative
approaches to geographic market definition should be applied in this
proceeding.
136. In the International Competitive Carrier Order, the Commission
determined that, for international service, every destination country
constituted a separate geographic market based ``primarily on the need
for a carrier to obtain an operating agreement prior to providing
service to a given country.'' With the possible exception of routes
where a BOC affiliate or independent LEC is affiliated with one or more
foreign carriers, we believe that there are no critical distinctions on
the basis of a BOC affiliate's or independent LEC's market shares,
their respective sizes and resources, demand and supply elasticities,
or conditions of entry from one destination country to another which
would require a route-by-route analysis of these carriers' market
positions. Further, the Commission recently determined that there is no
evidence to ``suggest[ ] that entry barriers vary substantially among
geographic markets.'' Thus, we tentatively conclude that, for purposes
of this proceeding, we can analyze the market power of the BOC
affiliates and independent LECs on a worldwide basis, and need not
generally make route-by-route findings, with the exception of routes in
which the carriers are affiliated with foreign carriers in the
destination market. We seek comment on this tentative conclusion. We
also invite parties to discuss why they believe we should examine
smaller areas for purposes of determining whether a BOC affiliate or
independent LEC possesses market power in the provision of in-region,
international services.
C. Classification of BOC Affiliates
137. In this section, we consider whether we should relax the
dominant carrier regulation that under our current rules would apply to
in-region, interstate, domestic, interLATA services provided by BOC
affiliates. In order to do so, our rules require us to determine that
the BOC affiliates will not possess market power in the provision of
those services in the relevant product and geographic markets. We also
consider whether to apply the same regulatory classification to the BOC
affiliates' provision of in-region, international services as we impose
on their provision of in-region, interstate, domestic, interLATA
services.
138. As a preliminary matter, we note that there are two ways in
which a carrier can profitably raise and sustain prices above
competitive levels and thereby exercise market power. For convenience,
we refer in the following discussion to a carrier's ability to engage
in such a strategy as the ability to ``raise prices.'' First, a carrier
may be able to raise prices by restricting its own output (which
usually requires a large market share); second, a carrier may be able
to raise prices by increasing its rivals' costs or by restricting its
rivals' output through the carrier's control of an essential input,
such as access to bottleneck facilities, that its rivals need to offer
their services.
139. Courts, applying the Sherman Act, have long distinguished
between the ability of a firm to restrict output and raise its price
above the competitive
[[Page 39418]]
level and the ability of a firm to leverage its market power in one
market to gain a competitive advantage in a second market. See, e.g.,
United States v. Griffith, 334 U.S. 100, 107-08 (1948) (holding that
monopoly power had been illegally used ``to beget monopoly''); Berkey
Photo, Inc.v. Eastman Kodak Co., 603 F.2d 263, 275-76 (2d Cir. 1979),
cert. denied, 444 U.S. 1093 (1980); Viacom Intern'l Inc. v. Time Inc.,
785 F. Supp. 371 (S.D.N.Y. 1992). Although a number of courts have
disagreed with Berkey's conclusion that ``the use of monopoly power
attained in one market to gain a competitive advantage in another is a
violation of section 2 [of the Sherman Act], even if there has not been
an attempt to monopolize the second market,'' Berkey, 603 F.2d at 276
(emphasis added), these courts have not questioned the distinction
described above. See, e.g., Alaska Airlines, Inc. v. United Airlines,
Inc., 948 F.2d 536, 547 (9th Cir. 1991); Fineman v. Armstrong World
Indus., Inc., 980 F.2d 171, 206 (3d Cir. 1992). Economists likewise
have recognized such a distinction by distinguishing between
``Stiglerian'' market power, which is the ability of a firm profitably
to raise and sustain its price significantly above the competitive
level by restricting its output, and ``Bainian'' market power, which is
the ability of a firm profitably to raise and sustain its price
significantly above the competitive level by raising its rivals' costs
and thereby causing the rivals to restrain their output. T.G.
Krattenmaker, R.H. Lande, and S.C. Salop, Monopoly Power and Market
Power in Antitrust Law, 76 Geo. L.J. 241, 249-253 (1987). We note that
raising rivals' costs does not necessarily result in an increase in
prices. If a BOC raises the costs of its affiliate's rivals so that the
rivals raise their prices, the affiliate could choose not to raise its
prices, in order to increase its market share. The exercise of this
type of market power could also delay the introduction of new
technologies or degrade the quality of service that a BOC affiliate's
interLATA competitors would otherwise provide.
140. We seek comment on whether the BOC affiliates should be
classified as dominant carriers in the provision of in-region,
interstate, domestic, interLATA services under our rules only if we
find that they have the ability to raise prices of those services by
restricting their own output, or whether the affiliates should be
classified as dominant if the BOCs have the ability to raise prices by
raising the costs of their affiliates' interLATA rivals. We believe
that our regulations associated with the classification of a carrier as
dominant generally are designed to prevent a BOC affiliate from raising
price by restricting its output rather than to prevent a BOC from
raising price by raising its rivals' costs. For example, price cap
regulation of a BOC affiliate's retail rates for in-region, interLATA
services should prevent the affiliate from achieving higher retail
interLATA prices, but generally would not prevent the BOC from raising
its affiliate's rivals' costs through discrimination or other
anticompetitive conduct. Although price cap regulation could limit a
BOC affiliate's ability to raise its interLATA rates if the BOC caused
the affiliate's rivals to raise their prices by increasing their costs,
price regulation would not prevent the affiliate from profiting from
the BOC's raising of rivals' costs through increased market share. Such
behavior would be profitable if the BOC were thereby able to retard a
rival's innovation or cause its affiliate's rivals to lose market share
to the affiliate. We note that this form of anticompetitive conduct
might well involve increasing the affiliate's own output. We also note
that the definitions of market power cited by the Commission in the
Competitive Carrier Fourth Report and Order referred to the concept of
a carrier raising price by restricting its own output.
141. In determining whether a firm possesses market power, the
Commission previously has focused on certain well-established market
features, including market share, supply and demand substitutability,
the cost structure, size, or resources of the firm, and control of
bottleneck facilities. All but the last of these features, bottleneck
control, appear to focus exclusively on whether the carrier has the
ability to raise price by restricting its own output. With respect to
the first index, market share, we believe that the fact that each BOC
affiliate initially will have zero market share in the provision of in-
region, interstate, domestic, interLATA services suggests that the
affiliate initially will not be able profitably to raise and sustain
its price by restricting its output. Because, however, the affiliate's
zero market share results from its exclusion from the market until now,
it says little about whether the affiliate would quickly achieve the
ability to raise price by restricting output. Although our analysis
below focuses on the possibility that a BOC affiliate would gain such
ability through anticompetitive activity by the BOC, we recognize and
seek comment on the possibility that an affiliate could gain such
ability through means other than anticompetitive conduct. For example,
the strength of a BOC's brand identity in its region alone might enable
its affiliate to gain substantial market share quickly, thereby giving
it the ability to raise price by restricting its output. As to supply
substitutability, since all interLATA customers currently are served by
the affiliates' competitors and could continue to be served by them
after BOC affiliates enter the domestic interLATA market, we believe
that the availability of this transmission capacity will constrain the
BOC affiliates' ability to raise its domestic interLATA prices.
Moreover, we recently found that the purchasing decisions of most
customers of domestic interexchange services are sensitive to changes
in price and would be willing to shift their traffic to an
interexchange carrier's rival if the carrier raises its prices. We also
believe that the cost structure, size, and resources of the BOC
affiliates are not likely to enable them to raise prices for their
domestic interLATA services. In the AT&T Reclassification Order, the
Commission noted that the issue is whether a carrier's ``lower costs,
sheer size, superior resources, financial strength, and technical
capabilities'' ` ``are so great to preclude the effective functioning
of a competitive market.' '' We seek comment on this analysis.
142. As noted above, in assessing whether a BOC affiliate would
quickly achieve market power in the provision of in-region, interstate,
domestic, interLATA services, we must also consider the significance of
the BOCs' current control of bottleneck access facilities. We noted
earlier that a BOC's control of access facilities poses two principal
problems as the BOC enters markets from which it has previously been
prohibited--improper allocation of costs and unlawful discrimination.
The BOCs' control of access facilities is a factor in both types of
market power discussed above. In analyzing whether a BOC affiliate
could raise its prices by restricting its own output, the primary
inquiry is whether the safeguards in the 1996 Act and any Commission
rules implementing these safeguards, coupled with other provisions of
the Communications Act and Commission regulations, will sufficiently
constrain a BOC's ability to improperly allocate costs, discriminate
unlawfully, or engage in other anticompetitive conduct such that its
affiliate would not quickly gain the ability to raise price by
restricting its output of in-region, interstate, domestic, interLATA
services. In analyzing whether a BOC could cause increases in the
prices for in-region, interstate, domestic, interLATA services by
raising the costs
[[Page 39419]]
of its affiliate's interLATA rivals, the inquiry focuses on whether the
statutory and regulatory safeguards will prevent a BOC from engaging in
unlawful discrimination or other anticompetitive conduct that would
raise its affiliate's rivals' costs.
143. As noted above, improper allocation of costs by a BOC is of
concern because such action may allow a BOC to recover costs incurred
by its affiliate to provide interstate, domestic, interLATA services
from subscribers to the BOC's local exchange and exchange access
services, in order to give the affiliate an unfair advantage over its
competitors. For purposes of market power analysis, however, we are
concerned with improper allocation of costs only to the extent it
enables a BOC affiliate to set retail interLATA prices at predatory
levels (i.e., below the costs incurred to provide those services),
drive out its interLATA competitors, and then raise and sustain retail
interLATA prices significantly above competitive levels. A BOC may be
more likely to attempt to improperly allocate costs to the extent the
BOC and BOC affiliate share common facilities and personnel. As
discussed above, section 272 imposes structural safeguards to prevent a
BOC from improperly allocating costs among its affiliate's interLATA
services and services provided by the BOC. Specifically, the statute
requires a BOC affiliate to ``operate independently'' from the BOC,
maintain separate books, records, and accounts from the BOC, and have
separate officers, directors, and employees. In addition, a BOC
affiliate must conduct all transactions with the BOC on an arm's length
basis, and all such transactions must be reduced to writing and made
available for public inspection. We believe that these safeguards will
constrain a BOC's ability to improperly allocate costs and make it
easier to detect any improper allocation of costs that may occur.
144. We believe that price cap regulation of the BOC's access
services also reduces the potential that the BOCs would improperly
allocate the costs of their affiliates' interLATA services. As the
Commission previously explained, ``[b]ecause price cap regulation
severs the direct link between regulated costs and prices, a carrier is
not able to recoup misallocated nonregulated costs by raising basic
service rates, thus reducing the incentive for the BOCs to allocate
nonregulated costs to regulated services.'' We recognize that under our
current interim LEC price cap rules, a BOC could select an X-factor
option that requires it to share interstate earnings with its customers
that exceed specified benchmarks and permit the BOC to make a low-end
adjustment if interstate earnings fall below a specified threshold.
Consequently, this regime may create some incentive for a BOC to
allocate costs from interLATA services to access services in order to
reduce the amount of profits the BOC is required to share with its
interstate access service customers. Similarly, the possibility of
future re-calibration of price cap levels also implies that price cap
regulation does not fully sever the link between regulated costs and
prices. We note, however, that we have tentatively concluded in the BOC
Accounting Safeguards NPRM that we should apply our affiliate
transaction rules to transactions between the BOCs and their interLATA
affiliates, in order to make it more difficult for a BOC to allocate to
its regulated local exchange and exchange access services costs that
should be assigned to its affiliate's in-region, interLATA activities.
145. In addition, we note that, even if a BOC is able to allocate
improperly the costs of its affiliate's interLATA services, it is
questionable whether a BOC affiliate could successfully engage in
predation. At least three interexchange carriers--AT&T, MCI, and
Sprint--have nationwide or near-nationwide network facilities. These
are large well-established companies with customers throughout the
nation. It may be unlikely, therefore, that a BOC affiliate, whose
customers presumably would be concentrated in one geographic region,
could drive one or more of these companies from the market. Even if it
could do so, there is a question whether the BOC affiliate would later
be able to raise prices in order to recoup lost revenues. As Professor
Spulber has observed, ``[e]ven in the unlikely event that [a BOC
affiliate] could drive one of the three large interexchange carriers
into bankruptcy, the fiber-optic transmission capacity of that carrier
would remain intact, ready for another firm to buy the capacity at a
distress sale and immediately undercut the [affiliate's] noncompetitive
prices.'' We recognize that action taken in concert by two or more BOCs
could have a more significant impact on interLATA competitors. In
paragraph , infra, we seek comment on the effect, if any, that a merger
of or joint venture between two or more BOCs should have on our
determination of whether to classify one of the BOC's interLATA
affiliate as dominant or non-dominant.
146. We seek comment on whether the structural safeguards in
section 272, price cap regulation of the BOC's access services, and the
accounting safeguards proposed in the Accounting Safeguards NPRM are
sufficient to prevent the BOCs from improperly allocating costs between
monopoly local exchange and exchange access services and their
affiliates' competitive interLATA services to such an extent that their
interLATA affiliates would quickly gain the ability profitably to raise
and sustain prices of in-region, interstate, domestic, interLATA
services significantly above competitive levels by restricting its
output of these services. If so, we seek comment on whether regulation
of a BOC's interLATA affiliate as a dominant carrier would prevent the
BOC affiliate from engaging in such pricing practices. We seek comment
on whether a BOC's ability improperly to allocate the costs between
interLATA and exchange access services would enable the BOC to raise
the costs of its affiliate's interLATA competitors.
147. In addition to improper allocation of costs, a BOC potentially
could use its market power in the provision of local exchange and
exchange access services to the advantage of its interLATA affiliate by
discriminating against the affiliate's interLATA competitors with
respect to the provision of exchange and exchange access services. As
previously discussed, there are various ways in which a BOC could
attempt to discriminate against unaffiliated interLATA carriers. For
example, a BOC could provide its affiliate's interLATA competitors with
poorer quality interconnection to the BOC's local network than it
provides to its affiliate, or it could unnecessarily delay satisfying
its competitors' requests to connect to the BOC's network. As a more
specific example, the BOC may fail to cooperate with an interLATA
carrier that is introducing an innovative new service until the BOC's
interLATA affiliate is ready to initiate the same service. To the
extent that interexchange customers believe that the BOC affiliate
offers a higher quality of service, the BOC affiliate may be able to
raise its interLATA rates. Moreover, even occasional disruptions of a
competing carrier's services may cause customers to choose another
carrier. We believe that these and other forms of discrimination may be
difficult to police, particularly in situations where the level of the
BOC's ``cooperation'' with unaffiliated interLATA carriers is difficult
to quantify. To the extent customers value ``one-stop shopping,''
degrading a carrier's interexchange service may also undermine the
attractiveness of the carrier's interexchange/local exchange package
[[Page 39420]]
and thereby strengthen the BOC's dominant position in the provision of
local exchange services.
148. As previously noted, sections 272 (c) and (e) set forth both
general and specific nondiscrimination safeguards that apply to BOC
provision of in-region interLATA telecommunications service and other
services. For example, section 272(e)(3) requires that a BOC charge its
affiliate ``an amount for access to its telephone exchange service and
exchange access that is no less than the amount [that the BOC charges]
any unaffiliated interexchange carriers for such services.'' Section
272 also restricts the ability of a BOC to provide ``facilities,
services, or information concerning its provision of exchange access to
[its affiliate,] unless [it makes] such facilities, services, or
information * * * available to other providers of interLATA services in
that market on the same terms and conditions.'' Section 272(e)(1)
explicitly prohibits a BOC from discriminating against unaffiliated
carriers by delaying their requests for exchange service and exchange
access. The statute also includes joint marketing restrictions to
preclude, for example, a BOC affiliate from bundling long distance
service with its affiliated BOC's local service, unless competing
interexchange carriers have the same ability to bundle their long
distance service with the BOC's local services. As noted, we recognize
that the nondiscrimination requirements in section 272 will not
eliminate the BOCs' incentive to discriminate against competing
interexchange carriers. We seek comment, however, on whether and the
extent to which these safeguards would prevent the BOCs from gaining
the two types of market power discussed above. Specifically, we seek
comment on whether these safeguards would prevent a BOC from raising
the costs of its affiliate's interLATA rivals by discriminating against
those competitors, and on whether these safeguards would prevent a BOC
from discriminating to such an extent that its interLATA affiliate
would quickly acquire the ability profitably to raise and sustain the
price of in-region, interstate, domestic, interLATA services
significantly above competitive levels by restricting their output.
149. There is at least one other way, in addition to the improper
allocation of costs and discrimination, in which a BOC could use the
market power that arises from its control of local bottleneck
facilities to give its affiliate a competitive advantage in the
provision of in-region, interstate, domestic, interLATA services.
Absent appropriate regulation, a BOC could potentially raise the price
of access to all interexchange carriers, including its affiliate.
Equivalently, a BOC could fail to pass through to interexchange
carriers a reduction in the cost of providing access services. Price
cap regulation would not be effective in eliminating the effect of a
price squeeze initiated under these circumstances. This would cause
competing interLATA carriers to raise their retail interLATA rates in
order to remain profitable. The BOC affiliate could then capture
additional market share by not raising its prices to reflect the
increase in access charges. This process is known as a price squeeze.
Although the BOC affiliate would report little or no profit, the BOC
firm as a whole would receive higher access revenues from unaffiliated
interexchange carriers and increased revenues from the affiliate's
interLATA services causes by its increased share of interLATA traffic.
If the BOC were to raise its access rates high enough, it would be
impossible for the interexchange competitors to compete effectively.
Thus, the entry of a BOC's affiliate into the provision of in-region,
interstate, domestic, interLATA services gives the BOC an incentive to
raise its price for access services in order to disadvantage its
affiliate's rivals, increase its affiliate's market share, and increase
the profits of the BOC overall. One constraint on the BOC's ability to
engage in such conduct is the Commission's price cap regulation of the
BOCs' access services. We seek comment on whether price cap regulation
of the BOCs' access services prevents a BOC from raising its
affiliate's rivals' costs by raising the price of access. We also seek
comment on whether price cap regulation will sufficiently constrain a
BOC from raising the price of access to such an extent that its
interLATA affiliate would quickly gain the ability profitably to raise
and sustain the price of in-region, interstate, domestic, interLATA
services significantly above competitive levels by restricting its
output. Parties arguing that price cap regulation is not a sufficient
constraint on such anticompetitive behavior should also comment on
what, if any, mechanisms could be implemented to address this issue.
150. Based on the preceding discussion of the ramifications of the
BOCs' control of local facilities, we seek comment on whether the
statutory and regulatory safeguards currently imposed on the BOCs and
their affiliates are sufficient for us to relax the dominant carrier
regulation that under our current rules would apply to in-region,
interstate, domestic, interLATA services provided by the BOC
affiliates. Parties should address this issue with respect to both
types of market power discussed above--raising price by restricting
output and raising price by raising rivals' costs. Parties contending
that the safeguards are not sufficient, and therefore that we should
classify the BOC affiliates as dominant, should also comment with
specificity on whether we should impose price cap regulation on those
affiliates.
151. Parties should also address whether regulating BOC affiliates
as dominant carriers, including imposing price cap regulation on their
in-region, interstate, domestic, interLATA services, would provide any
additional protection against a BOC affiliate gaining market power in
the provision of these services, beyond that provided by the safeguards
established by the 1996 Act, our implementing rules, and our existing
regulations. We thus seek comment on whether imposing dominant carrier
regulation, including price cap regulation, on a BOC affiliate would
limit the incentive and ability of the BOC parent to engage in improper
allocation of costs, discrimination, or other anticompetitive conduct.
As previously discussed, dominant carrier regulation of the BOC
interLATA affiliates may subject the affiliates' interLATA services to
price cap regulation, as specified by Commission order, would require
the affiliates to file interLATA tariffs with cost support data and on
longer notice periods, and would impose more stringent section 214
requirements on the affiliates than those that apply to non-dominant
carriers. Although we currently review complaints against dominant
carriers under a different standard than complaints against non-
dominant carriers (non-dominant carriers rates and practices are
presumed lawful, while non-dominant carriers receive no presumption of
lawfulness), we have tentatively concluded in this NPRM that, in the
context of complaints alleging that a BOC has ceased to meet the
conditions required for the provision of in-region interLATA services,
we will not employ a presumption of reasonableness in favor of the BOC
or BOC affiliate, regardless of whether it is regulated as a dominant
or non-dominant carrier. Commenters should discuss which, if any, of
the regulations that would be applicable to BOC affiliates as dominant
carriers would constrain the ability of the BOCs to engage in improper
allocation of costs, discrimination, or other anticompetitive conduct
to the extent
[[Page 39421]]
that the affiliate would gain market power. Commenters should also
address any other costs or benefits of imposing dominant carrier
regulation on BOC affiliates. Finally, parties that favor dominant
carrier regulation of the BOCs' in-region interLATA affiliates should
comment on whether there are additional, administratively workable and
less burdensome safeguards that would permit us to regulate the
affiliates as non-dominant carriers.
152. The entry of the BOCs into in-region interLATA services does
not mark the first occasion when this Commission has considered the
safeguards that are needed when a LEC provides a competitive service
that uses the LEC's exchange access service. In the Competitive Carrier
proceeding, the Commission examined the safeguards that would be
required when an independent LEC provided interstate, domestic,
interexchange services. The Commission initially concluded in the
Competitive Carrier First Report and Order that it would regulate the
independent LECs' interstate long distance services as dominant carrier
offerings because of their control over bottleneck local exchange and
exchange access facilities. Subsequently, the Commission relaxed its
regulation of interstate, domestic, interexchange services provided by
an affiliate of an independent LEC, subject to the conditions discussed
above, but affirmed its regulation of such services under dominant
carrier rules if the independent LEC offered the service directly.
153. The Commission adopted a similar approach to BOC entry into
the provision of enhanced services. As noted, the Commission in the
Computer II rulemaking initially imposed rigorous structural separation
requirements on the BOC and its enhanced services affiliate. The
Commission later replaced these structural separation safeguards with
the non-structural safeguards adopted in Computer III. Based on its
experience in administering the Computer II requirements, the
Commission concluded that non-structural safeguards could furnish
adequate protections against the risk of the BOCs engaging in
anticompetitive improper allocation of costs and discriminatory
practices in order to achieve an unfair advantage over competing
enhanced services providers. Although the U.S. Court of Appeals for the
Ninth Circuit vacated portions of the Commission's Computer III
decisions in three separate decisions, see supra n.88, the most recent
decision found that the Commission had justified its elimination of
structural separation. California v. FCC, 39 F.3d 919, 923 (9th Cir.
1994).
154. Our experience with regulating the independent LECs' provision
of interstate, domestic, interexchange services and the BOCs' provision
of enhanced services suggests that our existing safeguards have worked
reasonably well and generally have been effective, in conjunction with
our regular audits of the BOCs, in deterring the improper allocation of
costs and unlawful discrimination. To be sure, we have found instances
where individual BOCs may not have complied with our non-structural
safeguards in providing non-regulated services. Our experience to date,
however, has not disclosed a systematic pattern of anticompetitive
abuses by independent LECs or the BOCs that would indicate that our
safeguards are ineffective.
155. We recognize, however, that our experience in regulating the
independent LECs' provision of interstate, domestic, interexchange
services and the BOCs' provision of enhanced services may not be
directly relevant to our analysis of the effectiveness of our existing
and proposed safeguards that would apply to the BOCs' provision of in-
region, interstate, domestic, interLATA service. The BOCs' local
exchange and exchange access bottleneck facilities extend over much
larger geographic areas than the independent LECs' facilities.
Moreover, because the BOCs are likely to offer local exchange and
interLATA services as integrated offerings to end users, they may have
a greater incentive and ability to use their control over local
bottlenecks to obtain anticompetitive advantages over their interLATA
rivals. Indeed, to the extent that both the BOCs and their competitors
offer local and long distance services as a unified package, BOC
practices that reduce the attractiveness of their competitors' long
distance offerings would make the package of services as a whole less
attractive. We invite parties to comment on this assessment.
156. As noted, two pairs of BOCs have proposed to merge their
operations, which would result in merged BOCs of greater size and with
larger in-region areas. We seek comment on what effect, if any, a
merger of or joint venture between two or more BOCs should have on our
determination whether to classify the interLATA affiliate of one of
those BOCs as dominant or non-dominant. Parties should also discuss
what effect, if any, such a proposal to merge or to enter into a joint
venture should have on this determination.
157. We also seek comment on whether, if we decide not to adopt the
domestic market definition approaches discussed in the previous section
of this NPRM, we should classify the BOC affiliates as dominant or non-
dominant in the provision of in-region, interstate, domestic, interLATA
services. Parties are invited to discuss how alternative approaches to
market definition should affect how we classify the BOC affiliates in
the provision of those services.
158. With respect to in-region, international services, we
tentatively conclude that we should apply the same regulatory treatment
for the BOC affiliates' provision of in-region, international services
as we apply for their provision of in-region, interstate, domestic,
interLATA services. The relevant issue in both contexts is whether the
BOC affiliate can leverage its market power in local exchange and
exchange access services to raise prices (by restricting its own output
or by raising the costs of its rivals) in another market (the domestic
interLATA or international market). We find no practical distinctions
between a BOC's ability and incentive to use its market power in the
provision of local exchange and access services to improperly allocate
costs, discriminate against, or otherwise disadvantage unaffiliated
domestic interexchange competitors as opposed to international service
competitors. We thus tentatively conclude that we should apply the same
regulatory treatment for BOC affiliates' provision of in-region,
international services as we adopt for their provision of in-region,
interstate, domestic, interLATA services. We seek comment on this
tentative conclusion.
159. This tentative conclusion presumes that a BOC or BOC affiliate
does not have an affiliation with a foreign carrier that has the
ability to discriminate in favor of the BOC or an affiliate of the BOC
through control of bottleneck services or facilities in a foreign
destination market. Our proposal to adopt the same regulatory
classification for a BOC affiliate's provision of in-region,
international services as for its provision of in-region, interstate,
domestic, interLATA services does not modify our decision to regulate a
U.S. international carrier as dominant on those U.S. international
routes where an affiliated foreign carrier has the ability to
discriminate against unaffiliated U.S. international carriers through
control of bottleneck services or facilities in the foreign market. The
safeguards that we apply to carriers that we classify as dominant based
on a foreign carrier affiliation are contained in Section 63.10(c) of
the our rules and are designed to address the incentive and ability of
the foreign carrier to
[[Page 39422]]
discriminate in favor of its U.S. affiliate in the provision of
services or facilities necessary to terminate U.S. international
traffic. This framework for addressing issues raised by foreign carrier
affiliations will apply to the BOCs' provision of U.S. international
services as an additional component of our regulation of the U.S.
international services market.
160. Finally, we observe that most of the section 272 safeguards
will cease to apply to a BOC three years after the BOC or its affiliate
is authorized to provide interLATA services under section 271(d),
unless the Commission extends such period by rule or order. To the
extent effective local competition develops, the need for many of the
section 272 safeguards will wane. We have no way of knowing at this
time, however, the rate at which local competition will occur. We also
intend to monitor the performance of the BOCs in the interexchange
marketplace, including their affiliates' market share in the provision
of in-region, interLATA services and in-region, international services.
We may therefore consider in a later proceeding, if necessary, the
impact that the removal of the section 272 safeguards pursuant to
section 272(f)(1) would have on our regulation of BOC provision of in-
region, interstate, domestic interLATA services and in-region,
international services.
D. Classification of Independent LECs or Their Affiliates
161. In this section we consider whether we should modify our
existing rules that require independent LECs (exchange telephone
companies other than the BOCs) to comply with certain specified
separation requirements in order to qualify for non-dominant regulatory
treatment in the provision of in-region, interstate, domestic,
interexchange services. We also consider whether to apply the same
regulatory classification to the independent LECs' provision of in-
region, international services as we adopt in this proceeding for their
provision of in-region, interstate, domestic, interexchange services.
For purposes of this analysis, we tentatively conclude that, because
control of local exchange and exchange access facilities is our primary
rationale for imposing a separate affiliate requirement on independent
LECs, we should limit application of these requirements to incumbent
independent LECs that control local exchange and exchange access
facilities. For purposes of determining which independent LECs are
``incumbent,'' we propose to use the definition of ``incumbent local
exchange carrier'' as provided in Section 251(h) of the Communications
Act. Section 251(h) provides that a LEC is an incumbent LEC, with
respect to a particular area, if: (1) the LEC provided telephone
exchange service in that area on the date of enactment of the 1996 Act
(February 8, 1996), and (2) the LEC was deemed to be a member of NECA
on the date of enactment or the LEC became a successor or assign of a
NECA member after the date of enactment. By limiting application of the
separate affiliate requirements to incumbent independent LECs, we will
avoid imposing unnecessary regulation on new entrants in the local
exchange market, such as interexchange carriers, cable television
companies, and CMRS providers, that will not have control of local
exchange and exchange access facilities. We seek comment on this
tentative conclusion.
162. Under the current rules as set forth in the Competitive
Carrier Fifth Report and Order, independent LEC provision of
interstate, domestic, interexchange services is subject to non-dominant
treatment if such services are offered through an affiliate that meets
certain requirements. For purposes of qualifying for regulation as a
non-dominant carrier, an ``affiliate'' of an independent LEC is ``a
carrier that is owned (in whole or in part) or controlled by, or under
common control with, an exchange telephone company.'' Specifically, in
order to qualify for non-dominant treatment, the affiliate must: (1)
maintain separate books of account; (2) not jointly own transmission or
switching facilities with the exchange telephone company; and (3)
obtain any exchange telephone company services at tariffed rates and
conditions. If an independent LEC provides interstate, domestic,
interexchange services directly, those services are subject to dominant
regulation. The Fifth Report and Order separation requirements apply to
all independent LECs, regardless of their size. We note that some of
our accounting rules relating to the Competitive Carrier Fifth Report
and Order separation requirements do recognize a distinction between
larger and smaller independent LECs. At this time, there are no
independent LECs that are regulated as dominant in the provision of
interstate, domestic, interexchange services. In other words, every LEC
that provides such services has elected to do so through an affiliate
satisfying the Competitive Carrier requirements, rather than providing
those services directly subject to dominant regulation.
163. We believe that it is appropriate at this time to review the
regulatory treatment of independent LEC provision of interstate,
domestic, interexchange services. Although the 1996 Act does not alter
the application of the Competitive Carrier separation requirements to
independent LECs, it does remove the restriction on BOC provision of
interLATA services, and specifies a new regulatory regime to govern BOC
provision of these services. In addition, in our recent Interexchange
NPRM, we addressed whether we should modify or eliminate the separation
requirements currently imposed upon independent LECs in order to
qualify for non-dominant treatment in the provision of interstate,
domestic, interexchange services that originate outside the areas in
which they control local access facilities. We have concluded, in the
Interim BOC Out-of-Region Order, that, for now, we would remove
dominant carrier regulation for BOC out-of-region, interstate,
domestic, interexchange services when offered through an affiliate that
meets the Competitive Carrier separation requirements. In light of
these regulatory changes, and in order to effect a comprehensive review
of the appropriate regulatory framework to govern the provision of
interstate, domestic, interexchange services by local exchange
companies (or their affiliates), we believe it is important to evaluate
whether we should continue to classify independent LECs as dominant in
the provision of in-region, interstate, domestic, interexchange
services, if they provide those services directly. We also believe it
is appropriate to evaluate the continuing necessity of applying the
Competitive Carrier requirements to the provision of those services by
independent LECs.
164. In the previous section, we sought comment on whether the
BOC's interLATA affiliates should be classified as dominant carriers
under our rules only if we find that they have the ability to raise
prices of in-region, interstate, domestic, interLATA services by
restricting their own output of these services, or, in the alternative,
whether the affiliates should be classified as dominant if the BOCs
have the ability to raise prices by raising the costs of their
affiliates' interLATA rivals. We recognized that a BOC's control of
local exchange and exchange access facilities potentially gives a BOC
an incentive and ability to disadvantage its affiliate's interexchange
competitors through improper allocation of costs, discrimination, or
other anticompetitive conduct. We therefore sought comment on whether,
despite the statutory and regulatory safeguards currently imposed on
the BOCs, a BOC would be able to
[[Page 39423]]
disadvantage its affiliate's rivals to such an extent that the
affiliate would quickly gain the ability profitably to raise price
above competitive levels by restricting its output, and, in the
alternative, whether the safeguards would prevent the BOCs from raising
their rivals' costs.
165. We believe that we should apply a similar analysis for
determining whether we should continue to classify an independent LEC
as dominant if it provides in-region, interstate, domestic,
interexchange services directly (rather than through an affiliate
complying with the Competitive Carrier requirements). We therefore seek
comment on whether, absent the Competitive Carrier requirements, an
independent LEC would be able to use its market power in local exchange
and exchange access services to disadvantage its interexchange
competitors to such an extent that it will quickly gain the ability
profitably to raise the price of in-region, interstate, domestic,
interexchange services significantly above competitive levels by
restricting output. We also seek comment whether, absent the
Competitive Carrier requirements, an independent LEC would be able to
raise its rivals' costs.
166. We believe that, regardless of our determination of whether
the independent LECs should be classified as dominant or non-dominant
if they provide in-region, interstate, domestic, interexchange services
directly, some level of separation may be necessary between an
independent LEC's interstate, domestic, interexchange operations and
its local exchange operations. This separation may be necessary in
order to minimize the potential that an independent LEC could use its
control of local bottleneck facilities to improperly shift costs or
discriminate against interexchange competitors. Such anticompetitive
conduct would be of concern irrespective of whether such an exercise
provides a basis for classifying the BOC affiliates as dominant
carriers under our current rules. Accordingly, we seek comment on
whether we should require independent LECs to provide in-region,
interstate, domestic, interexchange services subject to the Competitive
Carrier separation requirements or a variation of those requirements.
We seek comment on whether the existing Competitive Carrier
requirements are sufficient safeguards to apply to independent LECs to
address any potential competitive concerns. Commenters proposing to
modify or add to these requirements should address the extent to which
there is a possibility of improperly allocating costs or other
discriminatory or anticompetitive conduct, and if so, specifically how
the proposed modification or addition would mitigate such conduct.
167. We also invite comment on whether there are certain
circumstances that warrant different regulatory treatment among the
independent LECs. For example, does the size of an independent LEC make
a difference in determining what type of separation requirements should
apply? We believe that, in principle, the size of a LEC will not affect
its incentives to engage in cross subsidization between its monopoly
services and its competitive services. It may be the case, however,
that for small or rural independent LECs, the benefits to rate-payers
of a separate affiliate requirement may be less than the costs imposed
by such a requirement. For example, certain of our accounting rules,
such as cost allocation manual filings and annual independent audit
requirements, apply only to larger LECs (those with annual operating
revenues of $100 million or more), in recognition that the costs of
compliance with such requirements could be potentially burdensome on
smaller independent LECs. We therefore seek comment on whether there is
some minimum independent LEC size below which the separation
requirements, if any are retained, should not apply.
168. For the reasons expressed earlier, we tentatively conclude
that we should apply the same regulatory approach that we adopt for an
independent LEC's provision of interstate, domestic, interexchange
services originating within its local service area to an independent
LEC's provision of international services originating within its local
service area. The rules we adopt in this proceeding will be designed to
protect against leveraging of market power from one market (the local
exchange and exchange access market) to gain market power in other
markets (the domestic interexchange and international services
markets). We seek comment on this proposed approach.
169. As indicated above, our proposal to adopt the same regulatory
approach for an independent LEC's provision of in-region, international
services does not modify our decision to regulate a U.S. international
carrier as dominant on those U.S. international routes where an
affiliated foreign carrier has the ability to discriminate against
unaffiliated U.S. international carriers through control of bottleneck
services or facilities in the foreign market. In addition, our proposal
for the regulation of the independent LECs would not modify the
regulatory treatment of the noncontiguous domestic carriers to the
extent they are regulated as dominant due to a lack of competition in
their IMTS markets.
170. Finally, we seek comment on whether any or all of the separate
affiliate requirements that we may ultimately decide to apply, or to
continue to apply, to independent LECs should be subject to some type
of sunset, such as the sunset provision applicable to BOCs under
Section 272(f)(1) of the Communications Act.
IX. Conclusion
171. We seek comment on the foregoing issues regarding the
implementation of Sections 271 and 272 of the 1996 Act and our proposed
regulatory regime to govern the BOC affiliates' provision of in-region
interstate, interLATA services pursuant to the terms of the 1996 Act.
Any party disagreeing with our tentative conclusions should explain
with specificity in terms of costs and benefits its position and
suggest alternative policies.
X. Procedural Issues
A. Ex Parte Presentations
172. This is a non-restricted notice-and-comment rulemaking
proceeding. Ex parte presentations are permitted, in accordance with
the Commission's rules, provided that they are disclosed as required.
See generally 47 CFR Secs. 1.1200, 1.1202, 1.1204, 1.1206.
B. Regulatory Flexibility Analysis
173. Section 603 of the Regulatory Flexibility Act, as amended,
requires an initial regulatory flexibility analysis in notice and
comment rulemaking proceedings, unless we certify that ``the rule will
not, if promulgated, have a significant economic impact on a
significant number of small entities.'' The Regulatory Flexibility Act
generally defines the term ``small entity'' as having the same meaning
as ``small-business concern'' under the Small Business Act, which
defines ``small-business concern'' as ``one which is independently
owned and operated and which is not dominant in its field of operation
* * *.'' This proceeding pertains to the BOCs and other ILECs which,
because they are dominant in their field of operations, are by
definition not small entities under the Regulatory Flexibility Act. We
therefore certify, pursuant to Section 605(b) of the Regulatory
Flexibility Act, that the rules will not, if promulgated, have a
significant economic impact on a substantial number of small entities.
The Secretary shall send a copy of this NPRM, including this
certification and
[[Page 39424]]
statement, to the Chief Counsel for Advocacy of the Small Business
Administration. A copy of this certification will also be published in
the Federal Register notice.
C. Initial Paperwork Reduction Act of 1995 Analysis
174. This NPRM contains either a proposed or modified information
collection. As part of its continuing effort to reduce paperwork
burdens, we invite the general public and the Office of Management and
Budget (OMB) to take this opportunity to comment on the information
collections contained in this NPRM, as required by the Paperwork
Reduction Act of 1995, Public Law No. 104-13. Public and agency
comments are due August 15, 1996; OMB comments are due September 27,
1996. Comments should address: (a) Whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information shall have practical
utility; (b) the accuracy of the Commission's burden estimates; (c)
ways to enhance the quality, utility, and clarity of the information
collected; and (d) ways to minimize the burden of the collection of
information on the respondents, including the use of automated
collection techniques or other forms of information technology.
D. Comment Filing Procedures
175. Pursuant to applicable procedures set forth in Sections 1.415
and 1.419 of the Commission's rules, 47 CFR Secs. 1.415, 1.419,
interested parties may file comments on or before August 15, 1996, and
reply comments on or before August 30, 1996. To file formally in this
proceeding, you must file an original and six copies of all comments,
reply comments, and supporting comments. If you want each Commissioner
to receive a personal copy of your comments, you must file an original
and eleven copies. Comments and reply comments should be sent to Office
of the Secretary, Federal Communications Commission, 1919 M Street,
NW., Room 222, Washington, DC 20554, with a copy to Janice Myles of the
Common Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC
20554. Parties should also file one copy of any documents filed in this
docket with the Commission's copy contractor, International
Transcription Services, Inc., 2100 M Street, NW., Suite 140,
Washington, DC 20037. Comments and reply comments will be available for
public inspection during regular business hours in the FCC Reference
Center, 1919 M Street, NW., Room 239, Washington, DC 20554.
176. In order to facilitate review of comments and reply comments,
both by parties and by Commission staff, we require that comments be no
longer than eighty (80) pages and reply comments be no longer than
forty (40) pages, including exhibits, appendices, affidavits, or other
attachments. Empirical economic studies, technical drawings, and copies
of relevant state orders will not be counted against these page limits.
These page limits will not be waived and will be strictly enforced.
Comments and reply comments must include a short and concise summary of
the substantive arguments raised in the pleading. Comments and reply
comments must also comply with Section 1.49 and all other applicable
sections of the Commission's Rules. See 47 CFR Sec. 1.49. However, we
require here that a summary be included with all comments and reply
comments, regardless of length, although a summary that does not exceed
three pages will not count toward the page limit for comments or reply
comments. This summary may be paginated separately from the rest of the
pleading (e.g., as ``i, ii''). We also direct all interested parties to
include the name of the filing party and the date of the filing on each
page of their comments and reply comments. Comments and reply comments
must clearly identify, in their Table of Contents, the specific
paragraphs or sections of this NPRM to which a particular comment or
set of comments is responsive. If a portion of a party's comments does
not fall under a particular topic listed in the Table of Contents of
this NPRM, such comments must be included in a clearly labelled section
at the beginning or end of the filing. All parties are encouraged to
utilize a table of contents, regardless of the length of their
submission. Parties may not file more than a total of ten (10) pages of
ex parte submissions, excluding cover letters. This 10 page limit does
not include: (1) Written ex parte filings made solely to disclose an
oral ex parte contact; (2) written material submitted at the time of an
oral presentation to Commission staff that provides a brief outline of
the presentation; or (3) written materials filed in response to direct
requests from Commission staff. Ex parte filings in excess of this
limit will not be considered as part of the record in this proceeding.
177. Parties are also asked to submit comments and reply comments
on diskette. Such diskette submissions would be in addition to and not
a substitute for the formal filing requirements addressed above.
Parties submitting diskettes should submit them to Janice Myles of the
Common Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC
20554. Such a submission should be on a 3.5 inch diskette formatted in
an IBM compatible form using MS DOS 5.0 and WordPerfect 5.1 software.
The diskette should be submitted in ``read only'' mode. The diskette
should be clearly labelled with the party's name, proceeding, type of
pleading (comment or reply comments) and date of submission. The
diskette should be accompanied by a cover letter.
178. Written comments by the public on the proposed and/or modified
information collections are due August 15, 1996, and reply comments
must be submitted not later than August 30, 1996. Written comments must
be submitted by the Office of Management and Budget (OMB) on the
proposed and/or modified information collections on or before 60 days
after date of publication in the Federal Register. In addition to
filing comments with the Secretary, a copy of any comments on the
information collections contained herein should be submitted to Dorothy
Conway, Federal Communications Commission, Room 234, 1919 M Street,
NW., Washington, DC 20554, or via the Internet to dconway@fcc.gov and
to Timothy Fain, OMB Desk Officer, 10236 NEOB, 725 17th Street, NW.,
Washington, DC 20503 or via the Internet to fain__t@al.eop.gov.
XI. Ordering Clauses
179. Accordingly, it is ordered that pursuant to Sections 1, 2, 4,
201-205, 215, 218, 220, 271, 272, and 303(r) of the Communications Act
of 1934, as amended, 47 U.S.C. Secs. 151, 152, 154, 201-205, 215, 218,
220, 271, 272, and 303(r), a Notice of Proposed Rulemaking is hereby
adopted.
180. It is further ordered that, the Secretary shall send a copy of
this Notice of Proposed Rulemaking, including the regulatory
flexibility certification, to the Chief Counsel for Advocacy of the
Small Business Administration, in accordance with paragraph 603(a) of
the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (1981).
Federal Communications Commission
William F. Caton,
Acting Secretary.
[FR Doc. 96-19135 Filed 7-25-96; 8:45 am]
BILLING CODE 6712-01-P
