[Federal Register Volume 61, Number 132 (Tuesday, July 9, 1996)]
[Rules and Regulations]
[Pages 35964-35971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17404]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Chapter I
[CC Docket No. 96-21, FCC 96-288]
Bell Operating Company Provision of Out-of-Region Interstate,
Interexchange Services
AGENCY: Federal Communications Commission.
ACTION: Interim rule.
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SUMMARY: In this Report and Order, the Commission facilitates the
efficient and rapid provision of out-of-region, domestic, interstate,
interexchange services by the BOCs, as contemplated by the
Telecommunications Act of 1996 (1996 Act), while still protecting
ratepayers and competition in the interexchange market, by removing
dominant regulation for BOCs that provide such services through an
affiliate that complies with certain safeguards. These safeguards are
the same as those that have applied for more than ten years to
affiliates of independent local exchange companies (LECs) (i.e.,
exchange telephone companies, including GTE, other than the BOCs) that
are regulated as non-dominant interexchange carriers under the rules
established in the Competitive Carrier proceeding. These rules will
permit the rapid entry by the BOCs into the provision of out-of-region
interstate, interexchange services while providing protection against
anticompetitive conduct.
EFFECTIVE DATE: August 8, 1996.
FOR FURTHER INFORMATION CONTACT: Michael Pryor (202) 418-0495 or
Melissa Waksman (202) 418-0913, Common Carrier Bureau, Policy and
Program Planning Division.
SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's
Report and Order adopted on June 28, 1996, and released on July 1,
1996, FCC 96-288. The full text of this Report and Order is available
for inspection and copying during normal business hours in the FCC
Reference Center (Room
[[Page 35965]]
239), 1919 M St., N.W., 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: Public burden for this recordkeeping
requirement is estimated to average 6056 hours per response, including
the time for reviewing instructions, searching existing data sources,
gathering and maintaining the data needed, and completing and reviewing
the collection of information. Send comments regarding this burden
estimate or any other aspect of this recordkeeping requirement,
including suggestions for reducing the burden, to the Federal
Communications Commission, Records Management Branch, Paperwork
Reduction Project, Washington, D.C. 20554 and to the Office of
Management and Budget, Paperwork Reduction Project, Washington, D.C.
20503.
Synopsis of Notice of Proposed Rulemaking
I. Introduction
1. In enacting the Telecommunications Act of 1996 (1996 Act), Pub.
L. No. 104-104, 110 Stat. 56 (1996) codified at 47 U.S.C. Secs. 151 et
seq, Congress sought to establish ``a pro-competitive, de-regulatory
national policy framework'' for the United States telecommunications
industry. The 1996 Act, among other things, provided that upon
enactment the Bell Operating Companies (BOCs) could provide interLATA
telecommunications services originating outside of their in-region
states. In response to the new legislation, the Commission released, on
February 14, 1996, a Notice of Proposed Rulemaking, 61 FR 6607 (Feb.
21, 1996), in which the Commission proposed an interim regime to govern
the BOCs' provision of out-of-region domestic, interstate,
interexchange service. The Notice addressed all ``out-of-region''
interstate, interexchange services (including interLATA and intraLATA
services). Eighteen parties filed comments and thirteen parties filed
reply comments.
2. Under our existing rules, BOC provision of out-of-region,
interstate, interexchange services is subject to dominant carrier
regulation. In order to facilitate the efficient and rapid provision of
out-of-region, domestic, interstate, interexchange services by the
BOCs, as contemplated by the 1996 Act, while still protecting
ratepayers and competition in the interexchange market, we remove
dominant regulation for BOCs that provide out-of-region, interstate,
interexchange services through an affiliate that complies with certain
safeguards. These safeguards are the same as those that have applied
for more than ten years to affiliates of independent local exchange
companies (LECs) that are regulated as non-dominant interexchange
carriers under the rules established in the Competitive Carrier
proceeding. The safeguards require that the affiliate: (1) maintain
separate books of account from the LEC; (2) not jointly own
transmission or switching facilities with the LEC; and (3) take any
tariffed services from the affiliated LEC pursuant to the terms and
conditions of the LEC's generally applicable tariff. We also conclude
that a BOC affiliate providing out-of-region, domestic, interstate,
interexchange services should be treated, for purposes of the BOCs'
accounting, as a nonregulated affiliate under the Commission's joint
cost and affiliate transactions rules, just as independent LEC
affiliates are now treated.
3. The regime adopted in this Report and Order is expressly
designed as an interim measure to facilitate the BOCs' prompt provision
of out-of-region, domestic, interstate, interexchange services. In
March 1996, the Commission sought comment in the Interexchange NPRM, on
whether to modify or eliminate these affiliate requirements as a
condition for non-dominant treatment of independent LEC provision of
out-of-region, interstate, interexchange services. We also sought
comment on whether, if we modify or eliminate these requirements for
independent LECs, we should also eliminate or modify our treatment of
BOC out-of-region, interstate, interexchange services. We will
establish final rules for BOC out-of-region, interstate, interexchange
services in that proceeding.
II. Background
A. The Competitive Carrier Proceeding
4. Between 1979 and 1985, the Commission conducted the Competitive
Carrier proceeding, in which it examined how its regulations should be
adapted to reflect and facilitate the increasing competition in
telecommunications markets. In a series of orders, the Commission
distinguished between carriers with market power (dominant carriers)
and those without market power (non-dominant carriers). The Commission
gradually relaxed its regulation of non-dominant carriers because it
concluded that non-dominant carriers lacked the incentive and ability
to engage in conduct that might be anticompetitive or otherwise
inconsistent with the public interest.
5. In its First Report and Order, 45 FR 52453, November 18, 1980,
the Commission classified AT&T and its then-affiliated local exchange
companies as well as independent local exchange companies as dominant
carriers and concluded that these dominant carriers should be subject
to the ``full panoply'' of Title II regulation. Recently, in light of
increasing competition in the interstate, domestic, interexchange
telecommunications market, and evidence that AT&T no longer possesses
the ability to control prices unilaterally, the Commission reclassified
AT&T as a non-dominant carrier in that market.
6. In its Fourth Report and Order, 48 FR 52452, November 1983, the
Commission considered how it should regulate the provision of
interstate, interexchange services by independent LECs. Because the
Modification of Final Judgment, United States v. Western Elec. Co., 552
F. Supp. 131 (D.D.C. 1982), aff'd. sub nom., Maryland v. United States,
460 U.S. 1001 (1983), prohibited BOCs from offering interLATA services,
the Fourth Report and Order addressed only the interstate,
interexchange offerings of independent LECs. The Commission determined
that interexchange carriers affiliated with independent LECs would be
regulated as non-dominant carriers. In the Fifth Report and Order, 49
FR 34824, September 4, 1984, the Commission explained its definition of
the term ``affiliate'' as ``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,'' and identified three
separation requirements that the affiliate must meet in order to
qualify for non-dominant treatment. These requirements are that the
affiliate: (1) maintain separate books of account; (2) not jointly own
transmission or switching facilities with the LEC; and (3) if it uses
the LEC's services, it should acquire them via the LEC's tariffs. The
Commission further concluded that, if the LEC provided interstate,
interexchange services directly, rather than through an affiliate,
those services would be subject to dominant carrier regulation.
7. The Fifth Report and Order also addressed the regulation of the
BOCs' provision of interLATA services:
The BOCs currently are barred by the [Modification of Final
Judgment] 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
[[Page 35966]]
of separation, if any, would be necessary for the BOCs or their
affiliates to qualify for nondominant regulation.
B. The 1996 Act and the BOC Out-of-Region Notice of Proposed Rulemaking
10. Section 271(b)(2), added by the 1996 Act, provides:
A Bell operating company, or any affiliate of that Bell
operating company, may provide interLATA services originating
outside its in-region States after the date of enactment of the
Telecommunications Act of 1996, subject to subsection (j).
Thus, the 1996 Act does not require a BOC to obtain Commission
authorization prior to offering out-of-region, interstate, interLATA
services. The 1996 Act, however, does not modify the Commission's
determination in the Fifth Report and Order that BOC provision of
interstate, interLATA services initially would be subject to dominant
carrier regulation.
11. Immediately after the 1996 Act became law, we issued the BOC
Out-of-Region NPRM, in which we proposed, under certain conditions, to
remove dominant carrier regulation of the BOCs' provision of out-of-
region, interstate, interexchange services. In our Notice, we
tentatively concluded that, as an interim measure, if a BOC creates an
affiliate to provide out-of-region, interstate, interexchange services
(including interLATA and intraLATA services), and if the affiliate
satisfies the minimal separation requirements set forth in the Fifth
Report and Order that apply to the interexchange affiliates of
independent LECs, then the BOC affiliate's provision of those
interexchange services would be regulated on a non-dominant basis. We
also noted that LECs providing interexchange services through
affiliates pursuant to the Fifth Report and Order treat those
affiliates as nonregulated affiliates under the Commission's joint cost
rules and affiliate transactions rules for exchange carrier accounting
purposes. In our Notice, we sought comment on whether a BOC affiliate
providing out-of-region, interstate, interexchange services also should
be treated as a nonregulated affiliate for BOC accounting purposes.
Finally, we tentatively concluded that, at least for now, if a BOC
provides out-of-region, interstate, interexchange services directly, or
through an affiliate that fails to comply with these minimal separation
requirements, then dominant carrier regulation would be retained for
those services.
III. Discussion
A. The Purpose of the Interim Rules
12. This proceeding is necessary to enable the BOCs to begin
competing in an out-of-region area in the interexchange market on a
non-dominant basis. Currently, BOC provision of interstate,
interexchange service is subject to dominant carrier regulation until
we determine the degree of separation, if any, necessary for non-
dominant treatment. Thus, BOC out-of-region services would be subject
to dominant regulation, whether those services were offered directly by
the BOC or through another entity, no matter how structurally separate
from the BOC. We take no position in this proceeding on whether the
structural separation requirements, other safeguards established by the
1996 Act, and our existing regulations that would apply to BOC
provision of in-region services are sufficient to allow us to relax
dominant carrier regulation for the separate subsidiaries through which
the BOCs must provide in-region, interLATA services. See 47 U.S.C.
Sec. 272. We will address that issue in a separate proceeding.
13. In our Notice, we tentatively concluded that we could remove
dominant carrier regulation of BOC out-of-region, interstate,
interexchange services by applying to the BOCs the same rules that have
worked well for independent LECs. These rules were specifically
designed to impose minimal burdens on the smaller, independent LECs,
and thus are less stringent than the structural separation required
under our Computer II regime, and contain fewer restrictions than
imposed by the 1996 Act for BOC provision of in-region, interLATA
services. At the same time, the Commission found in the Fifth Report
and Order that these separation requirements provided some protection
against anticompetitive abuses that could arise from the LECs' control
over local bottleneck facilities.
14. Because we believe that we should move expeditiously in order
to advance the goals of the 1996 Act, we specifically stated in the
Notice that the actions we take in this proceeding would be interim. By
applying the well-established rules applicable to independent LECs as
an interim measure, we are able to: remove dominant carrier regulation
for BOC out-of-region, interstate, interexchange services, thereby
facilitating prompt and competitive entry by the BOCs into those
services; have the same level of assurance of protecting competition
and ratepayers as we have with independent LECs and their interexchange
affiliates; and avoid engaging in a protracted proceeding. We have
already issued a Notice in which we initiate a more comprehensive
review of the rules that are applicable to both independent LECs and
the BOCs in the provision of out-of-region, interstate, interexchange
services. In the Interexchange NPRM, we sought comment on whether it
may be appropriate to modify or eliminate the minimal separation
requirements applied to independent LEC affiliates providing
interstate, interexchange services originating outside of their local
exchange areas. We also sought comment on whether, if we do modify or
eliminate such requirements for independent LECs, we should apply the
same requirements to BOC provision of out-of-region, interstate,
interexchange services. We will finalize our rules governing both BOC
and independent LEC provision of out-of-region, interstate,
interexchange services in that proceeding.
B. Non-dominant Classification for BOC Affiliates
15. The record does not dissuade us from proceeding on an interim
basis as proposed in the Notice. NYNEX and Pactel support, as an
interim measure, adoption of the BOC Out-of-Region NPRM's tentative
conclusions, including use of the Commission's joint cost and affiliate
transactions rules. NYNEX contends that the proposed rules are ``an
excellent first regulatory step that the Commission can take promptly
to enable BOC entry into the long distance service markets.'' Pactel
supports the rules as a method of ensuring regulatory parity among all
exchange companies, BOCs and independent LECs, even though Pactel
disputes that the BOCs have market power in the interexchange market.
16. The remaining BOCs object to removing dominant regulation only
for affiliates meeting the Fifth Report and Order requirements and
contend that out-of-region, interstate, interexchange services should
be regulated as non-dominant even if provided on an unseparated basis.
These commenters raise essentially three arguments: (1) BOCs do not
have market power in the interexchange market under the criteria, such
as market share, established in the Competitive Carrier proceeding and
those applied in reclassifying AT&T as a non-dominant interexchange
carrier; (2) BOCs have neither the ability nor the incentive to
leverage their control over local facilities to impede competition in
the interexchange market, especially given current regulations and the
provisions of the 1996 Act that are designed to open the local market
to
[[Page 35967]]
competition; and (3) the proposed separation requirements for out-of-
region interexchange services are inconsistent with the 1996 Act.
17. BellSouth additionally argues that, by proposing to regulate
BOCs as dominant if they directly provide out-of-region, interexchange
services based on their market power in the provision of local
services, we are resurrecting the ``all services'' approach. BellSouth
states that, in the Competitive Carrier orders, the Commission adopted
an ``all services'' approach under which a finding that a carrier was
dominant in the provision of one service subjected a carrier to
dominant regulation of all services. BellSouth argues that, under this
``all services'' approach, the Commission ruled that bottleneck
facilities were prima facie evidence of dominance in all markets.
BellSouth maintains that the Commission rejected this approach in the
AT&T Reclassification Order. We reject this analysis. The ``all
services'' question addressed in the AT&T Reclassification Order was
whether the Commission could find AT&T non-dominant only if ``AT&T
lacks the ability to control the price of every tariffed service in the
relevant market.'' A very different question is posed by the BOCs entry
into out-of-region, interstate, interexchange services: whether a firm
with market power in one relevant market (the local exchange and
exchange access market) can leverage that power to gain market power or
an unfair advantage in another, related market (the interexchange
market).
18. As for the non-BOC commenters, MCI and TRA argue that, given
the potential for the BOCs to engage in anticompetitive conduct, the
BOC affiliate should be regulated as dominant. Almost all of the other
non-BOC commenters support non-dominant regulation of BOC out-of-region
services if provided through a separate affiliate, but contend that the
safeguards proposed in the Notice are insufficient to protect against
abuses by the BOCs. Specifically, these parties claim that without
these additional safeguards the BOCs could use their control over local
exchange facilities to unfairly discriminate in pricing or service
quality against competing interexchange carriers or could cross-
subsidize their long distance operations by shifting costs to the local
exchange and exchange access operations. They urge the Commission,
therefore, to impose full structural separation on the out-of-region
affiliate, including the separations imposed by section 272 on the in-
region interexchange affiliate. They also seek to bar joint marketing
of local and out-of-region services or, at least, require that
marketing personnel and operations be separated. Some ask the
Commission to require that the BOC provide all Title II services to its
affiliate at the generally applicable tariffed rates and that all non-
Title II services and access to information obtained by the BOC by
virtue of its provision of local exchange service be provided on a non-
discriminatory basis or that such information not be shared at all.
Finally, non-BOC commenters dispute claims that the Notice's proposals
are inconsistent with the 1996 Act.
19. We adopt here the interim rules proposed in the Notice, at
least until completion of our broader rulemaking proceeding, the
Interexchange NPRM. The Fifth Report and Order safeguards we adopt
herein on an interim basis have worked relatively well since 1984 to
protect against potential abuses by the independent LECs in their
provision of interexchange services and we believe that they will
provide adequate interim protection as the BOCs begin providing out-of-
region interexchange services. As the Commission noted in the Fifth
Report and Order, these safeguards provide some protection against
``cost-shifting and anticompetitive conduct.'' These safeguards have
been applied to independent LEC provision of interexchange services
originating in and out of their regions and should provide sufficient
interim safeguards for BOC provision of solely out-of-region services.
Additionally, these safeguards will be supplemented with the
application of our cost allocation and affiliate transaction rules, as
explained below, which provide further protection against cost
misallocations. Moreover, no party has presented persuasive evidence to
show that, at this time, these rules will not be effective interim
measures.
20. At the same time, we believe that these minimal requirements
should be in place pending further analysis of these issues. Not only
has the Commission adopted an NPRM to address these specific issues,
but we also have launched various proceedings, and are in the process
of issuing further rulemakings, relating to the implementation of
various aspects of the 1996 Act. These proceedings touch upon issues
raised in this proceeding, such as the proper market definition and the
scope of various safeguards. We believe it is prudent to assess the
record in those proceedings in order to assist us in adopting a
comprehensive and cohesive framework that addresses the myriad issues
involving BOC provision of services that the BOCs previously have been
barred from offering.
21. Thus we reject AT&T's argument that the proposed rules should
not be adopted because, AT&T contends, they improperly depart from the
use of a single, nationwide, interexchange market without submarkets
without providing a reasoned explanation. The Notice proposed to apply,
on an interim basis, the same rules to BOC out-of-region services that
we apply to independent LECs. We do not find that AT&T has presented
persuasive reasons to depart from this prior precedent for purposes of
these interim rules. Moreover, in the Notice, we explicitly proposed to
address only BOC provision of out-of-region, interstate, interexchange
services. At the same time, we made clear that we were planning to
adopt these rules on an interim basis, pending a future proceeding to
consider more fully the long-term issues raised by BOC entry into out-
of-region, interstate, interexchange services. We note that on March
25, 1996, we released the Interexchange NPRM initiating that
proceeding. In proposing to look only at BOC provision of out-of-
region, interstate, interexchange service here, we sought to balance
the goal of the 1996 Act to allow swift BOC entry into the
interexchange market, subject to interim safeguards, with the need for
a comprehensive review of our rules. We believe it is within our
discretion to conduct our proceedings in such a manner as to
accommodate these twin purposes.
22. We find that our interim plan of removing dominant carrier
regulation for BOC affiliates meeting the Fifth Report and Order
separation requirements and retaining dominant regulation for BOCs that
provide out-of-region services directly will not impose an unreasonable
burden on the BOCs. Initially, we believe it is important to clarify
the scope of the Fifth Report and Order separation requirements. Most
commenters refer to the Fifth Report and Order requirements as
structural separation. This is true only in the sense that the BOC or
LEC non-dominant interexchange affiliate is a separate legal entity. In
no other sense do we require ``structural separation.'' Indeed, in the
Fifth Report and Order, the Commission specifically rejected arguments
that structural separation requirements should be imposed between an
independent LEC and its interexchange affiliate because the Commission
found that structural separation would impose unreasonable burdens on
smaller, independent LECs. The Commission specifically sought to avoid
imposing
[[Page 35968]]
excessive burdens and noted that the LEC affiliate qualifying for non-
dominant treatment ``is not necessarily structurally separated from the
exchange telephone company in the sense ordered in the Second Computer
Inquiry * * * (e.g., fully-separated personnel and marketing are not
necessary for nondominant treatment).'' Thus, except for the ban on
joint ownership of transmission and switching facilities, a restriction
which we believe should pose little, if any, burden on the provision of
out-of-region, interstate, interexchange services, the BOC and the
interexchange affiliate will be able to share personnel and other
resources or assets. The affiliate may be staffed by BOC personnel,
housed in existing BOC offices, and use BOC marketing or other
services. Providing interexchange services through such an affiliate
will not impede the BOCs' ability to realize efficiencies gained
through the use of joint resources. To help ensure that the BOCs
properly allocate the costs of any services provided to the
interexchange affiliate, however, we require that the BOC treat this
affiliate for accounting purposes as a nonregulated affiliate and
therefore subject to our cost allocation and affiliate transactions
rules.
23. Additionally, we clarify the separate books of account
requirement and the requirement that to the extent the affiliate
obtains BOC services it do so under the terms of the BOC's tariff. We
do not require that the interexchange affiliate maintain separate books
of account that comply with our Part 32 rules. Instead, the separate
books of account requirement refers to the fact that, as a separate
legal entity, the affiliate must maintain its own books of account as a
matter of course. This is consistent with the current accounting
treatment of the interexchange affiliates of independent LECs. Books of
account refer to the financial accounting system a company uses to
record, in monetary terms, the basic transactions of a company. These
books of account reflect the company's assets, liabilities, and equity,
and the revenues and expenses from operations. Each company has its own
separate books of account. The Commission's Part 32 rules, the Uniform
System of Accounts (USOA), prescribe the books of account for the
telephone companies. The Part 32 USOA, however, is not required to be
kept by affiliates of a telephone company. These affiliates maintain
their own separate books of account. We note that, if a telephone
company decides to conduct out-of-region, interstate, interexchange
service within the telephone company without using a separate
affiliate, this activity would be reflected in the telephone company's
USOA accounts, because the USOA reflects the telephone company's total
operations. As to the tariff requirement, we clarify that this
provision applies only to services for which the BOC is required to
file a tariff, not to detariffed services such as billing and
collection. The provision also only applies when the affiliate obtains
tariffed services from its affiliated BOC.
24. Parties have offered no credible evidence to support
contentions that the Fifth Report and Order separation requirements
constitute burdensome regulation. Indeed, the entry of interexchange
carriers affiliated with independent LECs over the past decade serves
as evidence that these conditions will not prevent the BOCs from
competing effectively. Moreover, we note that several BOCs have already
established, or plan to establish, subsidiaries through which they will
provide interexchange services that meet or exceed these separation
requirements. We believe that separation requirements designed to
accommodate the resources of small independent LECs will not impose an
unreasonable burden on the much larger regional Bell companies,
particularly on an interim basis.
25. Finally, we conclude, as an interim measure, that if a BOC
chooses to offer out-of-region interstate interexchange services
directly, it will be subject to dominant carrier regulation and to
price cap regulation. Specifically, we require that the BOCs include
such services in the price cap Basket for interexchange services. See
47 CFR Sec. 61.42(d)(4).
C. Consistency With the 1996 Act
26. Several BOC commenters argue that the separate affiliate
requirement, even as an interim measure, is inconsistent with the
provisions of the 1996 Act. They contend that the 1996 Act specifically
excluded out-of-region services from the separate affiliate requirement
contained in new section 272. Some further argue that, because dominant
regulation is so onerous, conditioning non-dominant treatment on
complying with the separation requirements effectively requires BOCs to
establish a separate affiliate to provide out-of-region interstate,
interexchange services in contravention of the 1996 Act. They also
argue, more generally, that the proposed rules are inconsistent with
the overall deregulatory emphasis of the new legislation.
27. Bell Atlantic contends that the proposed separation
requirements are inconsistent with the 1996 Act for two reasons: (1)
section 272(f) contains a sunset provision for the in-region affiliate
whereas the proposed separation requirements are open-ended; and (2) a
BOC interexchange affiliate providing out-of-region services would be
barred from jointly owning transmission and switching facilities with
its operating company affiliate, whereas Section 272 contains no such
restriction for the in-region separate affiliate. Bell Atlantic
concludes that it would have to establish two subsidiaries, one for in-
region and one for out-of-region services.
28. Non-BOC commenters dispute these arguments. Some argue that,
because the 1996 Act is silent as to the type of regulatory regime that
the Commission should impose on the BOCs' provision of out-of-region
interexchange services, the statute contemplates that the Commission
may apply its existing dominant/nondominant regulatory regime. These
parties further point out that the separate subsidiary provisions of
the 1996 Act contain a savings clause which states that ``[n]othing in
this subsection shall be construed to limit the authority of the
Commission under any other section of this Act to prescribe safeguards
consistent with the public interest, convenience and necessity.''
Vanguard contends that the BOCs are essentially arguing that the 1996
Act repealed the Commission's existing statutory authority to apply its
dominant carrier rules to BOC interexchange affiliates by implication.
Vanguard asserts that a statutory construction that would repeal an
agency's authority by implication is ``highly disfavored'' by the
courts except where there is an irreconcilable conflict between the two
statutes or where there is compelling evidence that Congress intended
to repeal the prior statute. Sprint and others contend that the
proposed safeguards are less burdensome than the statutory separate
subsidiary requirement and note that, while the 1996 Act mandates a
separate subsidiary to provide in-region services, the Commission's
proposal permits the BOCs to offer out-of-region services through an
affiliate or directly.
29. We reject the contention that section 272(a)(2) prohibits us
from retaining the dominant/non-dominant regulatory framework which the
Commission has applied to interexchange carriers prior to passage of
the 1996 Act for BOC provision of out-of-region, interstate,
interexchange services. More specifically, we do not
[[Page 35969]]
agree that, by excluding out-of-region services from those services
that a BOC must provide through a structurally separate affiliate,
section 272(a)(2) bars the Commission from according non-dominant
regulation of BOC out-of-region, interstate, interexchange services
only to BOC affiliates that comply with the separation requirements we
adopt in this Order. Section 272(a)(2), relied upon by the BOC
commenters, provides in pertinent part that:
The services for which a separate affiliate is required by
paragraph (1) are:
* * * * *
(B) Origination of interLATA telecommunications services, other
than--
* * * * *
(ii) out-of-region services described in section 271(b)(2).
As noted by MCI, the legislation is silent on the issue of dominant/
non-dominant regulation of BOC interLATA services. We conclude that
Congress did not intend by implication to repeal our authority to
impose dominant or non-dominant regulatory treatment as we deem
necessary to protect the public interest consistent with our statutory
mandates. To the contrary, Section 601(c) of the 1996 Act provides that
we are not to presume that Congress intended to supersede our existing
regulations unless expressly so provided.
30. Nor is there any inconsistency between the separation
requirements we adopt by this Order as an interim measure and the 1996
Act. We do not mandate that the BOCs provide out-of-region, interstate,
interexchange services through a separate affiliate. Instead, this
Order concludes that, on an interim basis, BOCs will continue to be
subject to dominant carrier treatment if they offer out-of-region
interstate, interexchange services directly. The same requirement has
applied to all independent LECs since 1984. This order, in effect,
offers the BOCs a choice of providing out-of-region, interstate,
interexchange services under dominant regulation if they wish to
furnish those services directly or under non-dominant regulation if
they wish to offer those services through a separate affiliate that
meets the separation requirements.
31. We also note that the 1996 Act's provisions for the
structurally separate in-region subsidiary contain more restrictions
than those that will apply to the BOC affiliates' provision of out-of-
region, interstate, interexchange services as a non-dominant carrier.
For example, the 1996 Act requires that the separate subsidiary that
must be established to provide in-region interLATA services must have
separate officers, directors, and employees, and may not obtain credit
under any arrangement that would permit recourse to the BOC. See 47
U.S.C. Sec. 272(b). None of these requirements applies to the BOCs'
out-of-region affiliate.
32. Bell Atlantic contends, however, that our proposed separation
conditions are, in fact, more rigorous than those established by the
1996 Act for in-region services because we have not suggested a sunset
date and have barred joint ownership of transmission and switching
facilities. We are seeking comment in the Interexchange NPRM on whether
to modify or eliminate the separation requirements for independent LECs
in their provision of out-of-region, interstate, interexchange service
as a condition for non-dominant treatment. We are also seeking comments
on whether, if we modify or eliminate these separation requirements for
independent LECs, we should apply the same treatment to BOC provision
of out-of-region, interstate, interexchange service. Bell Atlantic's
argument is more appropriately addressed in that proceeding. During the
interim period that will be covered by the rules we promulgate today, a
prohibition on joint ownership of switching and transmission facilities
should cause no hardship on the BOC provision of out-of-region services
because, as the BOCs maintain, they initially will be using other
carriers' facilities and because of the geographic separation of in-
region facilities and out-of-region services. Additionally, the fact
that the 1996 Act contains a sunset provision for certain restrictions
is not a basis for concluding that our interim rules for BOC out-of-
region, interstate, interexchange services are inconsistent with the
1996 Act.
D. Proposed Mergers
33. After the record in this proceeding closed, SBC Communications
Inc., and Pacific Telesis Group announced, on April 1, 1996, an
agreement to merge their operations. Three weeks later, on April 21,
1996, Bell Atlantic and NYNEX announced that they had reached an
agreement to merge. We believe that mergers such as these raise
concerns with respect to the provision of out-of-region services during
the pendency of the merger. Specifically, they raise the concern that,
in the period prior to a merger's consummation, one partner to the
merger may act in ways to favor those out-of-region services of its
merger partner that originate in the first partner's service territory.
For example, BOC A may favor BOC B's long distance services originating
in BOC A's territory because BOC A may eventually share in BOC B's
profits. We do not believe that the record in this proceeding provides
an adequate basis on which to address the specific concerns raised by
such pending mergers. Accordingly, we exclude from the services covered
by this Order, those out-of-region services that originate in the in-
region states of a merger partner during the period prior to the
consummation of the merger. Given the interim nature of the rules we
are establishing in this Order, and the fact that we are not aware of
plans by any of the potential merger partners to provide out-of-region
services originating in their respective partners' service territories,
we believe that this approach likely will not impose any burdens on the
affected parties. Should such parties determine, however, to provide
such services, those parties should request the Commission, on an
individual case basis, for a determination of whether such services can
be provided on a non-dominant basis. Because our concern relates to the
incentives of one party to favor the operations of the other party
during the pendency of the merger, should an announced merger not be
consummated, the interim rules established in this Order for out-of-
region services shall apply to all out-of-region services provided by
the parties to the proposed merger.
34. Nothing in this section on proposed mergers should be construed
as indicating the Commission's position with respect to mergers in
other sectors of the telecommunications industry or outside of this
particular and unusual context. A unique confluence of circumstances
lead us to conclude that it is both reasonable and prudent to postpone
our determination of the appropriate regulatory treatment for BOC out-
of-region services originating in a potential merger partner's
territory. These unique circumstances include: (1) The announcement of
mergers, following the closure of the record in this proceeding,
involving four of the seven regional Bell companies that would be
subject to the rules established in this proceeding; (2) the concern
that a BOC, through its position in the local telephone exchange market
and its bottleneck control over inputs into the interexchange market,
may have the ability, along with the incentive, to favor the out-of-
region interexchange services operations of a potential merger partner;
(3) the interim nature of these rules; and (4) the 1996 Act's
authorization for BOCs to begin providing out-of-region services upon
enactment. Given these unique circumstances, we emphasize that this
[[Page 35970]]
action is limited to the facts and circumstances set forth in this
discussion of proposed mergers.
E. Joint Cost and Affiliate Transactions Rules
35. In the BOC Out-of-Region NPRM, we stated that independent LECs
providing interexchange services through affiliates pursuant to the
Fifth Report and Order treat those affiliates as nonregulated
affiliates under the Commission's joint cost and affiliate transactions
rules for exchange carrier accounting purposes. The BOC Out-of-Region
NPRM sought comment on whether BOC out-of-region, interstate,
interexchange services should be treated as nonregulated services for
BOC accounting purposes.
36. AT&T, Pactel, NYNEX, Comptel and Vanguard support the treatment
of BOC out-of-region affiliates as non-regulated for accounting
purposes. AT&T and Comptel believe such rules are necessary to
constrain the BOCs' ability to cross-subsidize and to ensure that local
monopoly assets are not used unfairly to advantage long distance
operations. Vanguard asserts that the rules would not impose a burden
because BOCs account for certain services on this basis already and
because such treatment would merely entail setting up the initial
account for service, not changing existing procedures. NYNEX states
that these rules have been effective as applied to independent LECs,
and thus would not be unreasonable to apply to BOCs providing similar
services. AT&T and Comptel also contend that some type of independent
audit should be performed periodically to certify that long distance
affiliates retain their financial independence. Pactel supports
application of the affiliate transaction rules as an interim measure.
37. Ameritech opposes application of the affiliate transactions
rules to BOC interexchange affiliates. It contends that the joint cost
and affiliate transactions rules are designed to allocate costs between
regulated and nonregulated activities, not between two regulated
services and that, in any event, application of those rules would be
unnecessary because the Part 69 rules already require BOCs to identify
separately interexchange costs. At a minimum, Ameritech argues that the
rules should not apply to any BOC subject to pure price cap regulation
at the state and federal level. The Public Utilities Commission of Ohio
(PUCO) also opposes treating the affiliate as nonregulated because they
contend that accounting abuses are better detected by treating the
affiliate's services as regulated.
38. Our existing accounting safeguards for affiliate transactions
were developed in the Joint Cost Order and are codified in Parts 32 and
64 of our Rules. The Part 64 cost allocation rules prescribe how
carriers separate the costs of regulated activities from the costs of
nonregulated activities, where the nonregulated activities are
performed directly by the carrier rather than through an affiliate. The
Part 32 affiliate transactions rules prescribe the way costs are
recorded, for Title II accounting purposes, when a regulated carrier
does business with its nonregulated affiliates. These rules are
designed to prevent local exchange carriers from imposing the costs and
risks of their competitive ventures on local telephone ratepayers.
These rules do not require carriers or their affiliates to charge any
particular prices for assets transferred or services provided; rather,
they require carriers to use certain specified valuation methods in
determining the amounts to record in their Part 32 accounts, regardless
of the prices charged.
39. Because the cost allocation and affiliate transactions rules
are an important component of our accounting safeguards, we find that
these rules should apply to BOCs providing out-of-region, interstate,
interexchange services through a separate affiliate. Even though
interLATA services are regulated services under Title II, under the
rules we adopt herein, the BOCs, for accounting purposes, will treat
the services as nonregulated, so as to make applicable our cost
allocation and affiliate transaction rules. The fact that interLATA
services are regulated services in and of itself does not eliminate the
potential for cost misallocation between the BOCs competitive
(interLATA) and noncompetitive (local exchange and exchange access)
services. Thus, we believe that application of our cost allocation and
affiliate transaction rules is necessary to minimize the possibility
that a BOC could improperly shift the costs of its interstate,
interexchange operations to its regulated local exchange and exchange
access ratepayers. We also note that this requirement is consistent
with the current practice of independent LECs that treat their
affiliates providing interexchange services as nonregulated for
exchange carrier accounting purposes.
40. We find that requiring BOCs to treat affiliates providing out-
of-region services as nonregulated will not be unduly burdensome. BOCs
currently have systems in place to account for transactions between
their nonregulated affiliates (i.e., for transactions between a BOC and
any of its information services which are not regulated under Title
II). Such a requirement will not entail extensive modification of
existing company procedures for the provision of interexchange services
because, prior to the passage of the 1996 Act, BOCs were prohibited
from providing interstate, interexchange services.
IV. Additional Issues
A. Regulation of CMRS-Related InterLATA Services
41. The BOC Out-of-Region NPRM stated that ``BOC provision to
commercial mobile radio service customers, of interstate, interLATA
services originating outside any of the BOC's in-region states, is
included in the out-of-region services addressed in this proceeding.''
42. BellSouth argues that the language in the Notice is susceptible
to two interpretations. According to BellSouth, it may apply to: (1)
The sale of out-of-region, interexchange service by a BOC to
unaffiliated commercial mobile radio service (CMRS) customers; or (2)
the provision of out-of-region, interexchange CMRS service by a BOC.
BellSouth believes that the Commission intended the first of these
interpretations--BOCs offering out-of-region long distance to
unaffiliated CMRS customers on a stand alone basis, not in conjunction
with the BOC's provision of CMRS--and BellSouth opposes applying the
Notice's proposed rules to this service for all of the same reasons it
opposes any separation requirements for out-of-region services.
BellSouth contends that the other interpretation--BOC's offering
interexchange, CMRS--constitutes ``incidental'' CMRS interLATA services
and is beyond the scope of this proceeding. To the extent that a CMRS
provider offers interexchange services in conjunction with its
provision of CMRS, the interexchange service is itself incidental CMRS,
and thus exempted from section 272 separate affiliate requirements,
according to BellSouth. Bell Atlantic and SBC also oppose any
restrictions on BOC provision of incidental interLATA services,
including CMRS, because most of these services were excluded from the
separate subsidiary requirement of 272.
43. MCI contends that the scope of Section 272 is irrelevant
because the 1996 Act does not prevent the Commission from imposing its
own separation requirements. Vanguard supports the proposed separation
[[Page 35971]]
requirements on the assumption that they will be applied to BOC
provision of interLATA services to the customers of its affiliated
cellular companies. Vanguard argues that the interest that a BOC has in
its cellular operations increases the incentives to engage in
anticompetitive conduct because such conduct can benefit both its long
distance operations and its cellular operations. Comptel urges the
Commission to apply to all incidental interLATA services the same rules
applied to out-of-region interexchange services because they raise the
same concerns about discrimination and cross-subsidization.
44. BellSouth's interpretation of our reference to CMRS in footnote
two of the BOC Out-of-Region NPRM is correct. Our statement in the BOC
Out-of-Region NPRM was intended to clarify that a BOC offering out-of-
region long distance service to unaffiliated CMRS customers on a stand
alone basis would be considered ``out-of-region'' services for purposes
of this rulemaking. BOC provision of interexchange services to its
affiliated CMRS customers is beyond the scope of this proceeding. We
also reject as beyond the scope of this proceeding Comptel's request to
apply the separation requirements to all ``incidental'' services
established under section 272(g).
B. Definition of Certain Services as In-Region Services
45. Section 271(j) provides that certain calls that originate out-
of-region will be deemed in-region traffic. Specifically, this section
provides that ``a [BOC] application to provide 800 service, private
line service, or their equivalents that terminate in an in-region State
of that [BOC], and allow the called party to determine the interLATA
carrier, shall be considered an in-region service subject to the
requirements of subsection (b)(1).''
46. Comptel argues that the Commission should declare collect and
third party billed calls to numbers terminating in the BOC's region and
BOC calling card calls to in-region numbers as ``equivalent'' services
and thus be deemed in-region services. Comptel's rationale is that,
like 800 number and private line services, the party paying for the
call selects the interLATA carrier and thus is subject to the BOCs'
local power. Comptel states that the Commission should therefore
prohibit the BOC out-of-region affiliate from completing collect calls,
third-party billed calls, or BOC calling card calls to terminating
numbers located within the BOC's region. Ameritech opposes Comptel's
interpretation, and asserts that calling card, collect and third party
calls that are placed from out-of-region do not fall within 271(j)
because the calling party, not the called party, determines the long
distance carrier. Ameritech states that the calling party decides
whether to complete the call on a 0+ basis or use access codes, and if
access codes are used, the calling party decides which carrier to use.
47. The key factor in determining whether a service falls within
the scope of section 271(j) as ``equivalent'' to 800 or private line
service is whether the called party determines the interLATA carrier
that is used. As Ameritech notes, calling card, collect and third party
billed calls that originate out-of-region and terminate in-region do
not fall within the scope of section 271(j) because it is the calling
party, not the called party, that determines the interLATA carrier.
Because the called party does not determine the interLATA carrier that
is used, there is no justification for treating such calls as in-region
services. Thus, we reject Comptel's proposal that we add calling card,
collect and third party calls to those services classified as ``in-
region'' under section 271(j).
V. Procedural Issues
A. Regulatory Flexibility Act Analysis
48. We certify that the Regulatory Flexibility Act is not
applicable to the interim rules we are adopting in this proceeding.
These interim rules will not result in a significant economic impact on
a substantial number of small business entities, as defined by Section
601(3) of the Regulatory Flexibility Act. Entities subject to the rule
changes are generally large corporations, affiliates of large
corporations, or are dominant in their fields of operation, and, thus,
are not ``small entities'' as defined by the Act. See 15 U.S.C.
Sec. 632(a)(1). We are nevertheless committed to reducing the
regulatory burdens on small communications services companies whenever
possible, consistent with our other public interest responsibilities.
The Secretary shall send a copy of this Report and Order to the Chief
Counsel for Advocacy of the Small Business Administration in accordance
with Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C.
Secs. 601, et seq. (1981).
B. Paperwork Reduction Act
49. The recordkeeping requirements in this item are contingent upon
approval of the Office of Management and Budget.
VI. Ordering Clause
50. Accordingly, it is ordered that, pursuant to Sections 1, 4,
201-205, 215, 218, 220, and 271 of the Communications Act of 1934, as
amended, 47 U.S.C. Secs. 151, 154, 201-205, 215, 218 and 220, the
REPORT AND ORDER is hereby ADOPTED. The requirements adopted in this
Report and Order shall be effective 30 days after publication in the
Federal Register.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 96-17404 Filed 7-8-96; 8:45 am]
BILLING CODE 6712-01-P
